Dollar price and interest hike: Concern over cost of doing business

The signage of Bangladesh BankReuters file photo

Leaving the bank interest rate on the market as well as simultaneously raising the exchange rate of US dollars at a go may increase the cost of doing business, causing a concern among businesspeople. Economists, importers and exporters said steps must be taken to control the cost of doing business following the measures by the central bank because prices of goods will increase again due to the rise in the cost of doing business, thus, inflation may go up, causing pressure on people.

Top importers of the country said they purchased dollars at a price between Tk 117 and Tk 120 to import various products including raw materials despite the Bangladesh Bank keeping the exchange rate within a certain limit. They had to pay banks in alternative ways, but now they will no longer be needed to pay additional prices to the bank via alternative ways because of the introduction of a crawling peg exchange rate system for spot purchases and sales of US dollars. Importers said the dollar price hike would not affect them much for now, but its long-run effect depends on how banks would implement the new system.

As part of the broader reform in the financial sector in light of the criteria for the International Monetary Fund’s (IMF) loans, Bangladesh Bank introduced a crawling peg exchange rate system for spot purchases and sales of US dollars, jumping the exchange rate of US dollar to Tk 117 a dollar from Tk 110 a dollar at one go. The central bank introduced a market-driven interest rate regime, also at the prescription of the IMF ditching the SMART (six-month moving average rate of treasury bill) reference rate for determining lending rates, as well as raised the policy rate instructing the banks not to raise the interest rate by more than 1 per cent than the existing rate. The bank lending rate crossed 13 per cent in April.

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Exporters, however, will reap benefits from the jump in dollar rate. Several exporters said if the dollar rate does not rise anymore, the facility of additional prices will increase exporters’ competition capacity significantly, thus, the economy will gain in the long run. They think earrings from export will increase because of the new decision, as well as it also created a bigger possibility of receiving more remittance through legal channels. If earnings from exports and remittances increase now it will ease the prevailing dollar crisis.

Economists and businesspersons, however, think raising the exchange rate of US dollars by 6.36 per cent at one go would increase fuel import costs and, thus, may raise power and fuel prices. Businesses said the government must adopt alternative ways to tackle this pressure, and the extra cost of fuel import can be adjusted from the additional revenue, which will be collected from the dollar price hike. Or else the situation can be tackled by not hiking in power and fuel prices anymore.

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Large industry sectors of the country like steel and cement are dependent on the import of raw materials. Replying to a query on the effect of the dollar price hike, leading steel manufacturing company BSRM deputy managing director Tapan Sengupta told Prothom Alo, “We could not import raw material at an exchange rate of Tk 117-118 a US dollar, and if the new decisions remain in place then our import cost will not be rise that much, but it this decision raises other costs of doing business, then that may create slight pressure.”

Cement factory owners’ organisation Bangladesh Cement Manufacturers Association (BCMA) president Alamgir Kabir told Prothom Alo it would take several more days to understand the extent of the impact of decisions to hike the dollar rate and introduce the market-based interest rate on business, and the matter would depend on how commercial banks would implement this decision.

Pressure on business to rise

Economists, bankers and entrepreneurs said a big rise in the exchange rate of dollars will affect local and foreign investments. Besides, foreign investors will also face loss in profit repatriation because now they would receive less money than they got previously. Dividends and profits of multinational companies (MNCs) and airline companies have remained on hold for a long due to the dollar crisis, and these funds will now have to be repatriated with a higher exchange rate that will decrease the income of foreign investors.

According to the private airlines’ global organisation International Air Transport Association (IATA), approximately 323 million US dollars from various private airlines remain withheld in Bangladesh. Foreign airline companies could not repatriate this fund due to the dollar crisis, but now they will have to purchase dollars with a higher exchange rate.

Exporters, however, said they would benefit more from the rise in exchange rate unless other costs of doing business increases as they will earn Tk 6-7 more per dollar and that will increase their competition capacity in global markets.

Regarding this, leading leather goods exporting company Apex Footwear managing director and Metropolitan Chamber of Commerce and Industry (MCCI) former president Syed Nasim Manzur told Prothom Alo, “Amid the present global situation, this rise of dollar exchange rate will increase our completion capacity at the international markets, but if transport, power and fuel costs increase due to dollar price hike, then exporters will not enjoy this benefit. A coordinated initiative must be taken so that other costs of doing business do not increase due to rise in the dollar rate.”

Multinational company Unilever Bangladesh managing director Mohammad Zaved Akhtar said even though it has been late dollar prices have been taken close to the actual market price lately and bank interest rates have also been made market-driven, and these decisions would raise pressure on business in the short term, but it may bear fruit in the long run.

The government’s revenue collection will increase by Tk 150 billion to Tk 160 billion due to the rise in the dollar exchange rate, and if a port of this additional revenue is spent to meet the extra cost of fuel import then it might not have been necessary to increase fuel and power prices. If no new cost of doing business is added, these decisions will benefit in the long run.

Analysts think the central bank’s decision more or less affects the economy negatively. However, these decisions should have taken a long time ago. Distinguished fellow of the non-government research organisation Centre for Policy Dialogue (CPD), Mustafizur Rahman told Prothom Alo the central bank’s decisions are delayed decisions, and had these been taken before, then these would have been ‘less painful’.

He said, “Lending costs will increase due to the market-driven interest rate regime, affecting investment and employment. We know there are various costs of doing business and these costs increase because of bribes and corruption. However, if skills, good governance, accountability and curbing corruption can be ensured, then we will be able to reduce the negative effects to a large extent.”