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Time running out to devalue taka sharply

Economists and bankers suggest ways to avert major exchange rate instability
AKM ZAMIR UDDIN
Bangladesh has so far resisted calls for a major devaluation of its currency despite runaway imports amid higher food, energy and raw materials prices globally.
But the stance might not be continued for too long as minor depreciation, which was brought in gradually, has already created indiscipline in the foreign exchange market.
Now, the country, like most other import-dependent nations, is facing difficult choices: immediately devalue the taka at a faster rate or face consequences that nobody could predict as the volatility in the global market is intensifying since the Russia-Ukraine war shows no sign of abating, China is under huge pressure for rising coronavirus cases, and inflationary pressures are deepening globally.
This is the suggestion from a number of economists and senior bankers, as they urge the Bangladesh Bank to immediately depreciate the local currency to a large degree against US dollars.
The gradual depreciation followed by the BB since the global economy rebounded from the pandemic late last year may not be effective as banks have already started charging more than Tk 95 per dollar for businesses to settle imports. This means that the interbank exchange rate set by the central bank has become inoperative.
The exchange rate now stands at $86.70 a dollar after the BB devalued the local currency by Tk 0.25 on May 9.
Banks usually sell US dollars to importers, under the arrangement known as BC (bills for collection) selling rate, by adding Tk 0.05 with the inter-bank exchange rate. But importers now have to pay Tk 94-95 to purchase a dollar from banks.
Similarly, some banks are offering between Tk 92 and Tk 95 per dollar to remitters to encourage them to send their money through their channel.
Banks usually add Tk 0.10 with the BC selling rate when they pay remitters.
Migrant workers don’t send money through banks if a higher rate is not provided, said managing directors of three banks, requesting anonymity.
The interbank rate set by the central bank has not been effective as the foreign exchange regime is facing volatility of a high degree, they said.
So, the central bank should address the issue promptly or else the instability will spread further. Against the backdrop, the interbank exchange rate should be set on the basis of the demand and supply of the greenback, they said.
Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, called for raising the inter-bank rate to at least Tk 92 per dollar immediately.
He argued: “We earlier urged the central bank to depreciate the local currency by Tk 3 to Tk 89 per US dollar. But the central bank had not done so. As a result, the situation has worsened.”
In December last year, he urged the BB to depreciate the taka more against US dollars in order to discourage imports and to maintain macro-economy stability.
If the local currency is not depreciated, remittances will be hit hard by the ongoing instability, he said yesterday.
Expatriate Bangladeshis will send their hard-earned money through the hundi channel, an illegal cross-border money transaction system, more if they do not get the desired rate from banks, said Mansur.
Yesterday, a trader of the kerb market, an illegal trading platform of foreign currencies, said clients had to count Tk 94.30 to purchase a dollar.
So, providing a 2.5 per cent cash incentive to remitters will not bring any output due to the higher rate prevailing in the kerb market, said Mansur, also a former official of the International Monetary Fund.
Between July and April, migrant workers sent home $17.30 billion, down 16.2 per cent year-on-year, data from the BB showed.
Mansur added that the attempts to keep the depreciation of the local currency subdued will put an adverse impact on exporters as well.
“The ongoing global economic crisis stemming from the coronavirus pandemic and Russia’s invasion of Ukraine may not be over immediately. The twin issues will linger. So, the central bank will have to address the foreign exchange issue keeping them in mind.”
He described more than $7 billion in expenses to settle import payments for a single month as illogical and urged the central bank to insulate the foreign exchange reserves from the ongoing global volatility.
The inter-bank exchange rate set by the central bank has not been effective as the foreign exchange regime is facing volatility of a high degree