The value of taka has been allowed to depreciate by around one per cent from early this month, however, informally since the last 10 months basically to bring correction in external trade regime while some other trading nations have also depreciated their currencies to take advantage in global market.
Outwardly the move aims at reducing import and encouraging exports. But in view of many, depreciation has been allowed at a time when some major trading nations like China, India or Vietnam adjusted the value of their currencies downward indirectly requiring Bangladesh to act accordingly.
In domestic perspective, the devaluation becomes highly critical factor when the country’s exports have significantly slowed down to around 3.35 per cent during the last FY2014-15 and further down to 0.83 per cent during July-September this year. Export growth dipped into 6.98 per cent negative in September compared to the same period last year unfolding a critical situation.
Foreign trade slowdown
On the other hand import grew by 11.25 per cent during the FY2014-15 registering the highest growth of 24.87 per cent in August to the tune of $3319 million. It was at a time when many believe capital flight was at its peak under the cover of fake imports.
The galloping rise in imports gradually fell in the consecutive months with 2.99 per cent negative import growth in July-August this year compared to the same period last year. These are updated figures released by Bangladesh Bank up to September last.
But it is not sure whether fake imports which are used to move out capital from the country has equally declined or to be impacted by it. Because illegal money has no concern about cheaper or dearer exchange rate; its all windfall gain. Insiders in the banking sector have justified the depreciation saying ‘payment pressure’ led the banks to depreciate taka to discourage imports. It may be partly true but when yet bigger payments were made against imports, there was no such depreciation to suggest the causes may be otherwise.
It is true that the country has to pay more against imported goods from textile machinery to raw materials, mobile phones to fuel oils and cars. Devalued taka will put a brake on real unnecessary imports. But doubts remain over fake imports.
On the other hand, exporters and remittance senders will benefit as they would get more in local currency against dollar. Mainly exports will get a boost making the local products, specially the apparels cheaper.
The inter-bank exchange rate for a dollar rose to Tk 78.15 now from Tk 77.8 before the depreciation on October 25. Meanwhile, selling rate for bills for collections/import payments moved upward to Tk 79 a dollar compared to Tk 78.20 and kerb market rate hit at Tk 81.
Bankers are justifying depreciation because of slow down in export and falling remittance in October and payments pressure of oil imports, in addition to payment against rising foreign currency loans. “This is however a temporary phenomenon,” some bankers believed.
Silent currency war
Dr Abdullah Shibli, an economist, however explaining the background of depreciation of taka in a recent newspaper article, said: “a global currency war is going on without much fanfare or a formal declaration of war. All major economies, including the Eurozone, Japan, China, and Russia are depreciating their currencies against the dollar.
“The exchange rate for the euro has dropped from 1.4 to a dollar to 1.12 in one year and the Japanese yen dropped from .012 in 2013 to .009 in 2015. Russia’s ruble has nosedived since the rest of world imposed economic sanctions against it,” So, is that all good or bad for the Bangladesh economy, he posed the question trying to justify devaluation of taka.
He said a depreciating currency has multiple impacts. When the taka depreciates our exports become cheaper and inversely, imports become more expensive. It illustrates the reason, he said why countries let their currencies depreciate, i.e., to boost exports and stimulate demand for domestic products.
He said exports of Vietnam and Cambodia to Eurozone countries grew by 28.9 percent and 23.9 percent respectively during the July to September period last year partly based on devaluation. However, it may be also the results of their trade expansion activities at global market.
He pointed out, many of Bangladesh’s competitors, particularly in the garments sector along with those of Sri Lanka, Vietnam and Pakistan are in the same boat with Bangladesh. Only India, by letting the rupee slide against the dollar, appears to be getting an upper hand.
Exchange rate economics
Bangladesh Bank Governor Dr Atiur Rahman said Bangladesh is the only country in the region with the pressure for a stronger exchange rate. To keep dollar strong, he said Bangladesh Bank has bought $3.5 billion from banks in the currency market over the past year to prevent taka from strengthening. It helped boost foreign-exchange reserves to a record $27 billion.
“Bangladesh isn’t getting swept by the tide of depreciation because of the strength of its garment export industry, where it is the global leader after China. The devalued Yuan and Indian rupee help Bangladeshi apparel makers by reducing their cost of buying raw materials such as buttons.” It’s a balancing case between buying cheaper imports as against selling cheaper exports, he said.
“If their currencies go down, Bangladesh gains,” Rahman said. About 80 percent of the value of garment exports derives from imported materials.” In his view in free exchange rate taka may get even stronger at Tk 70 for a dollar. BB purchases dollar from the forex market so that the taka does not appreciate too much and exporters and remitters are not affected
Even with China’s economic slowdown and the ensuing financial market turmoil, Bangladesh’s exports rose 28 percent in August, he claimed. The industry produces garments for about a third of the price of China’s, the central bank claims.
Currency is the major player in external trade, in addition to domestic inflation and Bangladesh appears highly critical as to whether and how far it can depreciate taka to encourage exports at a time when it is also making more imports.
Source: Weekly Holiday