While the minimal depreciation kept the exchange rate and money market stable in the given period, it hurt exporters as they lost competitiveness in export markets
Bangladeshi currency, the Taka depreciated by only 0.5% against the US dollar in the last fiscal year, the lowest among most Asian trading partners and rivals in the global export markets.
According to a Bangladesh Bank(BB) data, Bangladeshi currency depreciated by only 0.5% in the last fiscal year, while other Asian nations including India’s currency depreciated by 8.8% followed by China 2.8%, Indonesia 1.1%, Vietnam 0.7% and Cambodia 0.7%.
While the minimal depreciation kept the exchange rate and money market stable in the given period, it hurt exporters as they lost competitiveness in export markets.
Why Taka remains strong
The exchange rate remained broadly stable and competitive in FY20 aided by the timely intervention of the BB.
“During the first half of FY20, the exchange rate of Taka against intervention currency USD faced a little depreciating pressure, which disappeared gradually during the second half due mainly to shrinking growth of imports and a significant amount of receipt in the financial accounts along with a good inflow of workers’ remittances,” said the BB in its monetary policy for FY21 unveiled on Wednesday.
In FY20, remittance inflow hit a new record of $18.20 billion, while imports declined by 10.81% to $46.24 billion from $51.84 billion in FY19
However, the exchange rate of Taka against the USD depreciated by 0.5% in FY20, which was markedly smaller than India and China but pretty much in line with other Asian competitors like Vietnam, Indonesia and Cambodia, it adds.
“BB’s ongoing expansionary policy measures and its recent drives of buying foreign currency from the market helped restore normalcy in both the money and foreign exchange markets, stabilizing the call money rate within the corridor of the repo and reverse repo rates and keeping the Taka-USD exchange rate competitive,” said the central bank.
Real and nominal exchange rate
Meanwhile, the movement of Nominal Effective Exchange Rate (NEER) index indicates that the exchange rate of Taka remained slightly undervalued while the Real Effective Exchange Rate (REER) index signals that it is largely overvalued as of June 2020 due mainly to big price differential with the major trading partner countries of the foreign currencies basket.
In FY20, the NEER of Taka was Tk112.6 against USD, while REER was Tk98.8.
On the other hand, the US currency rate reached Tk 84.80 on Thursday.
Should the currency depreciate more?
As per the real exchange rate, Taka is undervalued which is hurting the country’s exports sector. On the other hand, the government does not let the market function on its own to maintain stability.
In the given situation, exporters want more depreciation of Taka as the exchange rate is controlled, which is hurting the competitiveness in the global market.
“It is not new for us. It is a longstanding demand of exporters as we are losing competitiveness in the global markets to our competitors,” BGMEA senior vice president Faisal Samad told Dhaka Tribune.
Since the depreciation will increase prices of imported goods as said by the government, exporters are demanding Tk5 against a USD on the amount of export retention, adds Samad.
The exporters are going through a critical time and any appreciation could be a great cushion against the Covid fallout, he maintains.
On the other hand, economists also opined that there should be a reasonable depreciation of Taka especially for the non-RMG exporters, who enjoy less policy support.
“Bangladeshi currency has been overvalued against the USD for a long time, hurting the country’s exporters. But, the policy makers are not paying heed to this,” South Asian Network on Economic Modeling (Sanem) Executive Director Selim Raihan said.
It is true that the market driven exchange rate can increase import value and the regulator is controlling the rate to maintain stability, adds Selim.
But considering the exporters, especially small sectors interest, there is a need for a reasonable depreciation of Taka against the USD. This could be very close to the real effective exchange rate so that it would not remain overvalued, the economist says further.
Meanwhile, former World Bank lead economist in Dhaka, Zahid Hussain opined that the exchange rate should be market driven.
In attracting Foreign Direct Investments, Bangladesh also needs a floating exchange rate as the investors in the export- oriented sector will prefer to get the maximum return of investment, says the economist.
According to Zahid, in the managed exchange rate, exporters get less against the foreign currency earned through exports.