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FALL OF CURRENCIES

Impact not so imminent

Economists say, but caution exports may face a blow

Rejaul Karim Byron and Md Fazlur Rahman
Bangladesh's currency has maintained firmness in recent months riding on a huge surplus in overall balance and low portfolio investment, while the currencies of the country's export competitors are on a freefall.
However, economists yesterday ruled out any immediate impact of the devaluation of the currencies of India, Indonesia and Turkey on Bangladesh's economy.
"We should not assume that the impact will necessarily be negative, large and long-lasting," said Zahid Hussain,
lead economist of World Bank in Bangladesh.
But some economists cautioned the country could face troubles, especially exports could be a victim, if the situation persists.
The average exchange rate of the taka to the dollar was Tk 77.75 yesterday, and the local currency has been maintaining the same level since June 30, according to statistics from Bangladesh Bank.
The taka has appreciated 1.28 percent against the greenback since January, thanks to falling imports, moderate growth in exports and rising remittances.
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The overall surplus in the external balance was $5.12 billion last fiscal year, a huge jump from $494 million in the previous year.
The portfolio investments, such as in the stockmarket, are low in Bangladesh and were a net of $287 million last fiscal year, a central bank official said.
The capital accounts are also not convertible in the country, which successfully stops a rush in capital flight.
On the other hand, the Indian rupee has fallen by 15 percent against the dollar, Indonesian rupiah by 8 percent, Brazilian real by 20 percent and Turkish lira by 10 percent, since the start of the year.
The decline in these currencies has accelerated since May 22 when Ben Bernanke, chairman of the US Federal Reserve System, signalled his intention to cut Fed's massive programme of dollar printing and bond purchases as early as this September.
Fed has been pumping $85 billion a month into the financial markets through purchase of US Treasury securities and mortgage-backed bonds since December 2012, which fostered a flood of speculative capital into the emerging economies such as India, Brazil, Turkey and Indonesia.
The prospect of a reduction and ultimate halt in quantitative easing has led to higher interest rates in the US, and almost overnight the hot money that boosted the emerging economies has embarked on a flight back to the US.
Hassan Zaman, chief economist of Bangladesh Bank, said the key differences between India and Bangladesh is that Bangladesh is running a current account surplus and India is not.
“We are also much less reliant on short term capital flows for our external financing. This is why the current portfolio flowsled crisis is unlikely to have the same effect
on the taka, “ he said.
Still, the central bank is not complacent at all, Zaman said. "We know that we are not immune from external shocks since we also had to deal with our own currency depreciating rapidly between December 2011 and February 2012."
He said the rupee depreciation would help those Bangladeshi industries which are reliant on imported industrial raw materials, such as cotton, from India, while they would of course affect export competitiveness in others.
"However, it is too early to discuss the real impact of the current currency slump since markets may well have overreacted and we don't know what the new equilibrium will be."
Hussain of the WB said India, Indonesia and Turkey compete with Bangladesh in export markets. Such a laige depreciation of their currencies is likely to toughen competition for Bangladesh.
TTie impact will depend on the permanence of the currency depreciation, the impact of the policy response in these countries, the feedback effects on their inflation rates, and the impact on the cost of intermediate input and raw material imports in Bangladesh, he said.
"If the foreign exchange markets have over-reacted to Bernanke's signal then clearly a reversal will follow after the markets calm down and the reversal may be expedited if the policy tightening measures already announced in these countries begin to have the desired effects on market sentiments."
The WB official said these countries would also lose the competitiveness gained from currency depreciation if the latter stokes up their inflation.
"Also, Bangladesh is a large importer of raw materials and intermediate inputs from India. The depreciation of the rupee has
made these imports lot cheaper which will reduce the cost of producing Bangladesh's exports and thus mute the loss of competitiveness."
Hussain also said there might also be some re-sourcing of intermediate input imports from China to India, which would further reduce cost of producing Bangladeshi exports.
Zaid Bakht, a research director at Bangladesh Institute of Development Studies, said Bangladesh's exports would definitely be affected.
He said the imports would be cheaper as the taka is appreciating. "Still, we may not be able to benefit much as we import mostly capital machinery and raw materials," he said.
The economist said the potential benefit due to the taka's strong position against the greenback might not come due to investors' reluctance to pour money in an election year.
Ahsan H Mansur, executive director of Policy Research Institute of Bangladesh, thinks the slide of the rupee would affect the bilateral trade balance, which is in favour of India.
“Our exports will go down. On the other hand, imports will go up. As a result, India's gain in the bilateral trade will only rise, "he said.
He said Bangladesh enjoys 12-14 percent advantages in the European Union market due to a trade benefit - the generalised system of preferences. "As the value of the Indian currency has gone down by 30 percent in recent times, the competitiveness of Bangladesh will erode."
"The value of the currencies is going down in all of our competitors. So, although our production cost will fall due to cheaper imports, it still remains to be seen how our garment exports cope with the new challenge,” he said.