Stabilising forex market: BB actions contradict aim
Bangladesh Bank recently took a set of initiatives to bring about an effective floating exchange rate, meaning that which will rise or fall based on supply and demand, to bring back stability in the foreign exchange market.
In several meetings with commercial banks, the central bank said the demand and supply of the US dollar would determine the exchange rate of the taka.
But questions remain on whether the initiatives are helping market forces automatically set the exchange rate and providing benefits to businesses involved in export and import.
The Daily Star yesterday talked to three economists on the matter, two of whom believe those to be the wrong approaches.
Currently multiple exchange rates are in effect, all fixed by the BB and commercial banks, which does not bode well for businesses at home and abroad.
On top of that, many businesses running small-scale operations are losing out owing to the large gaps in the rates.
For instance, banks are offering Tk 108 to exchange houses for each US dollar coming in as remittance but Tk 99 if it comes directly from exporters and remitters, as decided by the lenders at a September 10 meeting.
The meeting also decided that importers have to buy the greenback based on the weighted average exchange rate, meaning the average of the rates at which banks purchase dollars from exporters and remittances from foreign exchange houses, plus Tk 1.
A substantial number of banks on September 22 set the weighted average rate in the range of Tk 102 to Tk 106, according to data prepared by Bangladesh Foreign Exchange Dealers' Association.
Add the Tk 1 and each dollar costs Tk 107 in many cases for importers.
So, the rate difference for exporters and importers is at least Tk 8 in some cases.
In reality, many exporters are also importers, since they have to bring raw materials from abroad to manufacture their goods, which is why they are now facing losses due to the large rate gap.
Md Saiful Islam, president of the Metropolitan Chamber of Commerce and Industry, Dhaka, said the gap was now Tk 10 per dollar, meaning that the policies, in effect, were discriminatory.
He came up with the remark at a network luncheon for business journalists at the MCCI office in Dhaka yesterday.
Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, said the rate difference was not favourable for small businesses.
Furthermore, it is tainting the country's image as multiple exchange rates fixed by authorities is not acceptable anywhere, he said.
The BB initiatives are contradictory to its aim to achieve a floating exchange rate, which is now also being observed by foreigners, he said.
Many foreign lenders are showing reluctance to increase their credit lines to facilitate the country's businesses involved in foreign trade, he said.
Moreover, the central bank now supplies greenbacks quoting a lower rate, which creates a distortion in the market, Mansur said.
The BB now injects greenback quoting Tk 96 for each dollar to help government enterprises clear import bills.
"We should follow a uniform exchange rate through which other rates for import, export and remittance should be fixed," he explained.
Monzur Hossain, a research director of the Bangladesh Institute of Development Studies, said the foreign exchange market could not continue running in its current state.
The role of the BB has been weakening, which is why it is now depending on the banks to fix the exchange rate, he said.
"The multiple exchange rates have created a distortion in the market. The market will not be able to perform well in the long run in this manner," he said.
Mustafizur Rahman, a distinguished fellow at the Centre for Policy Dialogue, however, said the presence of multiple exchange rates has not created that big of a problem at this moment.
Strengthening foreign exchange reserves is important for restoring stability in the market, he said, adding that a uniform rate should be established keeping up with the times.
Syed Mahbubur Rahman, managing director of Mutual Trust Bank, said the market has faced stress in recent months.
"But the situation is getting better. It will not be possible to have all the problems disappear overnight. The high exchange rates of the dollar are now on the decrease," he said.
The country's foreign exchange reserves have been depleting fast since the April-May period owing to rising import payments emancipated from the global supply chain disruptions.
The reserves stood at $36.85 billion on September 22 in contrast to $46.32 billion a year ago. During this time, the exchange rate of the taka against the dollar has decreased 26 per cent to Tk 107.65.