Bangladesh Bank to weaken taka in phases
The Bangladesh Bank is considering to follow the path of a gradual depreciation of the taka against the US dollar in order to protect the interests of exporters and remitters.
The move, however, may stoke the inflationary pressure, which is building up owing to the kinks in the global supply chain, rising imports and shipping costs, and a slowdown in remittances.
The central bank devalued the interbank exchange rate on Sunday, allowing the local currency to rise to Tk 86 against USD for the first time.
"The BB is considering a gradual appreciation of the dollar against the taka to give a boost to both exporters and remitters," Md Habibur Rahman, acting chief economist of the central bank, told The Daily Star.
The country's import payments have escalated due to the global supply chain disruption and the rising domestic demand from the industrial sector soon after the economy reopened.
The central bank has little scope to address the disruption, said Rahman.
"Although it is good for the economy if the market determines the exchange rate, the central bank will not expect an uncontrolled state in the foreign exchange regime," said Rahman, also an executive director of the BB.
"We are monitoring the inflationary pressure cautiously, which is why the central bank is thinking of a gradual depreciation of the local currency."
Another central bank official, on condition of anonymity, says that the BB has planned to depreciate the local currency closed to Tk 87 per dollar step by step this year given the state of the economy.
But Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, a think-tank, called for immediate devaluation.
"If it does not take the move promptly, the country's foreign exchange reserves will diminish."
The former official of the International Monetary Fund recommended the depreciation of the local currency to at least Tk 88 per dollar without further delay.
"This will help remitters send their hard-earned money through banking channel."
The central bank has been injecting dollars into the market on a regular basis since the inception of the current fiscal year to stop any steep fall of the local currency.
Banks have purchased around $2.50 billion from the central bank to settle import bills.
The BB allowed the local currency to be cheaper by more than Tk 1 in the last one year as the interbank exchange rate stood at Tk 84.80 on January 10 last year.
The depreciation, however, has not helped contain the escalation of the import payments, which stood at $31.16 billion in the first five months of the current fiscal year, up 54 per cent year-on-year.
The situation has worsened for falling remittances, which were down 21 per cent at $10.23 billion in the first half of 2021.
Although exports have picked up significantly in recent months, it has failed to offset the imbalance created in the foreign exchange market by the lower remittances and higher imports.
Against the backdrop, the foreign exchange reserves slipped to $44.36 billion on January 5 in contrast to $46.39 billion on June 30 last year. The reserves had surpassed $48 billion in August last year.
When his attention was drawn to the inflationary pressure stemming from the depreciation of the taka, Mansur said: "The overall macroeconomic stability is more important than containing the inflation."
Higher inflation has become a common phenomenon across the globe.
Pent-up demand fueled by stimulus and pandemic disruptions is helping accelerate inflation, spread around the world through global factors like higher food and energy prices, and soaring shipping costs, according to the IMF.
"When someone faces economic crisis, he or she should cut down consumption. Imports will automatically go down if the taka devalues," said Mansur.
In Bangladesh, the Consumer Prices Index rose 28 basis points to a 14-month high of 6.05 per cent in December, with non-food inflation reaching 7 per cent, a six-year high and food inflation to 5.46 per cent, the highest in six months.
Mansur says the deficit in the current account has already gone past $6 billion, and the shortfall may widen to $15 billion at the end of the fiscal year if the current trend continues.
"How will we manage the deficit? We will have to take foreign loans to manage the situation. Otherwise, the reserves will nosedive."
Naser Ezaz Bijoy, chief executive officer of Standard Chartered Bangladesh, said that the exchange rate should be determined by the market.
"The rate will continue to face pressure if commodity prices in the global market do not decline," he said, adding that the pressure on the exchange rate would ease if the government can manage soft loans from external sources.
Syed Mahbubur Rahman, managing director of Mutual Trust Bank, said that the peer countries of Bangladesh had devalued their currencies significantly.
"We should take the same measures in the interests of the export sector."
Both Emranul Huq, managing director of Dhaka Bank, and Mirza Elias Uddin Ahmed, managing director of Jamuna Bank, welcomed the central bank's initiative aimed at depreciating the taka.
The exchange rate in the kerb market is, however, Tk 89.70 per dollar.
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