Most of the researches in this area claim that short-term volatility is higher in the floating regime. There is wide disagreement among economists on which exchange regime can bring more stability and gain in welfare. In addition, comparative benefit in fixed and flexible exchange regime is still a contentious issue because there are many developed and developing countries that adopt either of the regimes. Continental European countries historically maintain fixed or limited flexible regime, while the US, Japan, Australia, New Zealand, etc. maintain freely floating regime after the breakdown of the Bretton-Woods system in 1973.

In developed countries, the cause of exchange rate volatility is seemingly due to non-economic factors, such as speculation, or due to changes in economic fundamental factors, such as terms of trade, interest rate, reserve position, productivity, etc. However, in those countries, freely floating is not fully free -- there is practice of limited intervention in the market from the government side. Recently, Japan and the US have disclosed their so-called secret data on intervention in the foreign exchange market. Some studies based on this data show that Japan and the US authority often intervene in the market as a part of some sort of coordination. These coordinated efforts have been found effective in controlling the foreign exchange market in Japan. Interestingly, the Bank of Japan (central bank) earned a huge amount of money (9 trillion yen, 2 percent of GDP) during the last decade (1991-2001) from the intervention. Theory also justifies intervention in the foreign exchange market.

Of course, the Bangladesh situation is quiet different than those of the developed countries. Our financial market is underdeveloped and exchange rate volatility here is not due to speculation or fundamental factors, this is simply a temporary phenomenon of demand-supply gap (or, dollar crisis). However, this temporary crisis might have obvious effect on different sectors of the economy. Perhaps we cannot go back officially to managed floating; rather we have to tackle the situation carefully and in an innovative way. Limited intervention might be more effective to maintain stability in Bangladesh's foreign exchange market. The main focus for developing countries like Bangladesh must be on short-term stability and long-term flexibility. Although there is worldwide growing concern on bipolar view -- either fixed or float -- however, the de facto exchange regime of a big portion of countries still remains in the middle (intermediate regime).

Some other initiatives that can be taken to improve dollar supply may include imposing discipline on LC opening, encouraging remittance through proper channels, increasing activities against money-laundering, etc. Without restricting LC opening, some discipline like queuing system may be imposed for giving priority to import essentials and machineries first, and then the others. Regarding remittance, though not a new idea, I have firm belief that offering cash incentive for remitters can lead to a surge in remittance through proper channels. Since the government offers various types of cash incentives for exportable items, I hope cash incentive for remittance will work more effectively and efficiently than the current one for exports.

Oil price hike
Recent oil price hike worldwide reminds us the situation of the 1970s -- two oil shocks during the decade for which the world faced severe inflationary situation, which in turn lead to the worldwide recession. Oil price shock has real effect on the economy as it has impact on prices and wages. Rise in oil price automatically raises the price of commodities and price hike translates worldwide quickly through import and export channels. If high oil price sustains, it would have impact on non-tradable goods and services too due to increased cost of living.

Some argue that the current oil price is not a shock like the 1970s -- it is just a response of increased demand for oil especially of China and India's fast growing economies. If it is so, there is no real hope for oil prices to come down.

The situation is more worrying for Bangladesh as it has come at the same time as the dollar crisis. Dollar crisis is also somewhat related to the situation of oil price hike -- more dollars are required to buy foreign goods due to increased price. This reminds us of the world recession of the 1980s followed by oil price hike and high exchange rate volatility of the 1970s. We have to be more cautious and careful about the situation. This might have a downward impact on economic growth and development, and the cost would be formidable.

Monga revisited
Another difficult situation is waiting for the people of the northern districts -- the well known as monga -- a situation when people suffer from food scarcity as well as severe scarcity of income generation before harvesting season in December started. This is a recurrent event of every year for which some people even die without food -- a scenario of hard-core poverty in some northern districts. This is the time to start government short-term intervention and NGO initiatives in those areas so that the hard-core poor can survive. Oil price hike and inflation would be an added difficulty for these people. Recent news is that the government has allocated some amount in the budget to address the needs of these hard-core poor. We understand that NGO responsibility is much higher to bring those people out of poverty through micro-finance activities.

In this newspaper last year, I proposed for some short-term to medium-term and long-term measures to handle the situation. Long-term investment is necessary in those areas, and short-term measures, such as the government's VGF and food for work program and NGOs' income generation programs, might be effective if they started from June each year. We often hear voices of NGO leaders and government officials from the seminars held at five-star hotels on containing monga, however, results are more or less unsatisfactory. We suggest that seminars must held at monga-prone areas with the participation of the hard-core poor to hear about their voices and needs, so that necessary action can be taken.

In sum, the dollar crisis and oil price hike are disturbing in real terms and worrying for the whole economy. Although not effecting the whole economy, monga is a serious cause of concern for a segment of the people of the country. These are the symptoms of formidable outcomes in the near future for which we must have proper preparation.

The author is a Ph.D candidate at National Graduate Institute for Policy Studies, Tokyo, Japan.