Economics and finance are twins that often elude the common person in their understanding of global currency exchange issues. The complex interactions of currencies have severe impacts on a particular economy and the world at large, especially for a country that has an extensive international product/service value chain to consider.
No country now lives in such an island of bliss that it does not have to worry about international price swings in the currency markets. Bangladesh is no stray animal in this game of currency, with its rising exports and equally compelling imports.
While Bangladesh has done remarkably well in its export sector, it is still a net importer, meaning Bangladesh buys more of foreign goods/services than it sells overseas. This is especially true when considering backward linkage imports of items for garments, textiles, and other industries.
The reason for bringing these issues connects to a recent discussion at a roundtable in Dhaka organised by FinExcel, which boasts the inclusion of noted economists, bankers, and financial gurus of Bangladesh. In that meeting, the issue of devaluing the taka was raised.
However, an alternative perspective can be provided. Let us begin by walking down the path of price escalation if the taka is devalued vis-à-vis the dollar, and absorb the fact that all commodities and food items that you have on your table will have to be purchased by dishing out more takas.
Who loses? The general mass spends approximately 20-25% of their earnings simply on food items. This figure becomes alarming for the impoverished or poor class, where more than 40% of household earnings are consumed on sustenance. A policy such as the devaluation of the currency therefore hits squarely on the general population, not to speak of other domino effects that may come about due to price inflations. The negatives and positives of currency devaluation are addressed below.
Let us draw out the dark side first. If the taka is devalued, then most import costs will rise. Note Bangladesh is heavily dependent on imports. Import costs will spiral all other costs, capital machinery costs will increase in all industries, including garments/textiles, import backward linkage costs will rise, international travel costs will increase, quarterly ACU payments will rise, some exports may fall due to global price competitiveness, huge slab of population will be financially hurt, foreign student costs will rise significantly, foreign currency outflows through illegal channels may spark further pressure on the taka, and so on.
Now let us review the bright side of taka devaluation. In short, if the taka is devalued, then a narrow percentage of truly rich garments owners will be benefited and that too not adequately clear, employment in the garments sector will continue to remain stable and perhaps grow slightly due to increased foreign currency earnings, and finally, more remittance may come.
The merit of devaluing the taka is greatly negated by the socio-economic impact of the devaluation for Bangladesh which currently sits on decent economic strengths. The logic of taka devaluation is an oxymoron, because even the garments sector, that claims to be benefited, has a large slab of import value chains significantly adding to the costs.
As and when the taka is devalued, more foreign currency remittance will come, and again the pressure on the dollar will rise (the dollar will be cheaper when converted to Bangladeshi currency, hurting the exporters again). The very purpose for which the consideration for the devaluation was sought will come to no use, and the government will again have to go into the downward cycle of further taka devaluation, causing severe financial loss and stress on the entire economy and the population at large. This action will be suicidal for the government, and create public unrest.
Additionally, capital machinery costs will rise, almost ensuring that economic growth through expansion of new industries and/or establishment of existing industries will be costlier. Therefore, the proposal for the devaluation of the taka by certain economists and financial gurus will impact the Bangladesh economy most severely.
The government should prudently manage the exporters’ predicament by providing other benefits and not by introducing a self-destructive currency devaluation policy for the welfare of the few. If the devaluation takes place, it is possible that Bangladesh will continue to slide backwards.
Another alternative is for the government to use the mounting foreign currency to expand our education base and provide a few thousand scholarships at the tertiary level at reputed global universities. Additionally, the government may purchase strategic assets in the world markets and position our citizens and others for employment there.
This will work to balance the flow of foreign currencies and reserves. It is time for taking smart governmental policy and not walk into the slippery slopes of short cuts that lack financial and strategic innovation.
On this same matter, I wrote an article few years back in a local national daily urging the government strongly not to devalue the Bangladeshi currency. Perhaps it is time to create a national urgency in this matter and stop Bangladesh from sliding backwards. Let us not squander the potential of Bangladesh by taking the most obvious route. Rather, let us grow our financial strengths and begin our journey into other equally efficacious possibilities before devaluing the Bangladeshi currency. Let us not put another nail in the coffin of economic duress for Bangladesh.