Finding a level for dollar vs taka

During my almost twelve years with two global banks, we often came across a question - what should be the right price of dollar against the local currency? The usual answer used to be – what the market is ready to pay. During my service at the Standard Chartered Mumbai, Singapore and especially the exotic desk at the London treasury, Zambian Kwacha used to be the most interestingly traded currency among the developing country currencies. Not Indian Rupee, Indonesian Rupiah and of course not Bangladesh Taka, the Zambian currency!

During the nineties, we saw how the G-7 central banks used to come forward to support any of their currencies through concerted buying or selling efforts. Then came the era of the real effective exchange rate (REER). It is basically the weighted average of a country's currency in relation to an index or basket of other major currencies. Though this used to be a guiding dictum for most of the central banks, especially in the developing world, the central bank's decisions these days reflect a combination of REER and on the ground political realities, i.e., possible price hikes in the local market, more specifically inflationary pressure.

According to Bangladesh Bank, the interbank dollar exchange rate in the local market went to Tk85.70 last week. Despite its recent release of around $1.5 billion, the dollar rally continues in the face of repeated interventions by the Bangladesh Bank to keep the foreign currency market stable. 

Taka has lost its value by Tk0.85 per dollar between July and October, which crossed Tk90 for the first time ever in the kerb market and is now reportedly being traded at Tk 90.40.

Though banks don't dare to trade at anything beyond the central bank selling rate or inter-bank reported rate, many interbank sales are happening through third currency like Euro, which takes the effective rate to little more than Tk 86 for a dollar. 

The interbank dollar exchange rate is on a rising trend because of growing market demand. Economists and business leaders are of the opinion that the Bangladesh Bank should further speed up its pumping of dollars into the market to put a leash on the rising currency rate.

The interbank dollar exchange rate in recent times was Tk85.65-Tk 85.70. On the other hand, different money exchange houses traded the greenback at Tk89.9-Tk90.40 in the open market. Before the dollar price began to go up in July this year, the interbank dollar exchange rate was Tk84.80, while the rate in the open market was Tk87-Tk88. 

However, those were the days of pandemic lockdown or semi-lockdown. In recent months, settlement of the pending import bills and reducing inward remittance has pushed the interbank dollar demand up. And the rise of dollar price in the kerb market was mostly prompted by the reopening of travels and destination countries getting into semi or full normalcy commercially. 

However, the 2% official incentive is too small an amount to cover up the large difference between official and kerb market rate of almost Tk4 to a dollar. 

But the upside is, volume in the kerb market, be it for travels, medical treatment in neighbouring countries or even small or regular capital account transfers, is still only 2-3 pct of the total volume traded officially. 

Bangladesh's import bills settlement and service payments are almost equivalent to $70-75 billion. Hence the regulators mostly are cautious not to heat up the import price, rather than encouraging exports largely through gradual depreciation of Taka against the greenback. 

One should also remember that typical devaluation of the local currency is not possible now, since the Taka was declared partially convertible in the current account since 2003 and exchange rate has been left to market movements influenced by demand and supply.

On the other hand, the continued rally of the greenback prompted the central bank to change its course – from buying to selling mode, to help the forex market handle the sudden surge in demand for the greenback from importers and travellers.

The Bangladesh Bank bought a record $8 billion in fiscal 2020-21 amid low imports and high inflow of remittance. However, till the end of October of this fiscal year, the central bank sold almost $2 billion to banks to ease the dollar price, mostly for the settlement of the government letters of credit.

Despite the central bank's intervention to stay strong, the dollar continues to gain against the local currency. In August, Bangladesh Bank sold $305 million to the banks and the amount more than doubled to $641 million in the next month and shot up to more than $1 billion in October.

The common belief is, the dollar price has recently jumped for two reasons: firstly, increased travel abroad for study, health and entertainment as the restrictions were eased or lifted around the world after the Covid-19 pandemic. And secondly, increased capital flight from Bangladesh. 

Also, the price hikes of different products in the global market have led to the dollar price fluctuation, as well as commodity shortages in China due to power generation debacles in 22 of its states. China is heavily importing most of the essential commodities, pushing the global price up significantly.

Like any other central bank in the developing world, Bangladesh Bank is trying to bring a balance between import demand and export rise aspirations. Our export earnings have started to increase; remittances are also expected to get back on track once there is more economic vibrancy in the middle eastern countries. Apart from rising global commodities prices, inflation is also growing untamed due mostly to market monitoring and governance failure, if not also supply chain distortion.

Inward remittances that kept the market flush with dollars during the pandemic have become sluggish since the beginning of the current fiscal year. This also has put pressure on the dollar market along with of course rising import costs mentioned earlier. Central bank data shows that in July-August this year, Bangladesh's imports amounted to $10.84 billion, while exports were $6.73 billion, pushing to a shortage of dollars.

While the depreciation of local currency typically provides a boost to export industries, regulators in the developing world should always draw a sync between import and export price, more importantly large service payments, as most of the economies are increasingly getting interfaced with global marketplaces. 

REER hovering around Tk90- may impel the central bank to gradually take the interbank rate a little higher. However, our overall commitment to keep the market price stable must continue. In order to tame the dollar price in the kerb market, the central bank with reasonably large foreign exchange reserves may consider increasing the foreign travel quota released through credit cards immediately. At the same time, they should divert some import bills settlements like fuel imports to other commercial sources like IDB without creating too much pressure on the foreign exchange reserve. 

Some are of the opinion that the country should have gone for sovereign or international bond raising much before, or at least when the timing was right, in order to test the market for Bangladesh risk appetite. This would have helped our journey post LDC graduation too.

Mamun Rashid is a partner at PwC Bangladesh.

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the opinions and views of The Business Standard.