AHSAN HABIB

As the US dollar shortage persists, businesses in Bangladesh are increasingly finding it difficult to open letters of credit (LCs) since banks can’t supply the adequate American greenback needed to finance imports.

This means many companies can’t secure the raw materials required to keep their factories up and running, which has forced them to cut production and hampered job creation.

Most of the listed companies representing various sectors that disclosed their financial reports last week said the LC opening problem has hurt their production of goods. As a result, profits have fallen drastically.

Against the backdrop, economists are recommending the government make the foreign exchange rate market-based and allow the depreciation of the local currency gradually against the US dollar in a bid to reduce the demand for the American greenback and draw remittance.

In September, the central bank fixed uniform buying and selling rates of the US dollar in order to contain the volatility in the foreign exchange market, which has been caused by a dollar shortage driven by higher import bills amid lower export and remittance receipts.

The move eased the volatility initially to some extent but has largely failed to overcome the crisis. Rather, the dollar shortage has deepened and the crunch may linger since the factors responsible for the current situation such as the Russian war in Ukraine and the global energy crisis are still there.

“There are multiple issues in the economy and the government is worried about investment, the banking sector and higher inflation. But a coordinated macro-management is still missing,” said Debapriya Bhattacharya, a distinguished fellow at the Centre for Policy Dialogue.

The government has unveiled some policies but they were not inter-lined. So, for example, when the exchange rate was adjusted, the interest rate cap on loans was not removed.

“A crawling downward adjustment of the local currency against the greenback is a must at the moment,” said Bhattacharya.

He thinks that if the government does not allow the adjustment, there will be a crash-landing for the taka like it happened recently.

As the foreign exchange reserves depleted fast, the local currency lost its value by about 25 per cent against the US dollar in the last one year and the major depreciation took place between August and September.

Bhattacharya said the government thinks that the downward adjustment of the currency may stoke inflationary pains.

“But the government should reduce the money supply by raising the interest rate in a bid to contain the inflationary pressure.”

Inflation eased for the fourth consecutive month in December as it slipped to 8.71 per cent. In August, inflation surged to a 10-year high of 9.52 per cent.

Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh, also thinks that the exchange rate and the interest rate should be left to the market instead of being determined by the central bank.

In April 2020, the central bank set the lending rate at 9 per cent. The lending rate was adjusted upwards to 12 per cent in January for only consumer loans.

With a market-based exchange rate, the local currency may weaken further, but it will be helpful in bringing stability in the demand and supply of dollars, Mansur said.

“If the government keeps the rate low artificially, there will be a point when it would have to be adjusted drastically and the consequences of such drastic adjustment would be much dire.”

For a proper macroeconomic situation, an environment needs to be created where demand and supply should be market-based.

“However, the government is trying to fix all the things from the stock market to the interest rate of the banking sector,” said Mansur.