With increased vigilance and coordinated actions between the Bangladesh Bank, non-resident Bangladeshis and relevant ministries, we can bring some common sense and balance to the foreign exchange market.
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Despite many tensions, the Bangladeshi taka remains one of the strong currencies in the region. There is no doubt that the taka is still overvalued and therefore it is trying to realign with the value of the US dollar through a measured depreciation.
According to the Bangladesh Bank, the level of devaluation in this fiscal year so far has been 3.2%. Most currencies in the region, including the Indian rupee, have depreciated much more than that.
Western currencies also devalued more than the taka. However, Southeast Asian countries, including Malaysia, Cambodia, Vietnam and Indonesia, devalued even less than Bangladesh.
Even though Bangladesh did not peg its currency to the USD like Malaysia did in the late 1990s following the Asian financial crisis, it did go through a controlled float of its currency through intervention appropriate in the market to keep its exchange rate stable against the USD in a band. I think this has been a very prudent policy by the Bangladesh Bank as it has been able to maintain a “sort of peg” with the USD for about a decade and a half or so.
This gave a clear signal to foreign and local investors that the risk arising from frequent fluctuations in the exchange rate was minimal. Exporters and importers knew exactly what the costs and benefits of their businesses would be in the medium term.
When the government and central bank felt that small currency acquirers like shippers were losing out due to the overvalued taka, they opted for cash incentives (now 2.5%) to keep them on board. formal payment. Exporters, especially RMGs, also received similar incentives to stay competitive.
However, lately there has been some turmoil in the forex market, mainly due to the sudden opening of businesses both at home and abroad in the post-Covid situation and of course further aided by supply chain disruptions from Ukraine. war.
Bangladesh, as a major importer of fertilizers, wheat and edible oil from Ukraine and neighboring countries including Russia, suddenly faced unprecedented supply constraints for these products. Moreover, the gas and oil markets were also destabilized by this war, creating enormous pressure on the payment of imports.
The current destabilization of the foreign exchange market in Bangladesh is largely due to the increase in the trade deficit (about $25 billion) leading to a similar increase in the current account deficit of about $14 billion (which was in surplus for many years). many years until this exercise) .
Simultaneously, there has been a decline in remittances this fiscal year, so far a contraction of around 18%, which has further complicated the situation.
As a result, there was an overall balance of payments deficit, creating pressure on the taka-dollar exchange rate.
The central bank continued to defend the value of the taka by selling nearly $6 billion this fiscal year. As a result, the foreign exchange reserve has fallen to about $42 billion, which can still earn about six months of imports. There is a limit to this defense against reserve erosion. Thus, the Bangladesh Bank wisely brought about a measured devaluation of the taka gradually.
However, the unofficial (Kerb) foreign exchange market accessed by travelers going abroad for tourism or medical purposes or to send money to relatives in small amounts has suddenly become manifestly unstable. It is of course a small market, but one that attracts the most media attention.
Most important is, of course, the interbank foreign exchange market, which is also under some pressure. However, the Bangladesh Bank has sold dollars to most banks, especially state-owned banks, for opening and settling letters of credit for the import of power, equipment and inputs related to the production of electricity, fertilizers and basic necessities.
It also supports all other banks by importing raw materials and investment machinery for manufacturing units. It was heartening to hear the Governor of Bangladesh Bank say that the central bank will continue to intervene in the foreign exchange market and take appropriate measures to calm it down. This forward guidance from the Governor was necessary and I hope the market received the right signal to take a position.
With this in mind, let me suggest a few policy actions that could help stabilize the forex market. Admittedly, this market is faced with a mismatch between demand and supply of currencies. So we need to address demand and supply issues in a pragmatic way if we really want to get to the root of the problem.
HOW TO LIMIT EXCHANGE DEMAND
First, the trade deficit must be reduced by restricting unnecessary imports. The import of luxury items, including luxury cars and electronics, needs to be curbed more drastically.
Bangladesh Bank has taken macroprudential measures such as increasing margins for these items up to 75%. Increase it further to 100% if you can. The import of certain items such as luxury cars may be postponed until the foreign exchange market stabilizes.
Second, delve deeper into trade finance where many irregularities are embedded as well as overcharging. Stop the loan against receipts from the trust, even temporarily.
Third, further consolidate public spending on prestige projects that will not produce immediate results. The honorable Prime Minister has already asked the services concerned to be more careful in this respect. Please note that each taka expenditure has a dollar component.
Fourth, austerity measures aimed at restricting overseas travel and physically holding international conferences must be well targeted. Much more can be done in this area.
Fifth, ensure phased implementation of major projects with higher foreign exchange commitments, including private projects that need sovereign guarantees to reduce foreign exchange commitments.
Sixth, temporarily restrict the supply of US dollars under the Export Development Fund to reduce the outflow of dollars from the reserve.
HOW TO INCREASE THE FOREIGN EXCHANGE SUPPLY
First, give cash incentives to remittance recipients by increasing the cash incentives to them by another to half a percentage point.
Second, a more flexible payment system is also an incentive. Arrange to receive income from nearly one million sub-contractors across the country. This can be done smartly through mobile financial services and banks with a proven track record of handling remittances from abroad. The Bangladesh Bank can be more innovative on this point.
Third, let non-resident Bangladeshis invest more in more lucrative investments and/or premium bonds digitally and transparently. The current cap of Tk 10 million can be waived for these investors.
Fourth, let NRBs, including regular remitters, open foreign currency deposit accounts easily and digitally with an attractive fixed deposit rate.
Fifth, that new skilled workers receive half of the airfares in the form of government grants on the condition that they open bank accounts and carry out formal transactions on their earnings.
Sixth, suspend the export retention quota for about six months and allow a portion of accrued ERQs (say 50%) (if not needed to be spent immediately) for a year with cash incentives like the ones that are granted for remittances.
Seventh, encourage the Economic Relations Division and relevant departments or ministries to speed up project negotiations with international development agencies and release committed foreign aid from the pipeline, which grows bigger every year.
Eighth, encourage relevant authorities to complete special economic zones as soon as possible to attract foreign direct investment.
Ninth, have coordinated monitoring of megaprojects to remain profitable, avoiding cost overruns and delays in project completion.
I have given only a few ideas on how to improve the trade balance and reduce the current account deficit by realigning the demand and supply of currencies. We have seen in the past that this is possible.
With increased vigilance and coordinated actions between the Bangladesh Bank, non-resident Bangladeshis and relevant ministries, we can bring some common sense and balance to the foreign exchange market. Along with this, the taka-dollar exchange rate will surely realign and stabilize at some point. As the governor said, there is no need to panic. We can do it. And let’s do it.
The author is an economist and former governor of Bangladesh Bank