Exchange rate adjustment-- its positive impacts

| Updated: December 21, 2021 20:32:35

Bangladesh Bank is responsible for foreign exchange management in the country. 	—FE Photo Bangladesh Bank is responsible for foreign exchange management in the country. —FE Photo

Bangladesh needs imports for individuals, corporates and investment consumptions. Foreign currency is needed for settlement of import payments. Major sources of inflows are export of goods and services, and wage remittances.

Export trend is at better shape in the current fiscal year. But Bangladesh exports at very competitive prices for which the sector depends on export incentives granted by the government. On completion of LDC transition, such incentive facilities may need to be phased out unless incremental time is allowed under subsidies and countervailing measures of the WTO. As such, alternative supports are warranted for export sectors.

During last fiscal year, inward remittances sent by Bangladeshi nationals working abroad reached record height. Economic activities at post-Covid situation are on track during the running fiscal. Positive focus is found in respect of export trade, as said earlier. But slow trend is observed in wage earners' remittances.

Downward trend in wage earners' remittances indicates that shadow foreign exchange market is active, absorbing huge foreign currency at better rates. Continuation of such activities will lead wage remittances to divert from banking channel to informal channel. Informal channels need to be brought under banking channel through policy supports in appropriate forms.

There exists a tug of war on adjustment of exchange rate. Foreign currency earners or receivers favour undervalued local currency. On the other hand, persons or corporates require to make outward remittances favour overvalued local currency.

Whatever the tug of war, Bangladesh economy is on track for which huge outflows will be in need for settlement of payments, particularly import payments on account of capital goods. Along with the official flows, unofficial flows prevail in all economies, particularly during transition period like ours due to cautious regulatory framework to manage external payments. The shadow side of the economy needs to be suppressed by channeling remittance inflows through banking windows which help demand side of shadow market to be narrowed. This is possible provided that beneficiaries are well benefited. Considering the upcoming situation for increased economic activities requiring outflows of funds, local currency should be allowed to be depreciated to a reasonable extent to keep the inflows from different sources at upward movements.

Depreciation of price of local currency gives adverse impact on imports. How to solve it is a challenge. Import finance at low cost may be a support.  But financing from local sources is not cost effective. It can be addressed through external finance at prescribed rate of interest. The facilities need to be extended to (a) commodity traders importing intermediate goods for use by domestic industries, (b) importers of essential consumer goods for a credit period of 120 days or for the required period.

Locking import price is a system to hedge risk of volatility of price in international markets. Products are traded in commodity exchange houses or over the counters. In both cases, commodities can be purchased through advance booking either by purchase of 'futures', or 'forwards', or 'options'. Such purchases need to be allowed to importers to hedge price fluctuation of commodities.

Policy supports as stated may give comfort to importers. However, customs assessment value will be higher in case of depreciation of local currency. But this will lead to increased revenue of the government on account of import duty. This incremental revenue definitely supports the government to meet increased public purchases like fuel.

Exchange rate adjustment in line with international scenarios facilities exporters. But many experts are of the opinion that undervalued exchange rates does not play effective role. Argument on this issue is that readymade garment, major export product of Bangladesh, brings low value addition. It is true for woven garments but whatever is left as value addition brings increased amount in local currency. This supports increase in profit which encourages entrepreneurs to invest, resulting in increased employment.

Exchange rate adjustment can work as an alternative to cash incentive. Benefit in the form of cash incentive to exporters is a fiscal cost to the government. As said earlier, exchange rate benefits will increase revenue from export sales. Export sector is vulnerable since its customers are foreigners. Exporters send goods but brings employment. Hence, volatility in the sector may lead negative impact on economy. Considering the situation, exchange rate adjustment becomes necessary. In addition, there is the need of support by way of  (a) financing facilities in foreign currency for working capital needs to meet wages and different utility payments, beside supplier/buyer's credit for input imports, (b) allowing bilateral countertrade by exporters with untapped countries having inadequate banking arrangements, (c) warehousing facilities abroad to accommodate business to consumer (B2C) export and business to business to consumer (B2B2C) exports.

Exchange rate benefits will facilitate beneficiaries of wage earners to receive incremental amount in Taka. This can remove supply supports in illegitimate foreign exchange market. Increased amount in local currency due to exchange rate adjustment will encourage inward remittances. As a result, supports by way of exchange rate adjustment will surely help the government to phase cash incentive programme available against inward remittances sent by Bangladeshi nationals working abroad.

Exchange rate adjustment without monitoring mechanism may encourage operators to manipulate market. Hence, market monitoring system needs to be operational for protection of undue manipulation. In this context, pertinent issues that need to be considered may include (a) continuous market monitoring, (b) adjusting mismatch between haves and have-nots of foreign exchange in the market, (c) arrangements for real time observations of exchange position with maturity schedules for assets such as foreign bill purchases and the like, (d) monitoring regular reconciliation between local books and foreign books of foreign currency assets, (e) regular monitoring on off-balance sheet exposure by banks in foreign exchange.

We know that advancement in technology displaces employment. Low cost foreign goods destroy domestic industries, resulting in unemployment. There are many situations in which people without capacity to cope up with the challenges face adverse effects without limiting to joblessness. This is the reality in changed situation which is protested by different quarters. But changed situation costs the government for extending safety nets for job-displaced people.

Different indicators show that Bangladesh economy is moving forward. The journey needs investment including outflows of foreign currency for payments of capital goods. Support for the requirement of foreign currency will be smooth provided that inflow-windows are lined up with banking system. Exchange rate management is a part of the system-flow. Management without fine tuning will displace inflow-windows to illegitimate locations far from the banking system.

Theoretically, foreign currency remitters like importers will face difficulty, as said earlier, in case of exchange rate adjustment for maintaining inflows at desired level. But illiquid position of foreign currency in the market ultimately administers market with depreciation of local currency. If such situation arises, non-beneficiaries like importers making outward remittances will be hit hard. This situation needs to be avoided by policy support like exchange rate adjustment.


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