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State of money market: Debacle or correction?

MAMUN RASHID
In recent times, we are observing a bit of uneasiness in Bangladesh money market, especially in the foreign exchange market. The liquidity of US dollars (USD) against Bangladesh taka (BDT) seems to be under huge pressure. As a result, lots of banks reportedly are not being able to meet their L/C payments on time.
BDT has started to depreciate against USD. Most importantly, we are also noticing that the inter bank USD/ BDT market is getting fragmented in various tiers. In the interbank transaction, USD/BDT is trading at 63.70/80 levels. However, the total amount of transaction at that level is very negligible. Previously, the daily volume was about US$ 15-20 million whereas the current volume is about US$ 2-3 million. In the absence of liquidity in the interbank market, Banks are staying away from the interbank market and focusing more on their customer transactions. Since interbank USD/BDT rates are managed not to be quoted beyond a level, the banks, which are desperate to make payments, are even buying USD through other major currencies (EUR/BDT, GBP/BDT, CHF/BDT etc) at an effective rate of Tk 66.00 or even higher, according to newspapers. Besides, there is a large difference between exchange rates being quoted by nationalised and other commercial banks. The nationalised commercial banks (NCBs) are selling USD to their clients at 63.90 levels.
On the other hand, the private commercial banks (PCBs) and foreign banks are selling at around 65.00 or higher level against taka. Although the Bangladesh Bank is doing little to narrow the gap between NCBs and PCBs quoted rates, it reportedly has started taking cognizance of the situation
and is supporting NCBs and some badly hit new generation banks with some foreign currency (FCY) liquidity in settling their pressing payments. However, they are also heard to be constrained by a commitment to hold on to a desired level of foreign currency reserve. This may politically sound bad but practised in many developing or least developed countries for better economic management.
Analysis question that arises is 'whether the foreign exchange market has suffered a debacle or it is a mere correction of the market'. To answer this question, we must review the whole background. If we examine our import data, we will find that in July-April 2004-05 fiscal year we have made payment of US$ 10.56 billion for import L/Cs, which is about 20 percent higher than that of July-April 2003-04 fiscal year. Of these import payments, about 55 percent is made for industrial raw materials and capital machinery. Because of price rise of oil and petroleum products, we had to pay a larger amount as well. Bangladesh Bank and others already expressed their concern about this rise in import payment. They have also suggested that we should take measures to curb the growth of credit to reduce pressure of future import payments. That is why, we witnessed the call money interest rate of BDT soaring above 10 percent for a long period. On the other hand, our export has also shown almost 12-13 percent growth, despite the worries regarding RMG export growth in post-MFA scenario. Although it is still too early to evaluate, the RMG export has shown a remarkable resilience in the face of quota free environment. Moreover, remittances from expatriate Bangladeshis has increased by
almost 15 percent.
In view of the above facts, it is apparent that the current devaluation of BDT against USD is more of a correction than a debacle. While we appreciate the importance of central bank taking cognizance of the market disturbances, bringing in required level playing environment for all operators in the market and supporting liquidity creation in the right target segment, we also have to realise that the economy of the country is passing through a critical juncture. After almost two decades of average 4-4.5 percent growth in GDP, we are now aiming at taking the growth rate at above 6 percent. To achieve that we have invested heavily in industrial raw materials and capital machineries. This additional investment has increased the credit growth of the economy as well as the import payments. As a result, we see absence of liquidity in USD/BDT market. To reduce the credit growth and thereby import payments for the time being and support our export for a longer term, we need to devalue BDT.
The devaluation of BDT will enable us to prioritise the right kind of investments, which will contribute to the GDP growth as well as discourage import and consumption of unnecessary goods and services. It will also provide appropriate incentives to our exporters and expatriate Bangladeshis all over the world, as mentioned. The devaluation of BDT should not hurt the general consumer or common people as long as there is good harvest and we are not importing essential food items. This would only create pressure on prices of luxury goods or 'life style' items mostly used by middle class and upper middle class. Surveys driven by the multinational fast moving consumer goods (FMCG) companies or service sector investors have proven 'enough opportunity space' in this segment.
We of course got to address the interim 'liquidity issue' with better funds management and at times, support from the central bank. However, gradual or market driven devaluation of BDT is also important for us to ascertain whether we are prioritising our investments in productive sectors that will elevate the economy's growth rate to a desired level and discontinue investments in 'not so productive' sectors. Devaluation of the currency does not necessarily reduce the growth of economy rather may channel all the investments of resources in optimum ways. The sectors, which will survive the devaluation, are the real sectors and are capable of generating substantial returns commensurate with their cost. Therefore, the correction of the currency will test the resilience and vision of our private sector as well as the economy to drive the country to the right growth path.
The private sector must take signal from the movement of market variables to allocate their resources in most optimum ways. Above all, we of course need better asset and liability management (ALM) in the financial institutions (FIs) and have to bring in more transparency and granularity in their profitability and depth in reading business as well as industry futures. Right approach in addressing these issues by FIs should also put pressure on their clients to discipline themselves and ensure right organisation and management platform. History says, any correction is painstaking and faces natural resistance, therefore, we got to think dispassionately and drive changes with a 'full view' of the destination.
The writer is a banker.