How the currency War might affect Bangladesh
A global currency war is going on without much fanfare or a formal declaration of war. All major economies, including the Eurozone, Japan, China, and Russia are depreciating their respective currencies against the dollar. The exchange rate for the euro has dropped from 1.4 to a dollar to 1.12 in one year and the Japanese yen dropped from .012 in 2013 to .009 in 2015. Russia's ruble has nosedived since the rest of world imposed economic sanctions against it, and the price of oil headed south, but that's another story. So, is that all good or bad for the Bangladesh economy?
A depreciating currency has multiple impacts. When the Taka depreciates against other currencies, our exports become cheaper and, inversely, imports become more expensive. As an example, if the value of Bangladesh's taka goes down against the dollar, say from Tk 75 per dollar to Tk 85, we pay more for petroleum imports in terms of Taka, but our garments become cheaper for Macy's and Walmart customers. This simple example illustrates the reason why countries let their currencies depreciate, i.e., to boost exports and stimulate demand for domestic products. A recent news story reported that Muscovites, who were desperate to unload their increasingly worthless ruble, were frantically buying televisions, washing machines, winter coats and other goods to get rid of cash. Well, that is what should happen in an ideal scenario in a depreciating country. But things go wrong for many reasons, and there are some unintended consequences too.
Depreciation might push up the domestic rate of inflation. If we depend on oil imports, price of gas at the pump goes up if taka depreciates. We also see an increase in the cost of production for diesel-based power plants. For some countries this may be a desirable side effect. In recent months, Eurozone countries and Japan, are struggling to avert deflationary pressures which cause consumers to hold back on their purchases in the expectation of further declines in the price level. Central banks, particularly the European Central Bank and Bank of Japan, have resorted to easy money policy, known as quantitative easing (QE), to jumpstart domestic demand by lowering interest rate--QE is also the tool used to lower the exchange rate of euro and yen. European Central Bank has just recently undertaken a programme to stimulate the economies of Eurozone by printing money and devaluating the euro. It is expected that a 10 percent depreciation of the euro will also boost French exports by 6 percent.
However, on the other hand, cheaper Japanese cars might adversely affect American automakers, and cheaper Chinese and Japanese steel are making significant inroads in the US domestic market. A recent report contends that the share of imports has jumped from 24 percent in February 2014 to 32 percent in January 2015, a trend which could eviscerate the struggling US steel industry. The US computer industry, including IBM, HP and Microsoft, are similarly hurting from the stronger dollar. It is well known that Alliance for American Manufacturing, a trade group representing US manufacturing industries, considers China a "currency manipulator" which tries to keep its exchange rate low to boost exports and curtail imports. As recently as January 2015, China depreciated its currency and the impact was very clear. Its imports dropped by 19.9 percent in January 2015 compared with last year while exports fell by only 3.3 percent with a surplus of $60 billion. As a result China is in the crosshairs and can't depreciate their currency further.
Another factor that determines the impact of the depreciation is the state of the domestic economy. Currently Japan, Canada, Switzerland, India, and the Eurozone economies are growing in a very sluggish manner and the central banks are providing QE (i.e., printing more money) to stimulate their respective economies. This measure is also weakening their currencies. But, when there is excess capacity in the economy, as seems to be true in many countries, increased demand from abroad is a godsend. This seems to have worked for Japan and European countries. Toyota, the world's largest automaker, has reported a jump in its earnings even while Japan's economy is stuck in the rut.
Now that I have shown that a) countries are engaging in a currency war, and b) a depreciating currency may be used to stimulate the domestic economy, can Bangladesh try the same? The answer is no. We have pegged taka to the dollar and have allowed it to appreciate against the euro. There is a feeling of uneasiness among some quarters that the competitiveness of Bangladesh exports will be eroded following the rise in the real effective exchange rate (REER) of the taka. And, this concern is legitimate since Bangladesh shipped some $13.7 billion worth of goods to the EU in 2011 or 58 percent of its total exports.
How could the rising exchange hurt our exports and cause diversion of trade from Bangladesh? One line of argument hinges on the evidence that some developing countries which compete with Bangladesh in the same export market are taking advantage of the declining euro by syncing their respective currencies to euro. According to another source, exports of Vietnam and Cambodia to Eurozone countries grew by 28.9 percent and 23.9 percent respectively during the July to September period last year. However, it needs to be borne in mind that not all trade takes place at the expense of other countries and might be an indication of trade expansion. In addition, fortunately, many of our competitors, particularly in the garments sector, viz. Sri Lanka, Vietnam and Pakistan are in the same boat as us. Only India, by letting the rupee slide against the dollar, appears to be getting an upper hand. However, once the dust settles down in the political arena, Bangladesh can expect to overcome any weaknesses due to its strong exchange rate and higher cost of transportation. Another boon that will soften the impact is the lower price of oil and diesel, and our strong trade and development relationships with China and Japan.
The writer is an economist who writes on public policy matters.
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