OP-ED: What helps in countering currency depreciation?
Depreciation of a currency benefits those bringing inflows of foreign currency
Representational image Bigstock
Mehdi Rahman
Publish : 20 Dec 2021, 06:36 PMUpdate : 06 Mar 2022, 02:35 PM
Textbook theories calculate the real price of a country’s currency.
While on calculation, price levels of peer countries are taken into consideration.
Price level of a country is a double-edged sword.
Depreciation of a currency benefits those bringing inflows of foreign currency.
But the opposite is for those who send outflows of remittances.
In this case, exporters of goods and services, wage earners, transfer recipients, etc. are beneficiaries.
On the other hand, importers of goods and services, borrowers having no export earnings making repayment of loans, and other remitters of factor payments face problems.
Policymakers try to make trade-offs through intervention in foreign exchange markets.
There are policy texts favoring depreciation of currency and the same is available favoring appreciation of currency.
Strong arguments are available on both sides.
In such a situation, a fixed exchange rate regime would have been better, no arguments are required. But the global economy is out of the fixed exchange rate regime.
But the system is de jure floating, and a de facto fixed regime.
It means that central banks intervene in markets to keep it operational in discipline.
So, the prevailing regime can be termed as a modified floating exchange rate system.
Except for a few king currencies, the rest are normal currencies.
Open economies need dependence on other economies.
This requires movement of goods, services, finance and people for which king currencies are needed to meet the outward payments.
King currencies are earned by way of export of goods and services, and wage remittances in particular.
The inward flows need to maintain smooth, otherwise wider outflows for payments of capital goods cannot be managed.
To keep inflows at a sustained position, pains in upward movement in price level are needed to bear.
It is not desirable for free fall of the exchange rate through short-sales or market manipulation as took place in 1992 in the city of London.
But market forces automatically determine the exchange rate of local currency unless external support in the form of intervention is imposed.
Keeping the price of local currency overvalued, inflows will face problems since it creates a shadow market for illegitimate transactions making inflow pipes narrower.
Local currency at an undervalued stage encourages inflows, especially by non-residents working abroad.
Automatically, an official channel without any incentive becomes attractive for remitters.
On the other hand, the export sector exports goods at under price with the support of incentives granted by the government.
Price benefits through exchange rate result in higher profits to exporters. Profit is one of the best factors to expand business resulting in employment.
This may also save the government to eradicate expenditures on account of incentives or export subsidies.
On transition from LDC stays, WTO rules on subsidies and countervailing measures will not permit continued incentive programs, for which exchange rate benefits may work as an alternative, among others.
It is said that Bangladesh exports goods at below costs, the gap including profit is supported by subsidies.
Incremental revenue due to higher price of foreign currency may cover all costs with profits.
Bangladeshi context
Bangladesh needs investment of around $600 billion until 2041, as revealed from different studies.
Major investment needs to be used for payments abroad on account of imports of capital goods and services.
We have moved from an aid based economy to a trade based economy.
Value addition from trade can support import needs, including domestic employment.
On the other hand, wage remittances are another major window to support imports.
Without inflows from current account transactions, import payments need to be settled by official loans and grants.
Hence, the price of currency is a factor for an open economy.
Price of currency at an undervalued stage has a dilemma.
Import costs become high to make payments.
There are different types of imports.
Capital goods are required at set-up and expansion stages of companies. Intermediate goods are regularly required to meet production demands.
Finished goods are imported for immediate uses.
Many of the finished goods are luxurious. Imports of these items depend on price and duty structure. These ones are not considerable as per their utilities.
But capital machinery, technologies and intermediate goods are essential for importing substitute industries as well as export oriented industries.
The later ones will not face problems since they have earnings in foreign currency.
In addition to the price of foreign currency, there are many factors involved in import payments which include interest rate on loans, duty and taxes, official bottlenecks and so on.
With regards to cost as interest, local currency loans bear high costs compared to foreign currency.
In this case, buyer’s credit may bring import cost at desired level.
Rationalization of duty structure can help domestic prices at a reasonable level.
Just policy support is needed.
On the other hand, price benefits will automatically lead export sectors to grow as said earlier.
This will result in an increase in employment.
Incremental money from export sectors will support buying sprees which will help domestic industries to grow and absorb shocks of changes in price level.
Depreciation
It is common that the passage of a day increases the age of a person.
Paid workers are periodically incremented in their wages like increase of age.
This increment fuels price level.
Corporate entities want enhancement in the price of their outputs with the passage of time.
We cannot blame corporations only for price level change.
Rather it is a common phenomenon with the passage of time.
Creative destruction is commonly used as coined by Joseph Schumpeter.
Grocery shops are phased out by e-Commerce.
New jobs are created with creative destruction. But people involved with grocery shops are not replaced by the charged stage.
The aged ones, especially those out of work, are facing a harsh reality.
Same is applicable for price level changes for those people having no way to enhance their income.
Economic activities are nothing but games which are never a win-win, rather zero sum situation.
Hence, at every changed situation, some quarters face sufferings which are inevitable.
Taka cannot buy foreign goods and services as the USA can do by their own currency.
All currencies are not international currencies, only a few are internationally acceptable.
Until reaching that stage, we need foreign currency to meet import payments.
We should look in such a way so as to keep inflow pipes to increase day by day for catering incremental needs.
Otherwise, we need to depend on debts, which are not solutions.
The economy is on track for which huge outflows will be in need.
Along with the official flows, unofficial flows are expected.
The shadow side needs to be suppressed by channeling inflows through banking windows.
This is only possible provided that beneficiaries are well benefited. Exchange rate gives the best benefit.
Management of exchange rate would merely be needed if our imports are insignificant but the situation is opposite, needing huge foreign currency to meet the demands.
Considering this upcoming situation, the exchange rate should be allowed to move at the interaction of demand and supply.
Otherwise, inflow pipes may be narrowed, leading to adverse situations.
Just monitoring is needed so that the market can work as per trends.
Manipulation in any way needs to be tackled strictly. In addition, regular reconciliation with counterparts abroad needs to be on watch.
We have already crossed LDC status, with expectations of an upper income level in the globe.
The upcoming days are challenging.
Market needs to be let move with watch-eye for achieving trade-off situations, avoiding foul-play.
Exchange rate may work as a single tool to expand trade with external sectors as well as development of import substitute industries including desired employment.
The author works in the development sector and can be reached at [email protected]
OP-ED: What helps in countering currency depreciation?
Depreciation of a currency benefits those bringing inflows of foreign currency
Textbook theories calculate the real price of a country’s currency.
While on calculation, price levels of peer countries are taken into consideration.
Price level of a country is a double-edged sword.
Depreciation of a currency benefits those bringing inflows of foreign currency.
But the opposite is for those who send outflows of remittances.
In this case, exporters of goods and services, wage earners, transfer recipients, etc. are beneficiaries.
On the other hand, importers of goods and services, borrowers having no export earnings making repayment of loans, and other remitters of factor payments face problems.
Policymakers try to make trade-offs through intervention in foreign exchange markets.
There are policy texts favoring depreciation of currency and the same is available favoring appreciation of currency.
Strong arguments are available on both sides.
In such a situation, a fixed exchange rate regime would have been better, no arguments are required. But the global economy is out of the fixed exchange rate regime.
But the system is de jure floating, and a de facto fixed regime.
It means that central banks intervene in markets to keep it operational in discipline.
So, the prevailing regime can be termed as a modified floating exchange rate system.
Except for a few king currencies, the rest are normal currencies.
Open economies need dependence on other economies.
This requires movement of goods, services, finance and people for which king currencies are needed to meet the outward payments.
King currencies are earned by way of export of goods and services, and wage remittances in particular.
The inward flows need to maintain smooth, otherwise wider outflows for payments of capital goods cannot be managed.
To keep inflows at a sustained position, pains in upward movement in price level are needed to bear.
It is not desirable for free fall of the exchange rate through short-sales or market manipulation as took place in 1992 in the city of London.
But market forces automatically determine the exchange rate of local currency unless external support in the form of intervention is imposed.
Keeping the price of local currency overvalued, inflows will face problems since it creates a shadow market for illegitimate transactions making inflow pipes narrower.
Local currency at an undervalued stage encourages inflows, especially by non-residents working abroad.
Automatically, an official channel without any incentive becomes attractive for remitters.
On the other hand, the export sector exports goods at under price with the support of incentives granted by the government.
Price benefits through exchange rate result in higher profits to exporters. Profit is one of the best factors to expand business resulting in employment.
This may also save the government to eradicate expenditures on account of incentives or export subsidies.
On transition from LDC stays, WTO rules on subsidies and countervailing measures will not permit continued incentive programs, for which exchange rate benefits may work as an alternative, among others.
It is said that Bangladesh exports goods at below costs, the gap including profit is supported by subsidies.
Incremental revenue due to higher price of foreign currency may cover all costs with profits.
Bangladeshi context
Bangladesh needs investment of around $600 billion until 2041, as revealed from different studies.
Major investment needs to be used for payments abroad on account of imports of capital goods and services.
We have moved from an aid based economy to a trade based economy.
Value addition from trade can support import needs, including domestic employment.
On the other hand, wage remittances are another major window to support imports.
Without inflows from current account transactions, import payments need to be settled by official loans and grants.
Hence, the price of currency is a factor for an open economy.
Price of currency at an undervalued stage has a dilemma.
Import costs become high to make payments.
There are different types of imports.
Capital goods are required at set-up and expansion stages of companies. Intermediate goods are regularly required to meet production demands.
Finished goods are imported for immediate uses.
Many of the finished goods are luxurious. Imports of these items depend on price and duty structure. These ones are not considerable as per their utilities.
But capital machinery, technologies and intermediate goods are essential for importing substitute industries as well as export oriented industries.
The later ones will not face problems since they have earnings in foreign currency.
In addition to the price of foreign currency, there are many factors involved in import payments which include interest rate on loans, duty and taxes, official bottlenecks and so on.
With regards to cost as interest, local currency loans bear high costs compared to foreign currency.
In this case, buyer’s credit may bring import cost at desired level.
Rationalization of duty structure can help domestic prices at a reasonable level.
Just policy support is needed.
On the other hand, price benefits will automatically lead export sectors to grow as said earlier.
This will result in an increase in employment.
Incremental money from export sectors will support buying sprees which will help domestic industries to grow and absorb shocks of changes in price level.
Depreciation
It is common that the passage of a day increases the age of a person.
Paid workers are periodically incremented in their wages like increase of age.
This increment fuels price level.
Corporate entities want enhancement in the price of their outputs with the passage of time.
We cannot blame corporations only for price level change.
Rather it is a common phenomenon with the passage of time.
Creative destruction is commonly used as coined by Joseph Schumpeter.
Grocery shops are phased out by e-Commerce.
New jobs are created with creative destruction. But people involved with grocery shops are not replaced by the charged stage.
The aged ones, especially those out of work, are facing a harsh reality.
Same is applicable for price level changes for those people having no way to enhance their income.
Economic activities are nothing but games which are never a win-win, rather zero sum situation.
Hence, at every changed situation, some quarters face sufferings which are inevitable.
Taka cannot buy foreign goods and services as the USA can do by their own currency.
All currencies are not international currencies, only a few are internationally acceptable.
Until reaching that stage, we need foreign currency to meet import payments.
We should look in such a way so as to keep inflow pipes to increase day by day for catering incremental needs.
Otherwise, we need to depend on debts, which are not solutions.
The economy is on track for which huge outflows will be in need.
Along with the official flows, unofficial flows are expected.
The shadow side needs to be suppressed by channeling inflows through banking windows.
This is only possible provided that beneficiaries are well benefited. Exchange rate gives the best benefit.
Management of exchange rate would merely be needed if our imports are insignificant but the situation is opposite, needing huge foreign currency to meet the demands.
Considering this upcoming situation, the exchange rate should be allowed to move at the interaction of demand and supply.
Otherwise, inflow pipes may be narrowed, leading to adverse situations.
Just monitoring is needed so that the market can work as per trends.
Manipulation in any way needs to be tackled strictly. In addition, regular reconciliation with counterparts abroad needs to be on watch.
We have already crossed LDC status, with expectations of an upper income level in the globe.
The upcoming days are challenging.
Market needs to be let move with watch-eye for achieving trade-off situations, avoiding foul-play.
Exchange rate may work as a single tool to expand trade with external sectors as well as development of import substitute industries including desired employment.
The author works in the development sector and can be reached at [email protected]
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