Like any other commodity, the price of a currency is determined by its demand and supply. If, in a period, demand surpasses supply, the price will go up, and the reverse will happen if supply overtakes demand. What really causes a demand for anything? The answer is its value. The value is measured by how much utility consumers derive from a particular commodity or service. The currency, as a medium of exchange, by itself does not have any utility, but the goods it commands in the exchange market have the utility. That is, currency has a demand not for its own utility but for the quality that it commands for buying goods and services.
Now when a currency commands more goods and services, it should have more value. In other words, a currency's value is measured by its purchasing power. If a currency can buy more goods and services than the other, it should have more value in the exchange market. So, when a currency's value goes up gradually against another one, the economists want to inquire about certain things behind it. They see, first, whether the competeting currencies lost value in terms of purchasing power; second, if the purchasing power remains as it is, they want to see what type of market the currencies are traded in or exchanged which might have caused an exchange rate of a currency to go up against the other. If a monopoly exists, then the dealer may cause the price of the currencies to move upward.
Even in an oligopoly, the same thing may happen, though to a lesser extent. If the exchange market is competitive, then also the price of a currency can go up depending on the sudden rise of demand for a currency. In Bangladesh, for long, the Taka-Dollar exchange rate remained stable. The exchange rate was ranging between Tk.78 and Tk.80 against one US Dollar. The stakeholders, specially the consumers and the importers, were happy at the exchange rate stability. The carb market exchange rate of Taka and US Dollar was also stable. There was no shortage of US dollars.
The Bangladesh Bank has pursued a prudent policy of keeping the foreign exchange market stable, supplying more of dollars when demand seems to be going up and buying back the excess greenback from the market when it was supplied with more dollars. This strategy was working well so long with the satisfaction of stakeholders. But recently it seems that the mechanism was taking a punch. Suddenly the price of US Dollar was going up against the Bangladesh currency Taka, with the latter losing more than 5 per cent in value against the former within a very short time.
What really caused the sudden scarcity of US Dollar?. Is Taka losing value against Dollar because of Bangladesh's currency becoming too cheap or losing its purchasing power? Or is it because of dollar gaining more value in terms of purchasing power? As our knowledge goes, the Dollar is losing its value in recent times against the other reserve currencies of the world. On the other hand, Taka is not losing value in terms of its purchasing power as the economy is experiencing a low inflation at a rate below 6 per cent per annum. Then, what did cause the surge in the price of US Dollar? Is it because of the type of market where the exchange rate is determined? Or is it because of a sudden rise in the demand for dollar?
The foreign exchange market in Bangladesh is not open; it is led by major dealers (banks) and closely supervised by the Bangladesh Bank. But this arrangement was bringing us good results so long and we should not complain with the structure of the market. Is it because too many people are demanding too much of dollars suddenly? This also should not be the case as we find no reason of such upsurge in demand. Then, is it because foreign investors are wanting to take too much of dollars abroad in the way of remitting the dividend incomes and capital gains from their portfolio investments? This also can not be the case because the outward movement of remittances by the foreign investors has long remained normal.
What caused the price of Dollar against Taka to go up? Is it a conspiracy by a vested quarter? The Bangladesh Bank is the right authority to know of this or any other reason that went against the Bangladesh Taka in the foreign exchange market. We can only advise the Bangladesh Bank to supply the market with more dollars from its account in the face of a rising demand for the greenback. After all, the Bangladesh Bank is the lone account holder in the country of the foreign exchange holdings. So, it has the responsibility to keep the market stable. Any instability in the foreign exchange market will have its spillover effect on the other areas of the economy.
The writer is Professor of Economics, University of Dhaka,
© 2017 - All Rights with The Financial Express