Economists for currency depreciation, inflation control to rescue receding export trade
The local currency's real effective exchange rate, which is closely linked to trade situation, remained high and hit hard the country's export-competitiveness.
As per official count, the rate was an all-time high last December. And people familiar with development told the FE that such higher appreciation of the taka could impact growth, tax revenues and banks' asset quality.
The REER stood at 150.01 in December 2016, 140.31 in December 2015 and 126.58 in December 2014, according to a report prepared by the central bank.
The calculations were based on the nominal exchange rates and inflation rates of the major trading partners. The IMF guidelines take into account inflation situation in 20 major trading partners in the case of Bangladesh.
The REER or real effective exchange rate, which used to measure international price-and cost- competitiveness, as adjusted for the effects of inflation, was at less than 100 earlier in Bangladesh.
Some economists argue that the authorities should now weaken the local currency to prop up the export-competitiveness although the taka had appreciated by more than one taka in a year to December 2016.
They believe that rising trend in the financial account of the balance of payments is contributing much to the mismatch between currency and export trade.
They argue that country's export receipts shrank significantly in July-February of this fiscal year as an eventual outcome of the real effective exchange rate. Exporters also do believe it.
Export growth contracted by 3.22 per cent to US$ 22.84 billion in eight months to February of this fiscal year. Conversely, it had expanded by over 9.0 per cent in the same period of last fiscal year.
On the other hand, if the taka remains on downward path against its most major global trading partners, it would facilitate export as its competitiveness gets enhanced on the international market.
A gradual depreciation may give some relief to the exporters, said Dr Ahsan H Mansur, executive director at the Policy Research Institute of Bangladesh.
"If we want our exports to pick up, then now a weak taka will be good for exports," he commented.
The nominal exchange rate between the taka and the US dollar was Tk 78 in December 2016, having appreciated to some extent from its value a year before.
But, at the same time, capital-account regime of the balance-of-payments indicator should be opened up despite there may be a pressure on capital outflow, the policy researcher said.
According to currency experts, the government and the central bank need to go for gradual depreciation, which is seen beneficial for export. This is one tool which the central bank could intervene with.
"There is nothing left much for the central bank to intervene under such situation," a currency official at the Bangladesh Bank told the FE.
Dr Zahid Husain, lead economist at the Dhaka office of the World Bank, told the FE that the strong taka is not only affecting the competitiveness but also impacting domestic industries which mostly market their products on the domestic market.
"Look, for such higher appreciation in the REER, the imported goods will be cheaper to Bangladesh. Then how the local industry will survive," Dr Hussain commented.
He said banks' asset quality may weaken as it impacts on export and economic growth.
The central bank should monitor the foreign-exchange market and export performance, the World Bank economist suggested.
"We've appreciated taka against dollar, but could we adjust with other currencies, like Euro, which were adjusted downward with dollar?" He posed the question.
The currency official of the Bangladesh Bank said reducing inflation may be one area which may arrest the upward trend to some extent.
Bangladesh's inflation remained much higher in December 2016 in comparison with its major trading partners.
The country's overall inflation was over 5.0 per cent in December 2016. On the other hand, China inflation was 2.31 per cent in the same month. India recorded 3.4 per cent in the same period while Germany had 1.68 and the USA 2.07 per cent.