Don’t panic about forex market volatility: Economist Mustafizur

There is nothing to panic about the current volatility in the foreign exchange market, said Mustafizur Rahman, a distinguished fellow at the Centre for Policy Dialogue.

The central bank should release more US dollars into the market and sharply depreciate the taka against the greenback in order to bring back stability in the foreign exchange market, he told at a lecture organised by The Daily Star at its office in the capital.

There was a major regulatory failure on the part of the Bangladesh Bank in implementing its instructions related to the exchange rates as banks are mostly ignoring the rates fixed by the BB.

For instance, the central bank has fixed the rate at which banks sell the US dollar to importers at Tk 87.60, but lenders are now charging around Tk 95-97.

As a result, individuals who feel uncertain about the foreign exchange market, are hoarding dollars for no reason.

Since the country's foreign exchange reserves now stand at more than $42 billion, releasing more dollars will not harm the BB, he said.

The central bank released $5.5 billion into the market in the current fiscal year.

Mustafizur recommended the BB implement "a drastic depreciation of the local currency" in order to defuse the panic.

The central bank's exchange rate yesterday was Tk 87.50 a dollar, up from Tk 84.80 a year ago. The central bank depreciated the local currency five times this year, but failed to reduce the demand for dollars.

The BB should have depreciated the taka gradually over the years, but it did not do so fearing inflation, which is why a pent-up pressure developed in the market, Mustafizur said.

Since May 2012, the taka has been devalued by 6.19 percent. The Vietnamese dong depreciated by 11.95 percent in the last one decade.

In Bangladesh, the common people now pay Tk 97-98 to purchase a dollar in the open market whereas receivers of remittance at best get Tk 90 per dollar, including the incentive provided by the government.

The gap between the formal and informal channels have been encouraging hundi, an illegal cross-border financial transaction system.

The current situation may also result in exporters under-invoicing for their products.

Mustafizur said lessons should be taken from the foreign exchange crisis Sri Lanka is facing.

The debt structure in Sri Lanka and Bangladesh has many differences. The foreign debt to GDP ratio in the island nation is 66 percent and in Bangladesh 13 percent.

Bangladesh's economy is less integrated with the global economy than that of Sri Lanka.

On the taka's value, he said, depreciating the local currency has certain unintended effects.

Bangladesh's private sector took a significant amount of foreign loans from foreign sources. After depreciation, the debt servicing of the loans will increase, he said, adding that the government should boost its monitoring of foreign loans due to exchange rate risk.

The pressure Bangladesh is facing over inflation is partly driven by the rising prices in the global market. Depreciation of the taka will increase the pressure, he said.

This means, designing the next budget will be a challenging task for the government. It should give utmost importance to tackle inflation, Mustafizur said.

The government should focus on stimulating investments and redistributing the tax money among the poor, he said.

There is no need to worry about achieving the GDP growth target. Rather, it should emphasise on keeping the exchange rate stable and containing inflation.

Inflation shot up to 6.29 percent in April, the highest in 18 months.