The dollar being an international currency has an important aspect on the economy of an import-based country like Bangladesh. Almost 90 percent of Bangladesh’s imports and exports are completed in US dollars. After the pandemic, imports started to increase when the wheels of the economy started moving in full force. But due to the war between Russia and Ukraine and the post-effect of Covid, the economic growth in Bangladesh has lost its pace – just like the rest of the world. Bangladesh’s economy is now threatened by the slowing global demand amid a crisis of cost of living in our main garment export markets – the US and EU. Besides, a low remittance inflow has also affected the net balance of foreign reserve. A dollar crisis in Bangladesh means when the value of the U.S. dollar declines compared to Bangladeshi Taka in the foreign exchange market. One dollar now costs almost Tk 109.60. The taka has been losing its value against the US dollar for months, with no signs of it changing. In the past six months, Bangladesh’s foreign reserves have dropped below $32bn from $39bn while the value of the taka has fallen by 27 percent from 84 to the dollar to 109.60. The US dollar reached an all-time high against the Bangladeshi taka earlier this year, soaring to Tk 115 per dollar for the first time in the country’s kerb market trading history.
In the last fiscal year, the most pressing problem in economy was the dollar crisis and the devaluation of the taka. The central bank reserves fell by $10.52 billion, or 25.39%, between June 30, 2022 and June 30, 2023. According to Bangladesh Bank data, the exchange rate of the US dollar against the Bangladesh Taka has climbed by Tk23, or 26.75%, since March of last year.
Such a crisis in both the Taka depreciation and Foreign Exchange (Forex) reserve decrease has never been seen in Bangladesh’s history.
Reasons for the dollar crisis in Bangladesh are:
There are several reasons for the increase in the US dollar value, but the primary factor is the demand for dollars. As the demand for the dollar increases, so does its value. Conversely, if the market falls, so does value. Demand for dollar increases when international parties, such as foreign nationals, foreign central banks, or foreign financial institutions demand more dollars. Demand for the dollar is generally high because it is the world’s reserve currency. Other factors that affect whether the dollar appreciates against other currencies include inflation rates, trade deficits, and political stability. Factors affecting exchange rates between currencies include currency reserve status, inflation, political stability, interest rates, trade deficit/surplus, and public debt. A weak currency is one whose value declines relative to other currencies. A weak currency can indicate economic and social fragility in many cases. A weak currency can arise from high levels of inequality, political instability, government debt and trade deficits. Finally, experts are currently talking about various reasons behind the global dollar crisis, such as the import-export deficit, the war between Russia and Ukraine, increase in military spending by the United States and allied countries, including Europe, decrease in remittance flow, economic and commercial blockade imposed by the United States on various countries including Russia, increase in fuel oil prices and reduced supply, corruption in developing countries and money laundering abroad, hoarding of extra dollars by traders hoping to make extraordinary profits, etc.
1) Russia-Ukraine Conflict:
When the Russia-Ukraine war began in February last year, prices of commodities skyrocketed along with a disruption of the supply chain. The price spike in global commodity prices caused by the Russia-Ukraine war has had major adverse impacts on many developing countries including Bangladesh. It had a huge effect on the oil prices as Bangladesh was dependent on Russia for its oil import. The Bangladesh Petroleum Corporation (BPC) is losing around Tk 19 crore per day. Due to high oil prices, the chain effect is felt through a hike in the prices of gas, fertilizer, and other essentials. Russia is making some projects in Bangladesh. Russia is currently creating a mega project in Bangladesh known as the Rooppur Nuclear Power Plant (RNPP) which is a large project. It involves USD 12.65 billion and is scheduled to be completed by 2025. The ongoing war and economic sanctions against Russia have delayed this expensive project, which means cost escalation in Bangladesh. This implies higher loans and a burden on the country which will take way longer even after the war is over. This war is one of the major reasons for the US dollar price to appreciate against Bangladeshi Taka.
2) Increase in Hundi:
Hundi means sending remittance out of the banking channel. It also means an illegal and informal money transfer system. One of the major contributors to the dollar crisis in Bangladesh is the use of Hundi. This has resulted in a significant amount of foreign currency being circulated outside of the official channels which leads to a shortage of dollars in the market. Generally, Hundi people give lucrative rates to attract people which is quite higher than market rate. Hundi has also been used for money laundering, tax evasion and corruption. It has been undermining the country’s financial system and creating chaos for the businesses. This is one of the main reasons for the surge of dollar prices.
3) Increase in Imports:
The increase in imports has been a major reason for the dollar crisis. Due to economic growth the demand for imported goods has also risen. This has put a strain on the country’s foreign exchange reserves, leading to a shortage of dollars in the market. Due to the increase in dollar prices, taka became cheaper, making import payments greater than before eventually leading to inflation through the import channel. It also signals macro instability.
4) Lack of Foreign Investment
This is caused due to several factors such as lack of infrastructure, a challenging business environment, unstable political condition, expensive labor. As the election time is approaching more people are becoming reluctant and giving a second thought about doing their investment in Bangladesh. Political unrest and chaos are one of the main reasons for the investor to step back. FDI is almost not there. Whatever is there, NCIs are making new investments, couldn’t take out profit and they are reinvesting money. Lack of technological development-As Bangladesh is still a developing country it is quite unable to stay in pace with the developed country such as United States. Investors find it quite difficult to cope with countries which lack technological development. Therefore, they look for better options in which they feel their investment is secure. Private foreign loans have decreased. This occurred due to an increase in the federal effective rate interest. The Fed’s goal is to slow consumer spending, but it is having a diversified effect on foreign investment thereby reducing demand for homes, cars and other goods and services, eventually cooling the economy and lowering prices.
5) Uncertain Climate Conditions
In recent years, the global economic losses from weather events like storms, floods, droughts and wildfires have grown more costly. In the first decade around 2010, the weather disasters cost more than $200 billion. In the second decade, those $200 billion dollars year losses seem to have become more normal, with seven out of ten years grossing over $200 billion in global losses from weather events. The costliest year on record was registered in 2017, totaling over $470 billion in losses, including those from major Hurricanes Harvey, Maria and Irma Due to uncertain climatic conditions, high input costs and the pandemic the international food market is likely to remain unstable in 2022 and 2023. When it comes to commodity imports. As inflation is rising Bangladesh is responsible for importing consumer items. However, the organization does not have enough capacity and is often blamed for lack of transparency. Rather than being involved in imports.
6) Bangladesh Megaprojects are Coming to an End
Bangladesh mega projects such as Padma Bridge and the Metro Rail, the Ruppur Nuclear Power Plant, Rampal Power Plant are almost over which is making investor less scope of investing. All the megaprojects of Bangladesh are coming to an end. Megaprojects such as Padma Bridge, Metro rail, Bangabandhu tunnel have turned out to be of great success but as they are completed investors are finding less opportunities and less scope for investing. There are no new mega projects that are being undertaken by Bangladesh.
Challenges and Recommendations to Overcome the current forex challenges:
As a trading nation, Bangladesh tries to maintain an exchange rate that helps both exporters and importers. The current crisis requires immediate government intervention to improve foreign currency supply into the market.
1) A separate fund should be set up for government imports such as fuel. This should be given to banks only for settling government imports; banks will not keep any profit margin for these payments. This will reduce pressure on the private sector demand for the dollar for the import of other essentials.
2) The Export Retention Quota (ERQ) should be reduced to 5-10 percent of repatriated proceeds for the exporters for the next six months. They need to encash everything other than back-to-back import payments for the next six months.
3) The current Net Open Position (NOP) of banks should be reduced by 50 percent immediately to inject forex flow into the market. Seventy-five percent of the existing NOP should be immediately sold off to the interbank market to facilitate supply to different banks.
4) The Bangladesh Bank should inject another USD 1-2 billion from the reserves to stabilise the market and reduce panic-buying in order to bring down the exchange rate. It may be mentioned that to support the rupee against the dollar, the Reserve Bank of India sold USD 20.1 billion in the spot forex market in March 2022.
5) The taka should be devalued to be closer to the interbank rate and be realistic to the market rate to align with the current situation. This should cool the market down and restore stability.
6) The forex reserves should be used judiciously. Import of luxury items should be restricted till the situation improves.
7) Effective measures involving all stakeholders are needed to improve the remittance flow. Remittances are not coming through the banking channel even after the incentives given to the remitters. Hundi is more lucrative to remitters as it offers higher rates compared to the formal banking channel.
8) Bangladesh should gradually establish links with the future commodities market to ensure a long-term supply contract with a few global suppliers. Of course, Bangladesh must increase its trading capacity to operate in the international commodities market.
The current exchange rate volatility is neither useful for business, nor individuals. The forex market is the major determinant of inflation. Therefore, a stable exchange rate is important for price stability. This, in turn, will help maintain a stable macroeconomy. The government should be proactive as well, because the inflationary pressure has hit the poor and low-income groups hard in the current circumstances.
Possible Solutions to Overcome the current dollar crisis:
1) A separate fund should be set up for government imports such as fuel. This should be given to banks only for settling government imports; banks will not keep any profit margin for these payments. This will reduce pressure on the private sector demand for the dollar for the import of other essentials. This will bring down the dollar price.
2) The Bangladesh Bank should inject approximately USD 1-2 billion from the reserves to stabilize the market. This will eventually reduce panic-buying to bring down the exchange rate. As Bangladesh is not currently undertaking any new mega projects so the government should inject more fund to stabilize the economy.
3) The taka should be devalued to be closer to the interbank rate and be realistic to the market rate to align with the current situation. This should cool the market down and restore stability.
4) Import of luxury items should be restricted till the situation improves. More tariffs and quotas should be applied to create a trade barrier for the imported goods.
5) Avoid hundi and pass a law against it so it improves the remittance flow. Bangladesh Bank has taken various steps to stop the flow of hundi transaction. Introducing the system of sending remittance through mobile banking is one of such steps. Moreover, the guidelines include opening MFS accounts of expatriates by following proper EKYC (Electronic Know Your Customer) and making contracts between foreign exchange house and MFS (Mobile Financial Services) companies. These steps will pave the way to increase remittance in legal ways and mitigate the dollar crisis, along with resume normal flow of export-import.
6) Bangladesh should increase its trading capacity to operate in the international commodities market. Bangladesh should increase its export market other than readymade garments sector. The heavy reliance on ready-made garments and Bangladesh’s protective tariff regime have diversified export growth. Further, with trade competitiveness based on low wages and trade preferences eroding, the country can increase the resilience of economic growth by diversifying its export basket.
Recommendations: As an emerging economy, our import and service payments would keep on increasing faster than foreign currency receipts, unless we actively try to balance it out. We have to carefully consider other policy reforms and incentives too. It isn’t reasonable to limit imports indiscriminately because the expansion and growth of our economy compels us to import capital goods and certain raw materials, but perhaps some form of import duties could be levied on luxury and consumer goods. At the same time, we need to increase our foreign currency receipts through exports and inward remittance. But for the long run, we should be doing everything we can to develop our domestic industries so that eventually we won’t have to rely on import as much, and our balance of payments will become much more manageable.
References:
- Hundi-the ‘main culprit’ behind dollar crisis – The Daily Industry
- Bangladesh’s economic crisis: How did we get here? – Atlantic Council
- Reasons for a worldwide dollar crisis | The Financial Express
- Why is Bangladesh facing a dollar crisis while others are not? | Dollar Shortage in Bangladesh (tbsnews.net)
- The dollar crisis and the bitter pill Bangladesh must swallow (dhakatribune.com)
- What a Fed interest rate increase could mean for you | AP News
- 8 things the government can do to stabilise the dollar rate | The Daily Star
- How much are extreme weather events costing the economy? | World Economic Forum (weforum.org)
- Dr Fahmida Khatun is executive director at the Centre for Policy Dialogue (CPD). Views expressed in this article are the author’s own. (The daily Star)
- How dollar scarcity, Taka devaluation created a once in a lifetime crisis. (dhakatribune.com)
- Dr Matiur Rahman is a researcher and development worker (thefinancialexpress.com.bd)
- Mamun Rashid is a leading banker and economic analyst (the dollar crisis in Bangladesh) (dhakatribune.com)
Rajib Datta
Assistant Professor
Finance Discipline
Department of Business Administration
Faculty of Business Studies
Premier University, Chittagong