Home ›› 17 May 2022 ›› Front
Drastically depreciating taka against dollar, reducing public expenditures, ensuring transparency in mega projects, emphasising agro production, and halting luxury item imports could help Bangladesh handle the current foreign exchange reserve instability, say experts.
They also say not only Bangladesh but also most South Asian countries are facing a dollar crisis.
Import demand increased due to the Russia-Ukraine war and Bangladesh’s ongoing economic recovery from the coronavirus pandemic, creating huge pressure on import payments.
The Bangladesh Bank data shows import payments rose by 43.8 per cent to $66.498 billion during the July-March period of the current financial year compared to the same period last year.
Following that, the demand for dollar increased and the central bank depreciated taka against the US currency by Tk 1.5 between March and May of this year.
The official rate of dollar was Tk 87.5 on Monday, but the unofficial rate was Tk 95-96 due to high demand.
The big difference between the official and unofficial rates creates inflationary pressure, which is not counted by regulators. This gap also discourages migrants from sending remittances through formal channels.
In this situation, economists and business leaders suggested the government allow further depreciation of taka against dollar to mitigate the gap.
Policy Research Institute Executive Director Ahsan H Mansur told The Business Post there was no alternative but to depreciate taka more against dollar and bring it closer to Tk 94-95.
He said this would encourage exporters and remitters. “As a result, dollar inflow to the country will also increase and current account deficit will fall.”
The current account deficit stood at $14.07 billion in the July-March period of FY22, which was only $555 million in the same period of the previous financial year.
Mansur said increasing incentives for remittances would yield no benefit since the dollar rate difference had gone up to Tk 9-10.
The government currently provides a 2.5 per cent incentive against remittances.
Centre for Policy Dialogue’s Distinguished Fellow Professor Mustafizur Rahman said import costs were rising since importers had to pay Tk 95 per dollar.
The Bangladesh Bank should therefore depreciate taka drastically in line with the reality, he added.
The Bangladesh Bank provided over $5 billion from the reserves between August 2021 and the current month due to the increasing demand for dollars. As a result, reserves fell from $48 billion to $41.93 billion between August last year and May 11 this year.
Mustafizur said the Bangladesh Bank would not be able to take more risks by selling dollar in the open market from reserves in this situation. “At present, there is no option but to increase the exchange rate to protect reserves.”
Dhaka Chamber of Commerce and Industry President Rizwan Rahman said food imports should not be hampered if the exchange rate was raised.
He said a pragmatic dollar rate needed to be set in line with the reality. He also stressed reducing government expenditures and stopping luxury item imports.
“Government spending should be reduced by at least 10 per cent in the upcoming budget. We need to ensure accountability for spending on mega projects.”
The Bangladesh Bank recently doubled the letter of credit margin for importing non-essential products to reduce import costs. Foreign trips of government officials were also halted while highly import-dependent projects were discouraged.
Mustafizur termed these initiatives timely. He said the government should focus on increasing foreign exchange earnings through exports and remittances besides reducing costs.
Mansur said the ongoing mega projects could not be stopped but the government should not start any new one that was highly dependent on imports.
Both Mansur and Mustafizur suggested reducing the government’s subsidy expenditures to keep reserves stable.
Mansur said the prices of some commodities and utilities, including fertiliser, electricity, water, and fuel, would have to be increased to tolerable levels to cut the pressure of subsidies, adding there was no alternative. “Inflation will increase further if money is printed.”
Mustafizur said depreciating taka would raise import costs while the pressure of subsidies would also increase.
“The government will not be able to bear this pressure if prices are not adjusted. It remains to be seen how efficiently price adjustments are made,” he added.
Both experts said the government should continue providing support for the low-income people to mitigate inflationary pressure. They also emphasised raising direct taxes to increase revenue collection.
Rizwan said depreciating taka was a short-term solution when it came to stabilising forex reserves. He said the government should focus on diversifying exports, increasing foreign direct investment, and reducing the cost of doing business as part of medium- and long-term strategies.
