Over the past year during the Covid crisis, Bangladesh has gained export competitiveness due to slower appreciation of the taka against the dollar compared to other competitor countries.
However, the situation has now reversed when other trading partners decided to depreciate their currencies soon after the Russian-Ukrainian conflict when dollar exchange rates fell, especially against Bangladesh’s devaluation policies.
Bangladesh has seen the taka depreciate by 1.74% against the greenback in the past three months since the Russian invasion in March, one of the weakest among its major trading partners in Asia such as India, China and Vietnam.
From March to May, China experienced a depreciation of 6.31% while India recorded 2.32% and Vietnam 2.62%.
The severe shortage of the dollar crisis in a context of high imports and low exports put downward pressure on the taka.
The rise in the real effective exchange rate (REER) index also signaled the need to change the monetary regime.
At present, the LC (letter of credit) settlement rate for imports has jumped to Tk 97 per dollar while the official rate set by Bangladesh Bank is Tk 87.50. On the open market, the price of the dollar broke through 100 Tk for the first time in the country’s history on Tuesday amid a severe shortage of dollars.
However, the rate fell to Tk98 the very next day while the LC rate remained unchanged above Tk95, according to bankers.
The dollar’s daily net opening balance in the banking sector has fallen to $1 billion in recent months from above $2 billion previously. The substantial drop in the net opening balance also highlighted the shortage of dollars in the banks.
The REER, the measure of a currency’s value against a weighted average of several foreign currencies – divided by a price deflator or cost index – rose to 115.65 in March from 115.34 in December of last year, according to Bangladesh Bank data.
Rising REER means inflation is rising. The country has been experiencing a rise in inflation since February with 6.17% which jumped to 6.22% in March and 6.29% in April, according to the latest data released yesterday.
The RRSP 100 index is considered the ideal exchange rate and when the index goes above 100 it means the currency is overvalued and falling means undervalued.
The obvious taka of the current RRSP index is overvalued by 15%.
Although there is a huge gap between the demand and the supply of dollars, the Bangladesh Bank bridges the gap by selling dollars, which jeopardizes foreign exchange reserves.
The Bangladesh Bank sold $5.11 billion in reserves from July to May 12 this year. As a result, foreign exchange reserves fell to $42 billion on May 17 from $48 billion in August last year.
According to the IMF (International Monetary Fund), a country should maintain a reserve that covers import payment for three to five months for normal weather and eight to 12 months for uncertain situations.
The current reserve covers around five months of imports, which is of concern for the country, experts said.
All market factors point to now being the time to let the taka weaken, breaking out of the managed floating currency peg, to give exporters a competitive edge and bring stability to the foreign exchange market, analysts said. industry officials.
Md Shahidullah Azim, vice president of the Bangladesh Garment Manufacturers and Exporters Association (BGMEA), said the taka has not yet devalued much against the dollar against currencies of competing countries.
“That is why we are lagging behind in export competitiveness. Due to adequate depreciation of their currencies, they derive more export earnings in local currencies than we do. stronger than us in price negotiations,” the apparel maker said. exporter told The Business Standard.
The current practice of piecemeal devaluations is of little use to exporters, he said, complaining that they have to settle export earnings in local currency at the rate set by the central bank but have to pay a much higher rate while opening letters of credit for raw material imports.
The BGMEA leader said they would soon raise the issue with the central bank.
Only one remaining option
Dr. Zahid Hussain, a former senior economist at the World Bank’s Dhaka office, said demand for dollars has risen worldwide relative to its supply due to soaring global commodity prices and soaring domestic demand in emerging countries, leading to its highest rate in almost two decades in a basket of selective currencies. And the situation is no longer temporary as the war shows no signs of an imminent end.
Asked what the central bank can do in such a situation, he replied that there are two ways to manage the imbalance between supply and demand in the foreign exchange market: allow the dollar rate to adjust or fill the reserve deficit.
“Bangladesh Bank has already used about $5.2 billion of its reserves to fill the gap so far this fiscal year. But how long can she continue to use her reserve which has already reached almost its minimum level? he said.
“The reality of the situation leaves no choice but to let the rate go and let the market make its own adjustment,” explains the economist.