Bangladesh Bank's move to devalue the taka to unprecedented levels against the dollar is certain to raise eyebrows. The central bank devalued the interbank exchange rate last Sunday, allowing the local currency to trade at Tk 86 against USD for the first time. BB is considering a gradual appreciation of the dollar against the taka to give a boost to both exporters and remitters. Exporters often demand depreciation to offset domestic price and wage inflation and regain competitiveness. Depreciation affects the objectives of the central bank (output and inflation) through different channels.
According to Bangladesh Bank data, the dollar price started rising from Tk84.8 on August 2 to Tk85.15 on August 24 in a span of just three weeks. After that, it remained stable for some time. On November 14, it rose again to Tk85.8. Finally, on January 9, Bangladesh Bank devalued the BDT against the USD by a large amount - 20 paisa in one go - in order to tackle pressure stemming from an increase in import payments and encourage remitters. Economists say although exports have picked up significantly in recent months, driving the post-pandemic recovery in the economy, it has failed to offset the imbalance created in the forex market by a fall in remittances and high imports.
Bangladesh adopted a freely floating regime on May 30, 2003 by abandoning the adjustable pegged system. In reality however, although the country professes to maintain a floating exchange rate, it practices what is called a managed float - what we are actually doing is pegging our currency to its intervention currency, the US dollar, almost always at an overvalued level. The central bank maintains the desired level through the buying and selling of dollars. An overvalued exchanged rate means that the goods and services exported by Bangladesh get relatively expensive for the overseas buyers while costs of goods and services imported from abroad get cheaper. In other words, an overvalued exchange rate depresses demand for domestic goods and services while encouraging spending on imports.
This means we cannot afford the luxury of an overvalued currency without diluting our overall objective of balanced economic development through export-led growth. This week, we also learned about the Cabinet Committee on Economic Affairs approving the draft 'Export Policy 2021-2024', where a target has been set to boost annual exports to $80 billion by the 2023-24. In order to achieve that, exports would need to more or less double in the space of three fiscals. It is probably no coincidence that the central bank's most decisive move till date to accommodate that, by pursuing a policy of gradual depreciation of the currency, occurred in the same week. It now remains to be seen how far they are willing to travel down this road.
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