Export competitiveness through currency adjustment | The Daily Star
12:00 AM, January 16, 2017 / LAST MODIFIED: 01:47 PM, April 18, 2017

Export competitiveness through currency adjustment

Export performance of Bangladesh in the recent past has been somewhat gloomy. During July-December 2016, Bangladesh's exports grew by only 4.4 percent which was targeted to achieve a growth of 8 percent. Export growth of readymade garments was 4.4 percent and of non-RMG 4.8 percent – both remained quite low compared to their respective growth targets of 8.1 and 7.4 percent for FY2017. This is disappointing since the country aspires to reach a USD 60 billion export target by 2021. This target can be materialised with an export growth of 11.9 percent annually. Similarly, to achieve the RMG export target of USD 50 billion by 2021, exports of RMG will have to grow by 12.2 percent in the next five years.

Even though in FY2016, exports grew by 9.7 percent, current export trend is displaying a less optimistic scenario. In recent months, major shock has come from the US market. Most RMG exporting countries faced a lower demand of their RMG products in the US market. Except Vietnam, a number of other countries such as Cambodia, China, Mexico and Pakistan experienced a negative growth of RMG exports. Though Bangladesh's non-RMG exports to the US market achieved a 13.1 percent growth, RMG exports had a negative growth of minus 9.2 percent in the US market. Of course, in the European Union market, Bangladesh's total export grew by 9.6 percent and RMG export grew by 10.1 percent during the last six months. It is, however, worrying that in December 2016 total export growth to the EU declined compared to December 2015. Non-RMG exports in the EU have been showing a declining trend.

The sluggish global economic situation is usually blamed for the export fall. Global economy has not been able to turn around since the financial meltdown in 2008. Recovery in advanced countries in terms of output expansion has been slow. Global trade has been equally slow as consumer demand could not pick up as yet.

However, the fall in Bangladesh's exports cannot be blamed on depressed global demand solely. Some of the reasons can also be identified within the domestic economic factors. Lack of infrastructure is surely one of them. But the other factor which has become prominent recently is the exchange rate of Bangladeshi taka against USD. The exchange rate is the price that determines BDT earned per USD of exports and BDT paid for per USD of imports. The exchange rate, therefore, plays a crucial role in determining the price competitiveness of exports in the global market. Profitability of export also depends on the exchange rate. 

Bangladeshi products in the global market are being undermined as currencies of almost all competing countries have seen significant depreciation of their exchange rates vis-à-vis USD. However, the exchange rate of BDT per USD has been mostly stable for quite some time. Also, BDT against Indian rupee is steady while BDT has appreciated against a number of currencies including Euro and Chinese Yuan. And, BDT remained volatile against British pound.

Of course, comparison of nominal exchange rates is not sufficient to understand the strength of currencies. Concepts such as nominal effective exchange rate (NEER) and real effective exchange rate (REER) are better indices for explaining export competitiveness and formulating trade policy responses. NEER measures the value of a currency against a weighted average of a basket of currencies. REER is the inflation adjusted rate. Though NEER of BDT has remained almost stable, REER has appreciated by 16.5 percent between November 2014 and November 2016. Such differences indicate that export competitiveness of Bangladeshi products is being diminished by the exchange rate of BDT.

In view of dismal export performance, exporters are demanding devaluation of BDT. It is understandable that policymakers have to take into consideration several factors before devaluation of BDT. Bangladesh imports petroleum, food items and raw materials from the international market. Given the low global oil and commodity prices, there is some breathing space. However, depreciation of BDT could increase import cost of raw materials used for exports that may result in higher cost of production. This could in turn reduce export competitiveness. Increased import costs could have a negative impact on the existing low inflationary trend which is a result of the decline in global commodity prices. Moreover, as the mobility of Bangladeshis around the globe has increased, there is an increasing demand for services payment abroad. If BDT is depreciated, foreign currency will become expensive for them and so will their services consumption. Additionally, foreign investors may feel discouraged due to the prospect of losses from currency depreciation.

Thus developing an exchange rate policy, keeping in view the multi-dimensional interests of various players in the economy, is challenging. Bangladesh Bank intervenes in the foreign exchange market from time to time in order to keep the USD/BDT rate stable. Given the widening gap between nominal and real effective exchange rates at present it is time to undertake some sort of currency adjustment. If the current trend of exchange rate continues, export competitiveness may erode further and trade deficit could be larger. The cascading effect will be on the current account balance which is already in the negative thanks to declining remittance flow in addition to trade deficit. Clearly, the major boost has to come from within the export sector. Transformation through quality improvement, product variation and market diversification will have to be pursued along with other policy measures in order to improve the sector's performance.


The writer is Research Director at the Centre for Policy Dialogue.

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