Bilal9
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In the last one year, during the Covid crisis, Bangladesh was gaining export competitiveness due to slower appreciation of the taka against dollar compared to other competitor countries.
However, the situation has reversed now when other trading partners moved to depreciate their currencies soon after the Russia-Ukraine conflict when dollar exchange rates fell especially compared to Bangladesh's devaluation policies.
Bangladesh experienced depreciation of the taka by 1.74% against the greenback in the past three months since the Russian invasion in February, one of the lowest among its major trading partners in Asia like India, China and Vietnam.
From March to May, China experienced 6.31% currency depreciation while India registered 2.32% and Vietnam 2.62%.
The severe shortage of the dollar crisis amid high imports and low exports put a depreciation pressure on the taka.
The rising real effective exchange rate (REER) index also signalled the need of changing the currency regime.
At present, the LC (letter of credit) settlement rate for import surged by Tk97 per dollar when the official rate set by the Bangladesh Bank is Tk87.50. In the open market, the dollar price crossed Tk100 for the first time in the country's history on Tuesday amid severe dollar shortage.
Illustration: TBS
Illustration: TBS
However, the rate came down to Tk98 on the very next day when the LC rate remained unchanged above Tk95, according to bankers.
The daily net opening balance of the dollar in the banking sector came down to $1 billion in recent months when the balance was above $2 billion previously. The substantial fall in net opening balance also evidenced the shortage of dollars in banks.
The REER, the measure of the value of a currency against a weighted average of several foreign currencies – divided by a price deflator or index of costs - increased to 115.65 in March from 115.34 in December last year, according to the Bangladesh Bank data.
The rise of REER means inflation is rising. The country has been experiencing rising inflation since February with 6.17% which surged to 6.22% in March and 6.29% in April, according to the latest data released yesterday.
The REER index 100 is considered as the ideal currency rate and when the index goes above 100, it means currency is overvalued and down means undervalued.
The current REER index evident taka is overvalued by 15%.
Though there is a huge gap in demand and supply of the dollar, the Bangladesh Bank is meeting the gap through selling dollars putting foreign exchange reserves at risk.
The Bangladesh Bank has sold $5.11 billion dollar from reserves during July to 12 May this year. As a result, forex reserves came down to $42 billion on 17 May which was above $48 billion in August last year.
According to the IMF (International Monetary Fund), a country needs to maintain a reserve that covers import payment of three to five months for the normal time and eight to 12 months for uncertain situations.
Current reserve covers around five months of import which is concerning for the country, said experts.
All market factors show that now it is time to let taka become weaker, coming out of the managed floating currency peg, to give exporters some competitive advantage and bring stability to foreign exchange market, said industry people.
Md Shahidullah Azim, vice president of Bangladesh Garment Manufacturers and Exporters Association (BGMEA), has said taka has not yet been devalued much against the dollar compared with currencies of competing countries.
"That is why we are lagging behind in export competitiveness. Because of adequate depreciation of their currencies, they are getting more from export proceeds in local currencies than we do. This puts them in a stronger position than us in price negotiations," the apparel exporter told The Business Standard.
The present practice of piecemeal devaluations comes to little use for exporters, he said, complaining that they are to settle export proceeds in local currency at the rate set by the central bank but to pay much higher rate while opening LCs for raw material imports.
The BGMEA leader said they will soon take up the issue with the central bank.
Only one option left
Dr Zahid Hussain, former lead economist at World Bank's Dhaka office, says demand for dollars has surged worldwide compared to its supply due to skyrocketed global commodity prices and spike in domestic demand in emerging countries, leading to its highest rate in nearly two decades in a basket of selective currencies. And the situation is no longer temporary as the war shows no sign of ending anytime soon.
Asked what the central bank can do in such a situation, he says there are two ways to deal with the demand-supply imbalance in the foreign exchange market – allowing the dollar rate to adjust or meeting the deficit from the reserve.
"The Bangladesh Bank has already used roughly $5.2 billion from its reserves to meet the deficit so far in this fiscal year. But how long will it be able to continue using its reserve that has already reached almost its minimum level?" he said.
"The reality of the situation leaves no option but to let the rate go and let the market do its own adjustment," says the economist.
