Whose fault is it that a dollar is now 117 taka?

After the independence of Bangladesh, the country chose the British point sterling as the standard to determine currency exchange rates. Back then, the exchange rate of 1 pound had been 18.9677 taka. This exchange rate was fixed in keeping with India's currency value. The dollar rate then was 7.27027 taka.

The first big change in exchange rates was brought about on 17 May 1975. Within the matter of one day, the taka was devalued by 58.16 per cent. So the pound exchange rate stood at 30 taka, from the previous 18.9677 taka. But in the kerb market, the pound rate was almost double. The decision had been taken at the behest of the World Bank and the International Monetary Fund (IMF).

On 11 January 1983 Bangladesh moved away from the pound sterling. Bangladesh's taka from that day was pegged to the US dollar. Bangladesh Bank fixed the dollar rate, the selling rate at 24.48 taka and buying rate 24.52 taka.

The next significant change came on 24 March 1994. From that day, taka was made convertible in current account transactions. But capital account was not made convertible. That means, the taka can't be converted into dollars and taken out of the country as capital. But scope was given to covert taka to dollars for everyday expenses, education or health purposes.

The biggest change in exchange rates came on 31 May 2003. The taka was made a floating currency. It was said that the dollar rate would be left to the market. Up until them, the adjustable peg had been followed. In this system, the authorised dealers could adjust the exchange rate within the ceiling fixed by Bangladesh Bank. Before that Bangladesh Bank would make an announcement to depreciate or appreciate the taka value. Since independence up till 2003, Bangladesh Bank devalued the taka 86 times and raised its value 6 times.

Though it was said that the exchange rate was left to the market, it wasn't actually entirely market-based. It was managed floating. Bangladesh Bank would keep the dollar rate in control by controlling the supply of money in the market. The central bank was a large partner in the foreign exchange market. So it was easy for the central bank to control the supply of US dollars.

In 2003, after all preparation, the exchange rate was made market-based. The dollar wasn't that sturdy then. Bangladesh's exports were doing well. The state-owned banks had ample dollars in hand. So the exchange rate did not make any large leap.

Before this announcement, the mid exchange rate for buying and selling the dollar was 57.90 taka. And in the new announcement the central bank stated that dollars could be bought and sold from dollars at any rate between 57.40 taka and 58.40 taka.

After announcing this floating rate, in order to keep the market stable, the central bank decreased the supply of the taka and for the first few days the inter-bank call money rate went up to 35. Then it went back to normal. The day that the exchange rate was made floating, the foreign exchange reserves in the country totalled just over 1.89 US dollars (189 crore 52 lakh 20 thousand US dollars). Within just a week the reserves exceeded 2 billion dollars, that is 200 crore dollars.

Two researchers of Bangladesh Institute of Development Studies (BIDS), Manzur Hossain and Mansur Ahmed, in 2009 carried out a study on 'Exchange Rate Policy under Floating Regime in Bangladesh: An Assessment and Strategic Policy Option.' In the study they showed that after the floating regime was introduced in 2003, the first 10 months were actually like a honeymoon period. During that time the taka devalued by only one percent. But after that the taka depreciated. For example, in mid-2004 to 2006, taka depreciated by 20 per cent. The price of the dollar went up to 70 taka. The two researchers showed that from the year 2000 to 2008, Bangladesh had always kept the taka rate high.

The country's economy faced danger in 2011. Exports dropped due to the recession in Europe and the United States. Remittance growth fell too due to the Middle East crisis. When differences arose over Padma Bridge, foreign assistance dropped. So when the dollar crisis emerged, in a matter of just one year the taka was devalued by around 16 per cent. So from 70 taka the dollar rate went up to 81 taka. Devaluation is linked with inflation. In 2011 inflation in the country was almost 11 per cent.

After 2012, the taka depreciated very little. For example, towards the end of June 2012, the dollar rate was 81 taka. Before the outbreak of Covid, that rate rose to 85 taka. And in February 2022 when Russia launched its attack on Ukraine, it was 86 taka. That means in 10 years the taka was devaluated by only 6.17 per cent.

Meanwhile, at the end of June 2012, the exchange rate of the Indian rupee was 56 rupees. By the end of February 2022, that increased to 75.49 rupees. That means, in those 10 years the rupee was devaluated by 34.80 per cent.

When the former US president Donald Trump started the trade war with China, China devaluated the yuan significantly to keep hold on the export market. India and other countries also devaluated their currencies to hold on to the export market. Bangladesh and a few other countries did not follow suit. Bangladesh could not hold on to its export capacity. The negative growth that fiscal was around 17 per cent.

Yet according to IMF, Bangladesh's currency was overvalued by 9.5 per cent in 2018 and 2019. While economists and exporters repeatedly recommended a devaluation of the dollar, the government turned a deaf ear. But that was the right time to relinquish hold on the taka rate. The average inflation at the time too was 5.65 per cent. Even the foreign exchange reserve at the time was over 36 billion dollars, that is, 3600 crore dollars.

When the Ukraine war began in 2022, Bangladesh fell into real trouble. When the cost of commodities went up in the global market, imports costs increased. When the US' central banking system Fed increased the policy interest rate in order to decrease inflation, the demand for investing in dollars increased further the world over. Expenditure on repaying loans taken in dollars also went up. Overall, the expenditure of dollars in the country far exceeded the earning in income in dollars.

When demand is high and supply is less, it is only natural that the rate of the dollar will go up. In order to prevent this spiralling of the exchange rate, Bangladesh Bank had to gradually sell dollars from the reserves. As a result, the reserve of 45 billion dollars has dwindled to 18 billion dollars. The usable reserves are even less. Various restrictions were also imposed on imports. Even that couldn't prevent the dollar rate from going up.

Various strategies were adopted in the meantime. When the crisis cropped up, Bangladesh Bank fixed the dollar rate for a few days. It was decided in September 2022 that, at the advice of the central bank, the dollar rate would be determined by Bangladesh Foreign Exchange Dealers Association (BAFEDA) and the Association of Bankers Bangladesh (ABB). But that did not solve the problem. On the contrary, the crisis mounted. The market saw four difference prices for the dollar. There were different prices for import, export, remittance and exchange houses.

The price of the dollar in the kerb market was high. When the official rate was 100 taka, it was 127 taka in the kerb market. In November last year he rate fixed by the money exchangers was also 127 dollars. When the expatriates were unwilling to send remittance at this rate, some banks were told to bring in remittance at a higher rate. Overall, extreme disorder as marked in the exchange rate regime.

Speaking about the changes in the exchange regime, in 2003 the eminent economist Wahiduddin Mahmud said, “The character of the market-based system is that trying to be over smart will result in harm.” That is exactly what had happened. Everyone had imagined the price of the dollar would go up further because of these steps taken by Bangladesh Bank. So, many were unwilling to send back the dollars which they had earned. Many held on to the dollars waiting for the rates to rise, the sold them at higher price. That is how the dollar black market emerged.

Lebanon’s former central bank governor Riad Salameh who stepped down on 31 July last year, was dubbed as the world’s worst central bank governor at the time. The main allegation against him was providing special benefits to a certain group by making several exchange rates during the dollar crisis.

After much tests, trials and ploys, Bangladesh Bank finally acquiesced to IMF’s conditions and took up a new foreign exchange regime. The crawling peg is not entirely market-based. The dollar will remain at a middle rate, like 117 taka at present. The exchange rate will be around this. It is not that this will resolve all problems, but the uncertainty over the dollar rate and expectations of a hike, will be controlled to an extent.

Bangladesh made the biggest blunders over the dollar rates in the three years before Covid. Most countries at the time had devalued their currency, but Bangladesh did not allow the dollar rate to increase. The second blunder was after the Covid outbreak. There was a low demand for dollars globally at the time.

With exports in a good place and import demands dropping, the foreign exchange reserves had just began to increase. The taka was kept at a fixed rate even then.

The third mistake started after the Ukraine war in 2022. Actually it was then that the price for the mistakes of the previous two years had to be paid. Even then the exchange rate was not left to the market and all sorts of strategies were adopted. As a result, the reserves plummeted and the dollar rate went up in leaps and bounds.

Despite all this, the government failed to rein in inflation. So even after taking up a new regime in exchange rates, it was too late. The question now is whether this crisis will abate any time soon.

* Shawkat Hossain is Head of Online, Prothom Alo

* This column appeared in the print and online edition of Prothom Alo and has been rewritten for the English edition by Ayesha Kabir