According to The Bangladesh Chronicle, like other countries
of the world, Bangladesh too is facing volatility in the foreign exchange
market. This was initially caused by the demand recovery and supply chain
disruptions as battered economies began recovering from the coronavirus
pandemic.
The volatility has exacerbated in the last one month because
of Russian invasion of Ukraine. This is not only likely to derail the rebound
from the health crisis but also bringing about a bigger macroeconomic challenge
for Bangladesh.
Maintaining a stable exchange rate of the taka against the
US dollar is a populist idea that prevailed in the mindset of both the
government and commoners. The same thinking might still be dominating, although
the country seems to be facing a far bigger crisis than the pandemic.
Bangladesh Bank seems to be indecisive whether it would go
for gradual depreciation of the local currency or opt for a quick devaluation.
The situation has been created by the dwindling flow of foreign exchange.
Bangladesh Bank injected a record US$3.78 billion between
July 1, 2021 and March 23, 2022 to stop the freefall of the taka, but the
initiative has hardly resolved the crisis faced by the dollar-strapped banks.
Although, export earnings are on the rise, this has not been
enough to offset the instability in the foreign exchange market led by a steep
increase in import payments and a sharp decline in remittance.
Between July 2021 and January 2022, imports grew to US$46.67
billion, up 46%YoY. As against this exports increased 29% to US$27.97 billion.
Remittance declined 19.4% to US$16.68 billion.
The imbalance between the inflow and outflow of US dollars
has compelled many banks to purchase the greenback from Bangladesh Bank to
settle letters of credit for imports.
The central bank is providing dollars to the banks with
utmost generosity as the taka would face a major fall if the support is not
extended.
The exchange rate now stands at Tk 86.20 per US dollar
compared to Tk 84.80 a year ago. This means the central bank has allowed the
taka to depreciate in a certain range.
But Ahsan H Mansur, an economist who earlier worked at the
International Monetary Fund, describes the central bank’s move as insufficient
to ensure macroeconomic stability from the current global turmoil.
“Bangladesh Bank will have to devalue the local currency by
Tk 3 against the dollar immediately,” he said.
Higher imports against moderate exports brought down
Bangladesh’s foreign exchange reserves to US$44.29 billion on March 23. This is
way down from the US$48 billion recorded in August last year.
Economists think the worse is yet to come. This is because
the impact of the global supply chain disruption stemming from Russia’s
invasion of Ukraine has not fully hit Bangladesh yet.
Businesses usually open letters of credit two to three
months before the arrival of imported products. So, the effect of the war will
be visible a couple of months later.
“The crisis in the
foreign exchange regime will deepen if the increasing imports cannot be
contained,” Mansur said.
He suggested bringing down the country’s import growth below
30% from 46% now or else the reserves will be hit hard by the ongoing
instability.
The depreciation risks stoking inflationary pressure to some
extent. The official figure of the Consumer Price Index surged to a 16-month
high in Bangladesh in February driven by soaring costs of essential food
ranging from staples such as rice, edible oil and vegetables to protein items.
“Inflation will increase, but you will have to embrace it
for the time being,” said Mansur when asked how the government would tackle the
situation.
“We don’t want to become Sri Lanka, which has long been
facing a foreign exchange crisis,” he added.
Sri Lanka has been hit with the financial crisis because of
a shortfall of foreign currencies. As a result, traders cannot finance imports.
On Tuesday, the country was forced to order troops to petrol
stations as sporadic protests erupted among the thousands of motorists that
queue up daily for scarce fuel.
“Any delays in taking initiatives to address the existing
crisis will deal a fatal blow to the macroeconomic stability,” said Mansur.
Remittance flow through the official channel may reduce
further as the exchange rate in the kerb market, an illegal trading spot, is
higher than in the banking sector.
A foreign currency trader says that people now have to count
Tk 91.80 per dollar, way higher than the Tk 86.20 interbank rate.
The foreign exchange regime volatility has even forced a
bank to stop publishing US dollar rates in the last few days since the rates
are fluctuating abnormally, said an executive of the lender requesting
anonymity.
“If the kerb market continues to offer a higher rate,
remitters will opt for the informal channel,” Mansur said.
“This will bring the reserves to a critically low level. So,
the central bank should narrow the gap as the subsidy of 2.5% given by the
government to beneficiaries of remittances is not adequate,” he added.
Md Habibur Rahman, Chief Economist of Bangladesh Bank, says
the central bank has decided to gradually depreciate the local currency.
He thinks the exchange rate gap between formal and informal
markets should be Tk 2.50 per dollar to ride out the ongoing situation.
If his view translates into reality, the exchange rate will
have to be depreciated to at least Tk 89 per dollar, which is also supported by
Mansur.
“The central bank will bring about quick depreciation of the
taka to a certain degree since injecting dollars to keep the exchange rate
stable is not an ideal stance for long,” Rahman said yesterday.
However, he has not given any hint as to how much depreciation
will be allowed.
Another central bank official said the government would try
to keep inflation in check in order to protect people from higher prices since
the next general election is not far away.
Mustafizur Rahman, a distinguished fellow at the Centre for
Policy Dialogue, says the reserves could cover import payments for more than
nine months a few months ago, but now it can finance imports for about 5 and a
half months.
He calls the gradual depreciation of the taka a
time-befitting move.
“The depreciation will bring imported inflation. The
government can lessen the woes of the common people by giving fiscal supports
such as waiving or reducing taxes and value-added taxes, and providing
subsidies to expand open market sales,” he said.
“But such fiscal measures will have an implication on
drawing up the next budget,” Rahman added.
Syed Mahbubur Rahman, managing director of Mutual Trust
Bank, says the imports of non-essential and luxury items have to be discouraged
as some banks now face foreign currency shortages.
