Bangladesh Bank’s bold move have already been commended by experts across the globe
In a gutsy move by the Bangladesh Bank on the 9th of January 2022, the taka was allowed to depreciate against the US dollar by BDT 1.2 standing at an unprecedented 86 from 84.8 as of January 2021. These are only interbank rates, and the country’s currency plunges further south to a jolting 91.5 at the open market. According to reports, in the last 13 years, the taka has depreciated almost every year, except for one. Bangladesh uses the US dollar for international trade, and despite being a tightly run ship, the taka lost nearly 25% of its value in the last 13 years. Over the previous five months, more specifically, the price of taka fell by BDT 1.20 against USD, and after holding its ground for a month and a half, it fell again on the 9th of January.
To this end, the Fitch Solutions and Country Risk and Industry Research released a prediction back in November 2021 that the dollar may stand at 86.5 by the end of this year. It credited global inflation and aggressive stances by major global central banks for this depreciation.
The Bangladesh Bank is planning to devalue the taka even more, but gradually and in phases as a cautionary measure to keep domestic commodity prices stable. To this end, the Fitch Solutions and Country Risk and Industry Research released a prediction back in November 2021 that the dollar may stand at 86.5 by the end of this year. It credited global inflation and aggressive stances by major global central banks for this depreciation.
Since independence, the government has fixed the value of taka against the dollar, and taka became acceptable for foreign trade in 1994. In 2003, this exchange rate was made ‘floating’, meaning that the forces of demand, supply and other economic factors would determine the price of taka against the dollar. The exchange rate of Bangladesh is not entirely left to the defences of the marketplace, however, and is instead somewhat controlled by the Bangladesh Bank in what is known as a ‘managed float system. Bangladesh Bank influences the country’s exchange rate by buying and selling dollars, so the country is not subjected to widespread fluctuations. For instance, in the fiscal year 2020-21, the Bangladesh Bank borrowed USD 8 billion different banks to keep the exchange rate stable, to hold on to exports and to boost the confidence of investors, especially after the severely decreasing import orders due to the pandemic, very high import payments valued at USD 31.6 billion early in the current fiscal year and the 21% steep fall in remittance in the first half of 2021.
The import demand has since improved by 50%, thanks to the world opening up post heavy lockdowns and industrial production on the rise, but they have not been able to offset the imbalance in the forex market created due to the severity of the above mentioned conditions.
The move to devalue the taka is expected to help exporters and remitters bring more money into the country and boost the nation’s foreign reserves. The central bank has assured the public that they have upwards of USD 44 billion in foreign reserves, so there is no cause for concern over the depreciation of taka. However, there is a noticeable decrease of 3.3% in reserves from the past year. Despite the best efforts from the Bangladesh Bank to grow its foreign reserves to offset the appreciation of the taka versus the dollar, reserves have slipped from USD 48 billion in August 2021 to USD 44 billion at present.
Despite the best efforts from the Bangladesh Bank to grow its foreign reserves to offset the appreciation of the taka versus the dollar, reserves have slipped from USD 48 billion in August 2021 to USD 44 billion at present.
Understandably, financial experts are concerned. Some experts, such as a former official of the International Monetary Fund who called for a one-time immediate devaluation of the taka, to as low as 88, as an urgent endeavour to conserve the country’s foreign reserves. They feel that remitters will be more open to sending money to the country through banks if the exchange rate converts into more takas for less or the same number of dollars. Likewise, a lower value of taka will boost exports as exporters will earn more takas while offering competitive prices to their foreign buyers, thereby increasing the influx of dollars into the forex reserves.
So, the question is, what keeps central banks from depreciating local currency if it is so good for balancing the current accounts? The truth is, devaluing the taka is an economical conundrum. Whenever the Central Bank decides to relax policy to increase the price of dollars and allow for more exports and remittances to enter the country, the general public feels the heat in the form of inflation.
In the post-pandemic era, inflation has become something of a global dilemma. According to the IMF, the worldwide rise in prices is due to the supply chain interruptions throughout the globe and a rise in energy oil and petroleum prices internationally. It is also being affected in the country due to the increase in imports, shipping cost increases, and a lull in remittances. Bangladesh crossed a 6% inflation rate, standing at 6.05% in December 2021, and it needs to restrict inflation rates to 5.3% to avoid a price spiral and come out at the top of its game after the covid-induced pause. It is largely due to this pressure that the central bank has been injecting dollars into the market periodically to avoid any steep devaluation of the currency, which could shoot up prices drastically in the last year. According to a Central Bank official, the taka will gradually depreciate to 87 against the US dollar in phases, judging by the state of the economy at each given point in time.
Inflation is not far off in the minds of the financial experts either, but they feel that overall macroeconomic stability is much more critical in the long run than temporary inflation. Furthermore, if prices of goods increase, the average consumer will reduce consumption, thereby automatically pushing down prices. Even as inflation becomes a global issue, fuelled by stimulus and post COVID-19 fervour, it is the lesser of the two evils. The current account deficit of more than USD 6 billion seems to be the more significant threat. The gap is expected to widen to USD 15 billion if precautionary interventions do not result in soft loans from other sources. Naser Ejaz Bijoy, CEO of Standard Chartered Bank, feels that the exchange rate should be left entirely to market forces, as the momentum will continue to face downward pressure if global prices keep rising. The pressure may only be let on if the government takes out soft loans. CEOs of other prominent banks say that Bangladesh should consider following peer nations who have significantly devalued their currency to boost their trade. They welcome the measures taken by the Central Bank with open arms.
Fitch Solutions hopes that the government will intervene for competitive exports and adopt stances to curb import inflation. It is a puzzling situation, but the cautionary stance of the government is understandable, given that the pandemic has been harsh to all strata of citizens and adding further pressure of inflation to their wallets may impact the economy adversely. Rahman, an executive director of the Bangladesh Bank, said that although the bank recognises the merits of allowing the exchange rate to float freely in the market, the central bank is not looking to leave the rates in an uncontrolled state just yet.
