Dollar price is now excessively high all across the world and it rose 16 per cent in the last one year and reached a 20-year high, putting the small economies in a dire state.
The scenario is nothing different when it comes to Bangladesh. Instability arose in the economy here which affected some significant indicators.
Bangladesh had never let the market decide the currency exchange rate. When the economy was doing well and there was no crisis in foreign currency income, the country intentionally retained the exchange rate of dollars.
But the central bank is now depreciating taka frequently against the greenback. The crisis has now been so acute that the dollar is selling nowhere at the fixed-rate.
Bangladesh Bank has fixed the dollar price at Tk 87.5 but the commercial banks are charging Tk 95 for each dollar. The price crossed the Tk 100-mark at the kerb market. Each dollar was selling at Tk 102 at the open market on Tuesday.
The rise in dollar price always leads to rise in import costs. Bangladesh’s import volume is higher than the exports. Now, all sorts of products, including fuel, edible oil, fertilizer and wheat, are being imported at a higher price. It is also pushing the inflation rate up.
Developed countries, including the United States, have cut down the policy interest rate to keep the inflation under control. During the Covid-19 pandemic, most of the countries have provided incentives to help businesses make up losses.
The stimulus packages geared up money flow in the market. Later, the Ukraine crisis, coupled with the increased money flow, intensified the inflation. The countries have raised the policy interest rate to slow down the money flow.
But the scenario is a bit different here as Bangladesh provided bank loans to businesses at low interest in the form of stimulus packages during the pandemic.
A large portion of the loans has not been repaid yet. There is also a question whether the stimulus packages have been used in productive sectors. Adding more to the woe, a fresh concern over the inflation appeared in the scene thanks to the turmoil in the world economy.
The crisis is turning worse from all aspects. The low-income group is now in a dire situation as the cost of living has risen due to inflation. Economists, against such a backdrop, suggested taking preparation for the worst. They said it needs to increase allocation for social safety of affected people and cut down unnecessary expenditure in the forthcoming budget.
Was the crisis sensed earlier?
Though the Covid-19 spread in 2020, the inward remittance was good enough until 2021. Initially there was a fear about the exports, but it was overcome later. Even, the import costs were affordable.
But some indicators started turning fragile at the beginning of the current fiscal year 2021-22. Bangladesh failed to retain previous year's overseas income, let alone growth. The inward remittance fell by 16.25 per cent in the first ten months of the current fiscal, against a 36.10 per cent growth rate recorded in the previous year’s corresponding period.
The total import costs of the previous fiscal were a bit more than $60 billion. But this year, an amount of $61.52 billion has been spent to pay the import liabilities of only nine months. With the remaining reserve of foreign currency, the country would be able to meet the import costs for another five and half months.
There is a trade deficit of $25 billion if imports and exports of the last nine months are taken into account. Basically, the country is now failing to pay the import liabilities with its export income, due to downsized remittance and high import costs. The main crisis lies here.
The pressure started to mount at the beginning of FY22. The Ukraine-Russia war later appeared in the scene and added more to the financial woe. The world is now heading towards a fresh recession, instead of embracing a post-Covid economic transition.
The policymakers were busy in showing high GDP growth and per capita income as well as calculating inflation as per a 17-year-old base year. The inflation rate was shown lower, but it was far from the reality. This means they put a little focus on assessing the ground reality.
Why dollar price is held back
Bangladesh Bank always keeps the dollar exchange rate under its control. The central bank used to devalue taka through public announcement 20 years back. In 2004, it moved away from the practice of depreciating local currency through announcement.
The exporters generally lose spirit if taka is devaluated as the amount of local currency increases against the greenback. The depreciation also pulls up the import costs and leads an import-dependent country to inflation. Bangladesh is going through such a situation.
The central bank intentionally holds up the dollar exchange rate to keep the import and export trade under control. There was a longstanding practice of not hiking the price above TK 80.
But this time the global turmoil forced Bangladesh Bank to move away from its longstanding stance and devaluate taka for five times in the current year. Initially, taka was depreciated by Tk 0.20, but the price was lowered by Tk 0.80 on Tuesday in the face of excessive crisis and demand.
Actually, Bangladesh could not help but take the decision to remain in the race as its international peers depreciated their local currencies as per the market demand. But combating the current crisis would have been easier had the exchange rate revised in right time in line with the market demand. Actually, the dollar market is now unstable owing to lack of time-befitting decisions.
Bangladesh Bank is now selling out dollars to other commercial banks to keep its price stable. But the move failed to solve the crisis as there is a disparity between supply and demand. Experts said the dollar rate cannot be kept stable through the current strategy. All are now staring at where the exchange rate reaches at the end of the day.
Possible consequences
Fuel and edible oil are being imported despite the price hike. But a question arose whether it would be possible to import wheat and fertilizer at a higher price. The high price of fuel is pushing up the production cost while that of edible oil and wheat is raising the cost of living.
The government is now highly concerned about chemical fertilizer as there is no alternative to fertilizer in agricultural productions. The authorities provide a significant amount of subsidy to fertilizer. The rise in price of fertilizer at the global market will inevitably lead to a rise in the government subsidy.
However, National Board of Revenue (NBR) reaps benefits to some extent when commodity prices rise in the international market. Its revenue collection rises as taxes are levied on valuables. As a result, the collection of import duty as well as VAT has risen nowadays.
Even then, Bangladesh is a backward nation in terms of tax to GDP ratio. The amount of government subsidy and loan repayment would increase in the upcoming budget.
Economists said the budget should contain special social programmes to help the vulnerable people combat the inflation. It requires extra money.
On the other hand, a huge amount of allocation has to be made to repay the internal and foreign debt liabilities. The amounts would increase in the budget. Apart from that, there is pressure of wages and pre-polls projects.
Bangladesh had to face no similar challenge in the economic arena in the previous one and a half decades. There is no satisfactory sector but the exports. The sector also may enter the danger zone if a fresh recession appears in the world economy.
So, the government has to maintain the stability in different key indicators as well as provide assistance to the affected group of people. It needs to cut down unnecessary expenses and put focus on meeting local and foreign debt liabilities. In a word, the government is now facing a tough challenge.