Back in 2017-18 the planning minister at the time, AHM Mustafa Kamal, had laughingly remarked, "Those of you who keep saying that the dollar value should be decided by the market, that is, devaluate the taka, should remember that Bangladesh is an import-dependent country. If import costs go up in taka, the common people will struggle to purchase essential commodities." I, too, laughed in reply and drew his attention to increasing exports and overseas remittance by means of correct exchange rate management in a growing economy.
Having long been involved in banking and also associated with large local and foreign importers, I am often asked - where will the value of the taka against the dollar end up? The international business firms operating in Bangladesh pay particular attention to the currency exchange rates for their future business planning.
Due to the negative impact of the global recession and various crises at home, there was a serious dollar crisis in the local market throughout 2023. Dollars were not available even at high prices. As a result, the taka saw a record devaluation against the dollar in a matter of one year. But because of the fluctuation of the dollar rate, the devaluation of the dollar has differed according to different calculations.
According to Bangladesh Bank, the value of the taka has dropped by 5.77 per cent in a matter of one year. In the banks, the taka value against the dollar has dropped by 22 per cent. In the kerb market, the taka has been devalued by 19 per cent. But while the value of the taka has fallen at that rate, the supply of dollars in the market does not meet the demand.
Meanwhile, the value of the taka against the dollar fell by 21.21 per cent in 2022. At the outset of that year the dollar rate was Tk 85.80. By the year end it stood at Tk 104. In that time it has increased by Tk 18.20. The dollar rate was mostly controlled by the central bank then. But towards the end of last year, most of the time it was out of control and that continues down till the end of this year too. Over the past two years the value of the taka has been plummeting against the dollar. It fell the lowest in 2023.
When Russia invaded Ukraine in 2022, a global crisis set in. This began to have a negative impact on Bangladesh's economy too. According to the central bank, over these past two years the taka has fallen by 28.21 per cent. But on the average buying and selling of dollars by the banks, the devaluation has been 44.52 per cent.
Undoubtedly there has been a multifarious negative effect on the economy due to the fall of the taka value against the dollar. Foreign debts have scaled up as have import costs. This has resulted in an increase in the cost of imported commodities. The increased cost of imported items has pushed up the price of other items too. With the rise in the dollar price and increase in fuel costs in the international market, costs for the transportation of all sorts of goods has gone up too. This has raised the prices of food and other commodities. At the end of the year, the food inflation rate crossed 12 per cent, according to BBC.
When the Russia-Ukraine war broke out in February 2022, the price of all sorts of commodities spiraled up in the international market. This caused an increase in the country’s import costs. From April that year, the impact of the dollar price was felt. That is why the central bank imposed control on imports from April and this has now been increased further.
The task of the central bank should be not to release dollars, but to let the market decide the exchange rate and work to this end in collusion with development partners and stakeholders. Indonesia and Sri Lanka may be examples for us in this regard.
At present the banks are not opening LCs for imports of commercial foods without arrangement of dollars in advance. As a result, import of these items has fallen. At the same time, alongside commercial banks, the central bank is providing dollars from the reserves for the import of essential commodities. Import of essentials is being kept at a normal level in this manner, but there has been a serious negative impact on commercial imports.
In this regard, the central bank has often been strict in order to keep control on the dollar price. But while this has brought down the price of the dollar in the market, the remittance flow decreased too. And dollar transactions in the kerb market came to a halt. This made the market more restive. The central bank therefore relaxed its control on the market somewhat. Taking advantage of this, the banks began buying dollars to meet the clients’ demands at rates higher than fixed by the central bank. The highest rate to buy remittance by the banks is now Tk 109.75. On top of that, they can give a 5 per cent incentive, comprising 2.5 per cent of the government and 2.5 per cent of the banks. That means the price of the dollar should be Tk 119.30. But almost all banks are buying remittance dollars for Tk 122 to Tk 126. The exchange houses overseas are not selling remittance dollars for less than this and so the banks are obliged to buy the remittance dollars at these higher costs. These dollars are meant to be sold to the clients at Tk 110 at the highest, but the commercial banks cannot buy dollars at such a rate from their own sources, other than from the central bank. So in most cases, dollars for imports are being bought for Tk 124 to Tk 128. There are instances of dollars being bought at even higher rates.
According to the newspapers, the bankers have said that the exchange houses abroad are aware of the dollar crisis in the country and that is why they have hiked up the dollar price. They do not sell dollars unless they get a higher rate. As a result, remittance has dropped and the dollar crisis has exacerbated.
According to the central bank, the cost of a dollar was Tk 104 at the beginning of last year. That means the value of the taka has fallen by 6 taka of 5.77 per cent. But dollars are not available at this rate in the market. A dollar now has to be bought for Tk 124 to Tk 126. Some banks are buying dollars at an even higher rate. Even if dollars are being sold on average at Tk 126 per dollar, the cost has gone up by 22 taka in a year. That means the value of ha taka has fallen by around 22 per cent.
At the outset of last year dollar in the kerb market were Tk 106. By the end of the year the dollar rate went up to Tk 127. That means the value of the taka has fallen by Tk 21 or 19 per cent. Last August the dollar rate went up past Tk 130. Later, at the intervention of the central bank and the intelligence agencies, the rate fell somewhat in the kerb market.
Before going into what the dollar rate will be in 2024, let’s say a little prayer that our central bank and the market operators do not take up unplanned and hot-headed decisions that create panic in the market or encourage us to create a dollarized economy like Cambodia.
If we want our export earnings to be sent back as expected and remittance to come more through banking or official channels, then the market must be allowed to function as a market. There may be some temporary setbacks, but the market will gradually settle in its own place. The objective of any growing economy should be to increase the liquidity in the market, particularly of foreign currency. The task of the central bank should be not to release dollars, but to let the market decide the exchange rate and work to this end in collusion with development partners and stakeholders. Indonesia and Sri Lanka may be examples for us in this regard.
* Mamum Rashid is a banker and economic analyst