Of all the elements of the monetary policy, the exchange rate regime of the Bangladesh Bank is the most perplexing. Floating market based rate exists on paper, but the practice is less than an optimal REER (real effective exchange rate) based fixed exchange rate regime. The trade i.e. exports competitors, India, Vietnam and Indonesia have depreciated their currency by 10 percent to 15 percent in the last 15 months and the taka has been allowed to maintain its value thereby appreciating it relative to the three competitor currencies. Consequently the Bangladesh exports growth in 2015-16, impressive as it is, could not be as much as it could have been. Economists are afraid that a free float will reduce the exchange rate to Tk 72 or so per US dollar although they do not visualise the demand pressure if all the underground dealings come to the fore as these would in a free exchange rate regime. But a political government may not have the stomach to risk this ‘instability’ in the third of its five-year tenure. Hence this option has to wait.
Bangladesh Bank knows that a properly calculated REER could mean Tk 100 or so to a US dollar exchange rate. Thus the authorities may think to appropriately administer an exchange rate around Tk 83-Tk 85 boosting the exports via reduction in the foreign exchange price of Bangladesh exports. This will also not only halt the slide in the remittances but will also provide a fillip to higher remittances. The cost in terms of higher amount of local currency matching the exports and the remittances net of the imports expenditure should not add any extraordinary pressure on price levels.
It may be noted that the inflationary trend is determined by the relative movement of the aggregate demand or total purchasing power (MV) and the real GDP, Q as the equation cited earlier. Investment will push up MV and Q will increase in response to the investment but with a time lag. Thus inflation may set in. But the past investment may start yielding results now to increase Q as well somewhat moderating the inflationary trend. Imports also augment Q. Investing producers and the traders always welcome moderate inflation 6-8 percent in order to have the profit incentive. The major price reduction in petroleum products and all the other commodities that Bangladesh imports will continue to pull down the prices in Bangladesh. The country’s inflation rate at 5.8 percent, although very low, is still higher than India (5.2 percent), China (less than 2 percent), all the other Asian countries and Europe and North America. Now is the time to come out of the fear of inflation and craft a monetary policy that will build up on the momentum and the tremendous pace at which the infrastructure in being built and nurture the private sector credit increase for growth and poverty reduction through employment generation.
As far as the $30-billion reserve is concerned, it is useful for confidence building and gives a good feeling. But a reserve that is equivalent to nine months’ imports cost is a luxury that Bangladesh can ill afford. Just as we suggested in December 2011 using reserves for domestic financing of the Padma bridge, we again feel the government should seek low interest (1 percent or so as the reserves kept in other central banks earn) or no interest loan from the reserves to finance mega infrastructure projects. One such project can be modernisation of the railways- broad gauging, double tracking and electrification for enhancing the productivity of the economy tending to push down the ICOR (incremental capital output ratio).
The coordination council scrutinises for consistency and coordinates the monetary policy, the interest rate regime, the foreign exchange rate and the overall fiscal policy. It is highly recommended that the half-yearly monetary policy may be placed before the coordination council for final check.
Source: The Daily Star
