Almighty dollar is getting stronger by the quarters, judged by the weakening of currencies of almost all countries that conduct trade using the greenback. The euro has dropped 0.4 per cent to United States (US) dollar 0.9932 and pound sterling is down by 0.3 per cent at US dollar 1.1346 after having touched a new 37 - year low at US dollar 1.1304.The dollar index, which measures the performance of the US currency against six major peers ( European Union, China, Japan, United Kingdom, South Africa and Brazil), rose to 0.32 per cent to 110.52, having touched a fresh two decade-high of 110.87. The experience of all other countries which use dollar for payments in international trade has been the same. Countries that have growing current account deficits are now going through turmoil in their foreign exchange market.
The strengthening of dollar has been triggered by sharp increases in policy rates. After following a zero-interest rate during the pandemic years and a policy of quantitative easing, the US Federal Reserve System (Fed), the central bank of the US, has reversed its monetary policy to contain spiralling inflation that reached a 40- year high, going above 9 per cent. Starting this year Fed has raised the basic policy rate by three quarter points (0.75) on three occasions in quick succession, the latest being on 22 September.
The strengthening of dollar has been augmented by higher demand for it for investment in US Treasury bills (bonds) and to pay for imports whose prices have gone up following the Covid-19 pandemic. This has been exacerbated by the rise in prices of oil, food grains and fertiliser after the outbreak of war in Ukraine. As a result the exchange rates of currencies of almost all countries that use dollar for international payments have been adversely affected. The volatility in the foreign exchange market that has occurred in recent months is largely due to this external factor. Some unscrupulous persons dealing with foreign exchange may have compounded the problem by fishing in troubled water.
Countries having substantial reserves of dollar are in a position to ride out the storm, though their importers (and ultimately consumers) have to pay higher prices for goods imported. This can be counterbalanced if export earnings in dollar are substantial. But not many emerging and developing countries are in this advantageous position. Sri Lanka has already become a poster child of the recent dollar crisis, having defaulted on sovereign debt. In her case strengthening of dollar alone did not cause the financial meltdown. Imprudent macro-economic policy aggravated by corruption has much to do with this fiasco.
SITUATION IN BANGLADESH: Though Bangladesh is not facing a crisis it is going through a very challenging time because of the global problem of strengthening of dollar. The current account deficit arising from surge in post-Covid imports and higher prices of imported goods put pressure on the foreign exchange market dominated by dollar. Bangladesh Bank sought to contain the depreciation of taka against dollar by fixing the exchange rate. But the traditional policy of 'managing' the exchange rate failed to bridge the gap between official rate and market rate. Taking a bold step, Bangladesh Bank has now allowed the market to determine the rate.
In a meeting on 11 September with the Association of Bangladesh Banks( ABB) and Bangladesh Foreign Exchange Dealers Association( BAFEDA), the Bangladesh Bank decided that the exchange rate between taka and dollar will henceforth be determined by market forces of supply and demand for dollar.
According to the decision banks will buy from remittance houses at a maximum of Tk (taka) 108 for a dollar and Tk 99 maximum against export bills. Banks have been allowed to add Tk 3.0 to the amount at which dollar is bought from remittance houses and exporters. This will enable importers to buy dollar at a maximum of Tk 104.50 from the banks.
According to the decision on deregulation of taka-dollar exchange, the banks will provide BAFEDA with the a five- day average of the prices at which they buy from remittance houses and exporters on the basis of which the latter will announce the buying and selling price of dollar daily. The decision came into effect from 12 September. According to BAFEDA the average price at which banks bought dollar on 13 September stood at Tk 103.33. Calculating on the basis of the formula agreed upon by all parties the exchange rate between taka and dollar was estimated at Tk106.65.This rate indicated an increase of 10.5 per cent compared to the previous day.
It is obvious that the rate determined in the market and monitored by Bangladesh Bank will vary from day to day but what will be important is to see the width of the band within which the rate fluctuates. If the gyration of the rate is not wild and runaway, as in the past few months, then the new foreign exchange regime can be said to have succeeded in stabilising the dollar market. According to a news report, after registering a fall by taka 1.40 the taka- dollar rate in the market rose to Tk108.In the curb- market the rate was even higher, Tk115. (Amader Somoy, 21 September).
The rise in the rate in the curb- market is not any indication of the success or failure of the new 'monetary policy' on foreign exchange. It will be the rate determined by BAFEDA on the basis of the feedback from banks about the average price at which they buy and to come to a conclusion in this regard at least a month's record will be needed. Meanwhile, necessary course correction should be made on the basis of weekly experience. For instance, if it is found that exporters are not submitting bills for encashment because of the differential between the rate offered to them and that given to remittance houses, the imbalance should be adjusted by bridging the gap.
It was announced at the time the new exchange rate policy came into effect that Bangladesh Bank will not inject dollar from its reserve unless absolutely necessary. But this has not happened. According to the news item mentioned above. Even on 20 September, one week after the new policy, Bangladesh Bank had to sell Tk 50 million worth of dollar to the banks, bringing the total amount of dollar sold from reserve during the first quarter of the current fiscal year (July- September 20) to $3.04 billion. Injecting dollar by Bangladesh Bank involves a moral hazard in so far as it may discourage banks from exerting to buy from remittance houses and exporters. Having allowed the market to determine the taka- dollar rate, the central bank should force it to stand on its own. The market should not be allowed to have the best of both the worlds. The bailout strategy should be kept a secret and not be seen as routine.
Market determination of exchange rate is a major policy change for Bangladesh Bank. It is timely and very appropriate. With its advent, the monetary policy of Bangladesh Bank, fallen into a rut, can be said to have come of age. In order for it to be successful close monitoring, and not offering crutches, should have priority.
Another momentous decision has been taken by Bangladesh Bank that has a very strong prospect of relieving the economy from the dollar crisis. According to another newspaper report banks in Bangladesh have been allowed to maintain accounts in Chinese Yuan with their correspondents or overseas branches for cross-border transactions made in Bangladesh to overcome the dollar crunch ( The Financial Express,16 September).This is a change not only required to tide over the exigency of overvalued dollar, but a policy shift which for which the ground is ready. The International Monetary Fund (IMF) included Yuan (officially, Renminbi) in its currency basket as SDR. The banks in Bangladesh which act as authorised dealers (AD) have been allowed to open foreign currency clearing accounts with Bangladesh Bank in US dollar, Japanese Yen, Pound Sterling, Euro, Canadian Dollar, Swiss Franc and Australian Dollar. So it is in the fitness of things to open similar account in Renminbi (RMB), particularly when it has become world's second largest economy and Bangladesh's important trading partner. Moreover China has introduced cross-border payment system like Belgium- based SWIFT, which will be convenient for Bangladeshi exporters and importers.
The immediate benefit will be to the scope to make payments for trade out of RMB earned by our exports. To that extent our dependence on dollar will be reduced. Moreover, given the stability in the value of RMB, it will be cheaper to buy it from international market than buying costly dollar.
On the heels of the historic decision by Bangladesh Bank a proposal has come from Reserve Bank of India to introduce similar arrangement for Taka -Rupee payment in our mutual trade. Though our export earnings from India is tiny ($2 billion appx) compared to the import bill (above $12 billion), payment in Rupee in lieu of dollar will give us some relief from the burden of paying in dollar. Since the Indian rupee is not in the IMF's basket of currencies, payment with rupee can be made as a part of a barter agreement.
As the old saying goes, necessity is the mother of all invention. Likewise, crises and problems make one look for new solution, away from the beaten track. The new ideas may not have originated with Bangladesh Bank but it deserves commendation for being receptive to them to get out of the rut of routine policy making.