Is Bangladesh paying the price for the managed exchange rate regime?
The taka has depreciated less against the US dollar against other South Asian currencies over the past year, eroding Bangladesh’s export competitiveness against its peers.
It appears that Bangladesh has tried to cope with the ongoing global economic crisis by artificially strengthening its currency, but this could have a negative impact on the macroeconomy, experts have warned.
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Currencies of South Asian countries, excluding the Maldives, saw devaluation between 6.06% and 79.82% over the past year, while the taka weakened by 3.18 %, according to data from the countries’ central banks.
All currencies in South Asia, which includes Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka, are now under pressure, like other currencies in the rest of the world, due to global supply chain disruptions and leaning. -up request.
The coronavirus pandemic spawned the crisis and it has now been exacerbated by Russia’s invasion of Ukraine.
Among the countries, Sri Lanka is facing an acute currency crisis, which has already forced its Prime Minister to intervene. Pakistan’s exchange rate regime is also experiencing volatility.
Amidst the volatile situation, the Bangladesh Bank is now making every effort to maintain stability in the foreign exchange market by weakening the local currency to some extent, ignoring the natural course of supply and demand.
The Daily Star spoke to five leading economists who suggested the central bank abandon its historic stance on the currency and devalue it.
The central bank has depreciated the taka five times this year, but these moves have not been enough given the surge in import payments, which have already generated a record trade deficit.
The interbank exchange rate was 87.50 Tk per USD on May 21, down 3.18% year-on-year. The rate was 81.84 Tk ten years ago.
Before the outbreak of the last financial crisis, the central bank had not depreciated the taka significantly. The rate stood at Tk 84.80 per USD in May last year.
Ahsan H Mansur, Executive Director of the Policy Research Institute (PRI), says Bangladesh’s peer countries have gradually devalued their currencies over the years, while the BB has not followed the same path.
For example, the dong, the currency of Vietnam, one of Bangladesh’s strongest competitors in the global export market, has been devalued by 11.95% to 23,145 VND over the past decade, in line with the Global market trend, according to data from the Southeast Asian nation’s central bank showed.
As a result, the dong has not been under any significant devaluation pressure lately.
“Bangladesh has tried to artificially strengthen its currency, so the current global volatility has created enormous pressure on the taka,” said Mansur, a former International Monetary Fund official.
But the banking industry now ignores the central bank’s BC (bills for collection) sell rate – the rate at which banks sell US dollars to businesses to pay for imports – due to the greenback shortage in the market.
Importers now have to pay 95-97 Tk to buy a dollar to settle import bills. Preventing the taka from following the usual course of devaluation carries a number of risks.
For example, exporters may opt for under-invoicing, while the flow of remittances through the formal channel may further decline as the US dollar rate in formal and informal markets has widened significantly.
Open market traders now charge 95-97 Tk for one USD, while the BB rate hovers around 86.5-87.45 Tk for shippers.
The taka is expected to face more pressure in the coming days as the US central bank raises its benchmark interest rate to contain inflation, a phenomenon that would make the US greenback more expensive.
On May 12, the dollar hit a new 20-year high as concerns persisted that central bank actions to curb high inflation would dampen global economic growth, boosting the appeal of the safe-haven currency. , reported Reuters. Further interest rate hikes are expected this year.
Mustafizur Rahman, a prominent fellow at the Center for Policy Dialogue, urges the central bank to inject an adequate amount of dollars from its foreign exchange reserves into the market while depreciating the local currency.
The BB has provided more than $5.3 billion to the market so far this fiscal year.
“We should also reduce imports to reduce the trade and current account deficit,” Rahman said.
Monthly import payments are now over $7 billion. Due to escalating imports, trade deficits reached a record high of $24.90 billion between July and March. The current account deficit stood at $14 billion.
Reserves fell to around $42 billion last week from $46.15 billion as of December 31.
Rahman recommended the central bank to restore discipline in the exchange rate regime since banks do not follow the instructions of the BB related to the price of the dollar.
Selim Raihan, executive director of the South Asian Network on Economic Modeling, thinks the central bank should have gradually devalued the local currency over the years.
“The central bank could take a wait-and-see approach for the time being. But the country could lose out if it takes too long to devalue the currency.”
Although local currency depreciation is fueling inflationary pressures, the central bank has no choice but to do so, he said.
“The government should take fiscal measures to protect low-income groups from higher inflation.”
The current crisis in the global market may persist as the war in Ukraine is still raging and the coronavirus pandemic is not yet over.
“Gradual depreciation is key to mitigating the crisis,” said MA Razzaque, PRI research director.
Shah Md Ahsan Habib, a professor at the Banking Institute of Bangladesh, advises the central bank not to depreciate the taka to a large extent all of a sudden and instead recommends the BB to monitor the market trend to assess the results generated by the recent depreciation. .
“If the BB depreciates the currency by Tk 4-5 suddenly, a panic will spread in the market,” he said.
Md Habibur Rahman, the central bank’s chief economist, said the central bank would observe the situation in the coming days before deciding on its next course of action.
“We will try to avoid imported inflation,” he said, adding that debt service will increase due to the devaluation.