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Exports get more competitive, imports costlier due to Taka devaluation

bluesky

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Exports get more competitive, imports costlier due to Taka devaluation
JASIM UDDIN HAROON | Published: November 22, 2021 09:07:37 | Updated: November 22, 2021 11:45:51
Representational Image
Representational Image

Bangladesh's export-competitiveness improved to some extent as Real Effective Exchange Rate (REER) of the local currency decreased nearly 1.8 per cent in June on a quarter-on-quarter basis, though it spurs inflation.

The country's REER - a measure of the value of a currency against a weighted average of several foreign currencies - depreciated to 112.41 in June 2021 from 110.41 in March, according to the central bank.

The monetary benchmark, REER, helps in analyzing the country's competitiveness for its trade in goods and services with its trading partners and competitor countries.

A decrease in it implies that exports have become cheaper and imports more expensive. Therefore, a decrease indicates a gain in trade competitiveness -- and this is the fundamental rule as per the International Monetary Fund (IMF).

Analysts say REER below 100 means the country's exports remain competitive and imports expensive. This arithmetic reverses when REER rises above 100.

In the meantime, economists believe that this drop is primarily due to the depreciation of the local currency against the US dollar. Two factors are believed to be important to influence the rate of real effective exchange: inflation in Bangladesh over its competing nations and nominal exchange rate.

The nominal exchange rate (NER) depreciated 1.2 per cent to Tk 85.8 (intern-bank Tk-USD exchange rate) in November. But the 'kerb-market' rate remained much higher.

REER is an index number that is free from any measuring unit and is calculated with reference to a particular year called the base year, which is arbitrary and subject to change over time.

Dr Ahsan H Mansur, executive director at the Policy Research Institute of Bangladesh (PRI), a private think-tank, says: "This drop is definitely favourable for export."

Inflation has been increasing around the globe since the reopening of the economies. Bangladesh is no exception, he told the FE.

"We've only one option -- to depreciate local currency to keep stable REER over its competition nations," said Dr Mansur, also chairman of BRAC Bank.

On the other hand, Dr. Masrur Reaz, chairman at Policy Exchange of Bangladesh, another local think-tank, told the FE that the drop in the REER is a reflection of the nominal exchange drop. But, he thinks, there is a challenging issue as to how much to devalue the local currency. "If we devalue much our currency, the imports will be expensive, leading to rising inflation.

"Balancing between the export-competitiveness through exchange rates and the devaluation is a tough issue." However, exporters say the currency should have been depreciated much to remain competitive on the global market.

They said recent price spike of fuels has chain effect on the economy and it made clothing manufacturing expensive. "The overall cost of manufacturing has surged following price adjustments of fuel with the international oil market," said Anwar Ul Islam Pervez, managing director at one of the leading RMG manufacturers --- Evince Group.

He said the currency should be devalued further in order to remain competitive globally.

In the meantime, country's export receipts registered a sharp increase by nearly 23 per cent during the past four months to October of this fiscal year. It increased over 15 per cent in the past fiscal year (202-21), according to Export Promotion Bureau.

jasimharoon@yahoo.com
 
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Wood

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Higher import tariffs often have the unintended consequence of stifling local industries that depend on imports to add value and eventually export. Good luck with the move, hope Bangladesh can get it right :cheers:
 

Destranator

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Currency devaluation severely hurts the poor and middle class due to inflation of imported essentials.
The marginal increase in exports would bring little benefit.

Currency devaluation is not a bad tactic for highly industrialised countries like China which is not import dependent for finished goods.
BB should do whatever it can to keep the exchange rate stable.
 

bluesky

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Currency devaluation severely hurts the poor and middle class due to inflation of imported essentials.
The marginal increase in exports would bring little benefit.

Currency devaluation is not a bad tactic for highly industrialised countries like China which is not import dependent for finished goods.
BB should do whatever it can to keep the exchange rate stable.
You may be doing some mistakes. The GoB is not devaluing the currency by itself. It is the exchange market that decides the value of a currency.

In reality, the GoB has been keping the Taka value at a higher rate than the REER rate. It is about 112 Taka per dollar. So, Taka should be devalued in line with the REER value. The export prices will be down and there will be more exports.
 

Destranator

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You may be doing some mistakes. The GoB is not devaluing the currency by itself. It is the exchange market that decides the value of a currency.

In reality, the GoB has been keping the Taka value at a higher rate than the REER rate. It is about 112 Taka per dollar. So, Taka should be devalued in line with the REER value. The export prices will be down and there will be more exports.
I didn't say the government is deliberately devaluing the currency but they are not doing enough to arrest the fall.
The BDT is not a fully floating currency; the exchange rate is artificially regulated by BB by buying/selling foreign currency to local banks.
As already explained, the minor export advantage is not worth the widespread suffering currency devaluation triggered inflation will cause to the ordinary people thanks to import dependency for essential goods like food.
Currency devaluation benefits me personally but I am still against it.
 

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