Featured 1
After a month or two of deep consternation, the country's policymakers may finally be seeing the light at the end of the tunnel, as some of the emergency policies brought in by the government start kicking in. Allowing the taka to float against the US dollar, despite the hiccups it caused during an extended period of adjustment, is bound to prove beneficial. The floating exchange rate policy was officially introduced in 2003, but before long, Bangladesh Bank reverted to the 'dirty' or managed float that saw the value of the domestic currency artificially fixed and often overvalued. Although popular, this was ultimately harmful for the trade balance and foreign exchange reserves. Hopefully this time the central bank can show it has the conviction to back itself and stand by its decision.
Most economists think the dollar's value should not be higher than Tk 110, and we saw it shoot up to Tk 120 in recent weeks. This can be explained by German economist Rudi Dornbusch's theory of exchange rate overshooting, which says the exchange rate will overshoot following its float, but it will eventually come back to the market-determined equilibrium. Since the dollar was artificially depressed below the market-desired level in Bangladesh, the world's strongest currency, in line with Dornbusch's prediction, overshot once the central bank eventually unleashed it.
There is some concern that the forex reserves are still depleting, although at a slower rate now. The trade deficit is still widening without encouraging notes. But that is quite normal after a rate adjustment, resulting in the worsening of the trade balance at first in the wake of an exchange rate devaluation, followed by recovery after a period.
That suggests the need for patience, and to not be swayed by daily events around us or in our neighbourhood. The unhealthy obsession with the fate that befell our neighbours Meanwhile, the central bank's efforts must continue to control imports, expedite exports, and rationalise the channels of remittance. While most countries have moved to electronic remittance for speed and certainty, Bangladeshi exchange houses abroad are still making remitters follow the process of filling out forms. Bangladesh Bank should remove the bureaucracy and advise other banks and exchange houses to adopt the fastest and simplest avenue to send remittance.
Side by side, the austerity measures set by the government, restriction on luxury good imports, and steps to tighten imports have started manifesting. However the central bank's failure to free the lending rate from the government-imposed ceiling at 9 percent may dampen much of its policy effectiveness, especially when it comes to controlling inflation. Runaway prices will not be tamed without putting the brakes on big loans. The government's untimely fuel price adjustment of course, added to the fire. It all goes to show that policymaking remains behind the curve, and the fiscal authority, in the Finance Ministry, remains out of sync with the central bank's goals or the sufferings of the people.
Leave a Comment
Recent Posts
Can the environment adviser sa ...
With the dry winter season now here, there is no getting away from the ...
The International Monetary Fun ...
The International Monetary Fund has offered an additional $1 billion t ...
Fifa confirmed Saudi Arabia's hosting of the men's 2 ..
The Fall and Rise of American Democracy
Why Are So Many Indians Fleeing to America?
Politics won’t influence ACC any longer