Thursday, December 1 2022

A business enterprise needs recurring money for which it can take out loans from banks or other sources. Owners can also inject money in the form of capital to meet the requirements. Similarly, an economy needs recurrent funds that come either from tax collection or from borrowing. During Covid-19, economic activities were blocked leading to supply shocks in global trade. As a result, commodity markets are getting jittery. The domestic commodity market is manageable to some extent, but foreign trade requires international currencies.

Trade is seen as the engine of economic progress. Thanks to trade revenues, Bangladesh is graduating from LDC status. But it faces challenges in managing external transactions in the post-Covid-19 economic recovery phase. External economic activities are maintained by international currencies whose flows depend on exports, remittances, investments, loans and grants. Inflows from exports and remittances are major sources for meeting current external payment needs, especially imports. There is a trade deficit of US$24.91 billion through March 2022. The current account deficit stands at US$14.07 billion. During the nine-month period of fiscal year 2021-2022, the monthly average import according to the balance of payments statement is $6.84 billion. On the other hand, exports are recorded at 4.07 billion dollars. The deficit is $2.77 billion, supported by monthly remittances of $1.7 billion. But that’s not enough when considering other service payments, resulting in an average monthly current account balance deficit of $1.56 billion.

The current account deficit is an indication of more spending on consumption and capital expenditure than on income. It is a good sign if one invests in importing capital goods, as this will increase income in the future. Until March 2022, the country’s foreign exchange reserve stood at over US$44 billion. Recently, the depreciation of the taka has led to an increase in import payments. But inside information indicates that each greenback is traded more than officially reported for sales and purchases.

Admittedly, the depreciation of the taka supports foreign currency buyers but costs more to those who have to make payments abroad. On May 29, 2003, the Bangladesh Bank (BB) declared a floating exchange rate, the price of which should be set according to the interactions of supply and demand. So how can the price of the dollar be depreciated officially? The simple answer is that the central bank intervenes in the foreign exchange market in different ways, either by selling and buying, or by dictating exchange rates without documentation. To contain the value of the taka, the central bank is now moving to impose restrictions on the opening of import letters of credit. Banks are asked to take a specified cash margin in this respect, except for imports for certain sectors and items. Restrictions can work as an alternative to reducing imports without raising tariff barriers to new heights.

What would be the situation if the BB had injected enough greenbacks into the market? Certainly the market would have eased. Should this be done? That’s another question. The exchange rate should reflect its fair value. The rate at which trades are executed is called the nominal exchange rate. There is another terminology known as the real exchange rate calculated by the central bank taking into account the macro variables of trading partner countries. A report published in a national daily indicates that Tka is still overvalued. To stay in external transactions, transparent inflows are needed for outgoing payments. Any disturbance will compromise the general situation. Foreign currency holders, especially exporters and wage earners, seem satisfied with the depreciation of the taka. The export sectors seem to be rebounding with the commitment of new investments. They should not be disturbed by a realignment of the exchange rate. This may be the reason why the central bank does not offer sufficient support to the market. The current situation must be managed with caution. The BB needs to focus on that.

Under judicious management, export earnings should be strictly controlled so that their repatriation is not delayed for better exchange rates. Foreign exchange banks must be strictly controlled so that they cannot manipulate the market. Local books and foreign account books must be adjusted regularly. It is observed that there is a mismatch between demand and supply due to market flexibility. The central bank should minimize the spread. Also, cost saving approaches should be introduced for the time being. To achieve this goal, online purchases of digital entertainment content by individual international cardholders should be prohibited.

Bangladesh should not be compared to Sri Lanka. Bangladesh’s external sector management is on the right track. For export trade, the exchange rate will be one of the only fully-fledged exit tools from LDC status. The current situation is shaping globally competitive export sectors with better margin for Taka domestically. More investment in this sector is expected over time, leading to job creation. From the Asian crisis of the 1990s to the last century and the global financial crisis of 2008, Bangladesh did not suffer. She has learned a lot since the end of 2021. This experience can be used for the management of external sectors.

The exchange rate will not go into free fall. It has already been realigned. Now is the time to stabilize the position.

[email protected]


How Saudi women's participation in the e-commerce workforce is growing


New Chief Appointed for Chamber of Commerce Serving Maple Ridge and Pitt Meadows – Maple Ridge News

Check Also