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Commentary

In defence of the Taka

By A Special Correspondent
The Taka, which has been made convertible for most foreign transactions, was deemed to be rather over-valued by the World Bank. As reported in The Daily Star November 11. World Bank Vice President Joseph Wood, who was in Dhaka last week, suggested that the currency be devalued by an unspecified aikount. Finance Minister Saifur Rahman opposed the idea vigorously. Why is this suggestion, and how
strong are the Finance Minister's arguments against it?
The World Bank's prescription of devaluation has taken many by surprise. Traditionally it is the International Monetary Fund (IMF) which is quick to point out exchange rate misalignments to governments. In case of Bangladesh the IMF has no complaint in this respect. The most recent IMF mission to Bangladesh gave a thumbs-up to the prevailing exchange rate of the Taka.
The WB is taking a different tack on this matter. Their view is that the Taka is valued correctly from a short-term perspective. But. from the longer term perspective of gaining a niche in the global market on a competitive basis, the Taka is overvalued. The reference point used by the Bank to establish this argument is the exchange rate of the Indian rupee. Rapid lowering of the inflation rate In Bangladesh in comparison 'to the Inflation rate in India and
successive devaluation of the Indian rupee have caused the Taka to appreciate in relation to the rupee. In March this year the World Bank estimated that between 1985 and 1992 the exchange rate of the Taka adjusted for price differences appreciated by 44 per cent against the rupee. In the same period the Taka appreciated 22 per cent against the Pakistan ru
These developments, according to the World Bank, are causing Bangladeshi products like Jute and leather to lose their competitive edge in the international market. The effect of this loss in competitiveness is being compounded by two sets of factors within Bangladesh. Firstly, labour productivity is going down while wages have gone up, secondly, poor performance of Infrastructure parastat al s like the PDB are making many inputs more and more expensive. The only way that
these cost push pressures on competitiveness can be eased immediately Is devaluation.
The World Bank's argument has one flaw, however Devaluation will make the price of Bangladeshi exports more at tractive at current cost. But what Is the guarantee that devaluation Itself will uot raise this cost? After all. export in dustries as well as the Industries servicing these are Import dependent to various extent Devaluation will increase their import costs as well as the Taka cost of servicing their foreign debts.
The defences that the Fl nance Minister Is putting up against the Bank's pressure to devalue are presumably the un certainty attached to the Immediate effect of devaluation and the programme at hand to raise Bangladeshi Industries competitiveness through trade liberalisation.
Minister Rahman's trade liberalisation programme has reduced average tariff rates leading to cost saving for many industries. But Bangladesh's competitors In the global market are taking similar measures. If Bangladesh cannot match this, the deciding factor will be the trend in price of Inputs like power and utilities and of wages, if wage rate Increases outpace productivity growth and if utility prices cannot be lowered Bangladeshi exports will face an uphill battle and. ultimately, the present defences for the external value of the Taka will crumble.