Home ›› 13 Nov 2022 ›› Opinion


Merits and demerits

Md Mazadul Hoque
13 Nov 2022 00:00:00 | Update: 13 Nov 2022 16:06:11
Merits and demerits

As an import-oriented economy, Bangladesh has to settle import payments more compared to export earnings mostly in the form of US currency. Amidst the Covid pandemic period, Bangladesh showed ability to bring significant volume of foreign currency thanks to Bangladeshi expatriates.

Export earning was contributor also in earning foreign currency. As a result of inflow good volume of foreign currency, the foreign exchange reserve reached worth $ 48.06 billion in August, 2021. Then, Bangladesh was overwhelmed with joy in seeing the growing trend of foreign currency. Bangladesh economy is accustomed to have trade deficit. But in recent times, trade deficit is widening. In July- September of FY 2021-22, trade deficit was recorded $ 677 crore. In current fiscal year of same duration, the deficit reached close to double at $ 754 crore. According to newspaper report, export earnings and remittance recorded low growth in September of running fiscal year.

Currently, Bangladesh economy is seeing falling trend in forex reserve. As of November 07, the reserve stood $ 34.3 billion. If considered IMF formula, the reserve shows $ 26.3 billion. The reason of decreasing forex reserve is low growth in export earnings and foreign remittance, no doubt. Since February of this year after beginning the war, the import cost has been increased many folds.

A Research Director at Centre for Policy Dialogue (CPD) said Bangladesh saw a 39 per cent hike in import payments for consumer goods in FY 2021-22 compared to previous fiscal year of 2020-21. Apart from consumer goods, excessive cost for importing crude oil, gas, fertilizer is being paid right now. Ultimately, the import payments are made from the country’s forex reserve mainly in the form of greenback.

Foreign-exchange market in Bangladesh began to experience shortfall in US dollar after soaring import payments following the ongoing war. A few months back, the banks were observed to fall in troubles in paying import payments. Due to rise in pent-up demand in economy, imports of goods and services had been in surge. The lenders were seen to make debut unauthorized business following shortfall in US dollar.

The forex market joined in a race of unholy competition in respect of mobilizing US dollar. Bangladesh Bank, the central bank of Bangladesh, failed to keep its supervision on forex market resulting in instability. It was one of challenging tasks for the central bank to bring forex market stable. With a view to stabilizing the market, the central bank in FY 2021-22 injected $ 5.31 billion in view of dollar shortage. Even though, Bangladeshi currency ‘the Taka’ was devalued five times in the aim of increasing export earnings and foreign remittance sent by the expatriates. It is essential to know that devaluation of Taka causes inflation and goes against importers’ interest.

Despite seeing untiring efforts to bring back stability in forex market, no mechanism brought expected result. Without finding no alternative ways, the central bank announced for introducing an effective floating exchange rate in in bring back stability in foreign exchange market. Under the move, the demand and supply of the greenbacks will determine the exchange rate of taka. But, the move remained stalled considering market situation.

Later, the central bank in presence of the Association of Bankers, Bangladesh (ABB) and the Bangladesh Foreign Exchange Dealers Association (BAFEDA) set multiple fixed exchange rates for remitters, exporters and importers. Tk 108 has been fixed for remittance through exchange house, Tk 99 for exporters, Tk 99 for inward remittance. Importers will buy the dollars based on the weighted average of the maximum rates plus Tk 1 (one). What should be noted here that the weighted average cost will be calculated based on actual cost on a rolling basis over a five-day period.

Following the decision taken by the central bank in collaboration of ABB and BAFEDA, inflow of foreign remittance came down worth $ 497 million in September lower than the month of August. According to news report, the remittance in October came $ 1.52 billion, lowest in eight months. In view falling trend in remittance, the exchange rates have been revised. As per latest rates, the remitters (through exchange house and banks) will get equally Tk 107, exporters will get Tk 100 and importers get in above stated formula.

Interbank exchange rates method worked better when US currency (dollar) was available in the market. The market, hit hard by the dollar crunch, became unstable. The central bank and BAFEDA thought that the decision of fixing multiple fixed exchange rates will work better in containing volatility. But, the scenario appears different.

It has been alleged that the remittance senders never welcomed the latest move. The remitters seek better rates of the greenback. The remitters are getting better rates in curb market, known as unauthorized market. More than Tk 4 is being provided to the remitters in the curb market resulting in decreasing remittance in formal channel.

In Asia region, Bangladesh is one of key remittance-dependent countries. But, inflow of remittance through formal channel is rarely seen in Bangladesh. About 49 per cent remittance enters through illegal cross border transaction known as ‘Hundi’.

The multiple exchange rates favor the country’s Balance of Payment (BoP) having deficit situation, no doubt. The rates also help lessen cost of living crisis Bangladesh faces now. With multiple exchange rates, the government get additional revenues. Besides, an economy, practicing multiple exchange rates, sees favorable terms of trade.

Desired capital flows and diversification in economy are notably observed with the launch of multiple exchange rates. But, home industries are badly affected with multiple rates due to cheap import from abroad.

To conclude, multiple exchange rates are favorable for least developed and developing countries in many ways. The rates encourage import of capital goods, intermediate goods and technical know-how. On the contrary, the rates discourage the import of luxury goods. Bangladesh, as LDC group country, needs multiple exchange rates considering current situation in economy. But, if the remittance senders do not welcome multiple exchange rates, the economy is set to experience upsetting situation in view of downward in foreign exchange reserve.


The writer is an economic affairs analyst. He can be reached at [email protected]