The market for the US dollar has become unstable due to a number of factors, threatening to adversely affect Bangladesh’s economy.
Experts point to the sharp appreciation of the dollar against the taka, inadequate information, sluggish export growth, and businesses' move to go for overseas transactions without even having their own tangible foreign currency incomes.
Economists said there would be no negative impact on the country’s economy if the greenback is exchanged according to the usual demand-supply mechanism.
In January this year, the average exchange rate of the dollar was around Tk79, but it rose to Tk84 in the last week.
During the months of January, February, April and November, the exchange rates of dollar rose by Tk2-3, causing an unanticipated loss to businessmen.
A rise in dollar exchange rates is not anything unusual, but it is a matter of grave concern that the US currency is appreciated extraordinarily frequently, the experts added.
Causes and effects of fluctuation
Speaking to the Dhaka Tribune, a Bangladesh Bank official said the rise in the exchange rates is caused not only by normal market forces, but prevailing tensions in the currency market.
Toufic Ahmad Choudhury, director general of the Bangladesh Institute of Bank Management (BIBM), said: “There is no chance of unusual fluctuations in the dollar exchange due to market forces. The rates do not shoot up if the currency supply remains normal.
“But, when the supply falls, even by only 1%, market manipulators hike the exchange rate by 10%, taking advantage of the supply shortage. That’s why the currency market remains volatile.”
He added that market regulators’ information asymmetry is also responsible for the fluctuation.
A leader of Bangladesh Foreign Exchange Dealers’ Association (BFEDA) said that such an abrupt volatility in the currency market affects interests of both exporters and importers.
“Exchange rate increasing by Tk3-4 by a day is quite unusual. The depreciation of greenbacks in a matter of hours also causes huge losses to banks as well as businessmen,” he added.
The BFEDA leader further said manipulators are breaching usual market rules for their own interest, as no wholesale currency market exists in the country.
In the open currency market, buyers are charged Tk2 extra per dollar, compared with bank and inter-bank rates.
AB Mirza Azizul Islam, former financial advisor to a caretaker government, blamed the depreciation of local currency for the mismatch between demand and supply of dollar.
Trade deficit, sluggish export growth, and decline in remittance earnings are among the factors contributing to the shortage of dollar supply, the economist observed.
Echoing Azizul, former Bangladesh Bank governor Dr Salehuddin Ahmed said: “Sometimes, companies like Bangladesh Petroleum Company have to make their transactions in dollars as per their deals. As a result, they require huge amounts of greenbacks when they settle the deals. Taking advantage of this, those who reserve currency hike the exchange rate of dollar. This is also responsible for the instability of dollar market.”
Syed Ahsanul Alam Parvez, chairman of National Bureau of Economic Research, a Dhaka-based think tank, said the scarcity of dollars in the country’s market is the result of an increase in the number of transactions through traditional Hundi system, especially Digital Hundi (a method of illegal transactions through mobile financial channels).
The appreciation of dollar against taka has both positive and negative impacts.
When dollar is appreciated, export earnings and remittance witness an upward spiral, while importers have to incur losses as prices of imported commodities go up.
Exporters’ Association of Bangladesh President Md Abdus Salam Murshedy said that if dollar is appreciated, exporters can sell their products at competitive prices to the countries that use dollars as their currency.
Md Yasin Ali, a supernumerary professor at the BIBM, said: “In fact, our currency is more valuable than dollar… So, dollar appreciation is needed as it gives our exporters a competitive spirit in global markets and interests our workers abroad in remitting their wage more and more.”
He stressed that sudden volatility in the currency market has to be stopped as it causes massive losses to both exporters and importers.
Controlling volatile market
As a sudden hike in the dollar exchange rates triggers inflation in the country, Bangladesh Bank has to intervene in the currency market to make sure that appreciation or depreciation is taking place at a reasonable rate, the experts suggested.
Meanwhile, to control the unstable market, the central bank did not purchase dollars between July 1 and November. On the other hand, it has sold around $500 million to different banks and financial institutions.
The bank also put a cap on US dollar at inter-bank exchange rate plus Tk2 on April 27 in a meeting with the Association of Bankers, Bangladesh with a view to keeping the market stable.
On November 13, it also asked the country’s banks to strictly follow the inter-bank rates to make foreign exchange transactions among them.
Experts suggested a range of measures to bring back stability to the market and turn it into an intervention-free and market-driven one.
In addition to buying and selling dollars, Yasin said the central bank has to constantly monitor the currency market.
“It is an era of digitalisation. Bangladesh Bank has to take advantage of this to monitor importing, exporting and other functions on a daily basis,” he added.
Yasin also suggested monitoring of dollar reserves held by banks and holding discussions on fixing transaction rates between brokerage firms.”
Salehuddin stressed that the central bank should take spontaneous measures to control the volatility.
Bangladesh Bank needs to formulate a guideline for foreign currency business and create awareness among customers, while the banks should hedge their trading to avoid unexpected losses of traders, he added.
An official of the central bank said they were trying to introduce a system of early forecasting so that such market volatility can be prevented or addressed immediately. He also asked the banks to make their transaction systems more transparent so as to ensure proper exchange rates.
Given the negative effects of instability and intervention, the experts urged the government to take proper initiatives to increase export earnings and remittance inflow to ensure steady supply of dollar.