The interbank exchange rate set by the central bank has not been effective as the exchange rate regime faces high volatility
Bangladesh has so far resisted calls for a major devaluation of its currency despite soaring imports amid rising global food, energy and commodity prices.
But this stance may not be maintained for too long as a minor depreciation, phased in, has already created indiscipline in the FX market.
Today, the country, like most other import-dependent nations, faces tough choices: devalue the taka immediately at a faster pace or face consequences no one could predict as market volatility global escalation since the Russian-Ukrainian war shows no signs of abating, China is under tremendous pressure for rising coronavirus cases and inflationary pressures are mounting globally.
This is the suggestion of a number of seasoned economists and bankers, who are urging the Bangladesh Bank to immediately depreciate the local currency to a large extent against the US dollar.
The gradual depreciation followed by the BB since the global economy rebounded from the pandemic late last year has not been effective as banks have already started paying over Tk 95 per dollar for businesses to settle imports. This means that the set of interbank exchange rates by the central bank has become inoperative.
The exchange rate now stands at $86.70 per dollar after the BB devalued the local currency by 0.25 Tk on May 9.
Banks generally sell US dollars to importers, under the provision known as the BC (bills for collection) selling rate, adding Tk 0.05 with the interbank exchange rate. But importers now have to pay Tk 94-95 to buy a dollar from banks.
Similarly, some banks offer between 92 and 95 Tk per dollar to senders to encourage them to send their money through their channel.
Banks generally add Tk 0.10 with the BC sale rate when they pay remitters.
Migrant workers do not send money through banks unless a higher rate is expected, the chief executives of three banks said, speaking on condition of anonymity.
The interbank rate set by the central bank has not been effective as the exchange rate regime faces high degree of volatility, they said.
Thus, the central bank should address the issue quickly or else the instability will spread further. In context, the interbank exchange rate should be set based on demand and supply for the greenback, they said.
Ahsan H Mansur, executive director of the Bangladesh Policy Research Institute, called for immediately raising the interbank rate to at least Tk 92 per dollar.
He argued, “We previously urged the central bank to depreciate the local currency from Tk 3 to Tk 89 per US dollar. But the central bank did not do so. As a result, the situation deteriorated. “
In December last year, he urged the BB to further depreciate the taka against the US dollar to discourage imports and maintain macroeconomic stability.
If the local currency is not depreciated, remittances will be hit hard by the current instability, he said yesterday.
Expatriate Bangladeshis will send their hard-earned money through the hundi channel, an illegal system of cross-border money transactions, more so if they do not get the desired rate from banks, Mansur said.
A trader at the curbside market, an illegal foreign currency trading platform, said yesterday that customers had to count 94.30 Tk to buy a dollar.
Thus, providing a 2.5% cash incentive to shippers will bring no production due to the higher rate prevailing in the curbside market, said Mansur, also a former International Monetary Fund official.
Between July and April, migrant workers sent home $17.30 billion, down 16.2% year on year, according to BB data.
Mansur added that attempts to limit local currency depreciation will also negatively impact exporters.
“The current global economic crisis resulting from the coronavirus pandemic and Russia’s invasion of Ukraine may not be over immediately. Both problems will persist. Thus, the central bank will need to address the currency issue by keeping them in mind.”
He described spending more than $7 billion to settle import payments for a single month as illogical and urged the central bank to insulate foreign exchange reserves from the current global volatility.
Reserves fell to $41.9 billion on May 11 from $46.15 billion on December 31, due to increased imports needed to fuel the economy rebounding from the coronavirus pandemic.
Between July and February, import payments reached $52.60 billion, of which at least 72.38% was spent on essential commodities.
Faced with depleted reserves, the BB last week asked banks to take up to 75% of import payments in advance from companies to open letters of credit for luxury and non-essential goods .
But Mansur said the move might not yield major long-term results as the dollar would gain more.
Earlier this month, the Federal Reserve, the central bank of the United States, raised the benchmark interest rate by 0.5 percentage points to a target rate range of between 0.75% and 1% to curb the surge in inflation.
Further rate hikes are expected.
The Economist Intelligence Unit, the research and analysis arm of The Economist Group, expects the Fed to hike rates seven times in 2022, hitting 2.9% at the start of 2023, according to a Guardian report. .
This means that the currencies of almost all countries will face devaluation pressure this year.
Mustafizur Rahman, a senior fellow at the Center for Policy Dialogue, said the central bank should quickly depreciate the local currency.
“The increase in the margin at the opening of LCs alone cannot offset the volatility of the foreign exchange market. A sharp one-time depreciation of the local currency is essential.”
Mohammad Shams-Ul Islam, managing director of Agrani Bank, said many banks have engaged in an unholy competition to hunt US dollars as remittances following currency shortages.
“The central bank should explore other ways to ease the ongoing exchange rate pressure. »
Syed Mahbubur Rahman, managing director of Mutual Trust Bank, thinks the current situation warrants more writedowns.
Zahid Hussain, former chief economist at the World Bank’s Dhaka office, says monetary policy must protect reserves by increasing exchange rate flexibility.
“It is now almost a done deal. Better to do it from a position of strength than from a position of weakness. This means allowing interbanking to adapt to market conditions.”
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