What's new

Bangladesh: Forex crisis now threatens macroeconomic stability

Homo Sapiens

ELITE MEMBER
Feb 3, 2015
8,898
-3
20,939
Country
Bangladesh
Location
Bangladesh

Forex crisis now threatens macroeconomic stability​


AKM Zamir Uddin
Sun Mar 27, 2022 12:00 AM Last update on: Sun Mar 27, 2022 08:10 AM



Like all countries in the world, Bangladesh too is facing volatility in the foreign exchange market. This was initially caused by the demand recovery and supply chain disruption as battered economies began recovering from the coronavirus pandemic.
The volatility has exacerbated in the last one month because of Russia's invasion of Ukraine and this is not only threatening 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.

But Bangladesh Bank seems to be indecisive whether it would go for gradual depreciation of the local currency or execute a quick devaluation. The situation has been created by the dwindling flow of foreign exchange.
Bangladesh Bank injected a record $3.78 billion between July 1 and March 23 this fiscal year 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 and January, imports stood at $46.67 billion, up 46 per cent year-on-year, while exports increased 29 per cent to $27.97 billion, central bank data showed. Remittance declined 19.4 per cent to $16.68 billion at the same time.

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 $44.29 billion on March 23. This is way down from the $48 billion recorded in August last year.
And 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 per cent from 46 per cent 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 per cent 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 5.5 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.

 

Destranator

SENIOR MEMBER
Jul 20, 2018
3,157
-2
5,772
Country
Bangladesh
Location
Bangladesh
This is why Bangladesh should never get complacent with forex reserves worth 9-10 months of import bills. Our forex earnings are heavily dependent on export of garments and low skill labour both of which are highly vulnerable to competition and global economic downturns. We should target having hundreds of billions of $ in reserves and invest them globally.
 

bluesky

BANNED
Jun 14, 2016
14,156
0
15,614
Country
Bangladesh
Location
Japan
Between July and January, imports stood at $46.67 billion, up 46 per cent year-on-year, while exports increased 29 per cent to $27.97 billion, central bank data showed. Remittance declined 19.4 per cent to $16.68 billion at the same time.
Imports are not shown in itemized form in the news, but it is possible that increase in the imports consisted mostly of the finished consumer products as BD has yet to build industries that produces high end consumer goods.

The remittances are shielding BD from an unwanted situation. However, it is not healthy. The country must expedite with building many industries that produce high end consumer goods.
 
Last edited:

mb444

SENIOR MEMBER
Apr 18, 2012
4,669
1
7,843
Country
United Kingdom
Location
United Kingdom
Managed Taka depreciation is not a bad thing from every perspective... it will increase exports but will pressure imports...good when it reduces import of luxury items but bad when it impacts cost of imports such as cotton that is bought as an input in the RMG sector. Overall RMG profitability will fall in the short term.

BD just like other countries need to reduce dependence on dollar. This is an artificial crisis.
 

BlindEagle

BANNED
Nov 9, 2021
115
0
186
Country
Kuwait
Location
Ukraine
This is why Bangladesh should never get complacent with forex reserves worth 9-10 months of import bills. Our forex earnings are heavily dependent on export of garments and low skill labour both of which are highly vulnerable to competition and global economic downturns. We should target having hundreds of billions of $ in reserves and invest them globally.
Yeah keeping huge sums of money locked up in nostro Vostro accounts isn’t practical at all. Without even bringing up the settlement delays and transaction costs.
Everything points to flip of switch moment towards crypto and Bangladeshi banks buying up xrp behind peoples back is enough for me to believe in the dream.
 

Users Who Are Viewing This Thread (Total: 1, Members: 0, Guests: 1)


Top Bottom