Plan ahead to stop economic instability

It is disconcerting to note that Bangladesh, like many other countries, is facing a volatile situation in the foreign exchange market. Initially, this volatility was the result of demand recovery after Covid and the ongoing supply chain disruptions. But over the last one month, this instability has increased as a result of Russia's invasion of Ukraine and other factors related to that crisis.

To prevent the taka from fluctuating rapidly, the Bangladesh Bank had injected a record USD 3.78 billion between July 1 and March 23 this fiscal year. But this has hardly resolved the crisis for banks facing a dollar shortage for their transactions. Even though export earnings have risen by 29 percent to USD 27.97 billion year-on-year, it has not been enough to offset the steep increase in import payments—as imports rose by 46 percent year-on-year, to USD 46.67 billion—along with a sharp decline in remittance. As a result, demand for the dollar went up significantly—particularly in comparison to its supply—which even compelled some banks to purchase the greenback from the central bank to settle letters of credit for imports.

In response, the central bank has been generous in providing dollars to commercial banks to prevent a major fall in the value of taka. Yet, the exchange rate now stands at Tk 86.20 per USD compared to Tk 84.80 a year ago, which means the central bank has allowed the taka to depreciate slightly. But, more importantly, our forex reserve declined from USD 48 billion in August last year to USD 44.29 billion on March 23 this year.

Despite these concerns, experts believe that the worst is yet to come, as Bangladesh has still not felt the full brunt of the crisis. And they believe that the taka will eventually have to be depreciated against the dollar. That depreciation will lead to further inflation, and the government has to take certain policy measures to counteract its effects, particularly on low-income people. Amid the current global turmoil, policymakers will have to remain extra vigilant to ensure macroeconomic stability in the country. And to make sure that our forex reserve doesn't decline further, experts suggest that the government look to stem imports, particularly of non-essential and luxury items. Given that the taka is expected to lose some of its value, leading to increased inflation, the government should plan ahead to provide further fiscal support to the poor population. Additionally, it should consider reducing taxes and VATs, as well as expand its open market sales (OMS) programmes, as recommended by experts.