Shakhawat Hossain |
Dec. 14, 2021, 9:30 p.m.
Bangladesh needs imports for individuals, businesses and investments. Foreign currency is required for the settlement of import payments. The main sources of influx are exports of goods and services and remittances.
The export trend is improving during the current fiscal year. But Bangladesh exports at very competitive prices for which the sector depends on export incentives granted by the government. At the end of the transition to LDCs, these incentive facilities may need to be phased out, unless additional time is allowed under WTO subsidies and countervailing measures. As such, alternative support is justified for export sectors.
In the last fiscal year, inbound remittances sent by Bangladeshi nationals working abroad reached an all-time high. Economic activities in a post-Covid situation are on track during the current fiscal year. The focus is on export trade, as noted above. But a slow trend is observed in employee remittances.
The declining trend in employee remittances indicates that the parallel foreign exchange market is active, absorbing huge foreign currencies at better rates. The continuation of such activities will lead to divert remittances of wages from the banking channel to the informal channel. Informal channels need to be integrated into the banking channel through political support in appropriate forms.
There is a standoff over the adjustment of the exchange rate. People who earn or receive foreign currency prefer the undervalued local currency. On the other hand, natural or legal persons need to make transfers of funds in favor of an overvalued local currency.
Whatever the standoff, Bangladesh’s economy is on track for which huge outflows will be required for payment settlement, especially import payments for capital goods. Along with official flows, unofficial flows are prevalent in all economies, especially during a transition period like ours due to a prudent regulatory framework to manage external payments. The dark side of the economy must be removed by channeling remittances to bank machines, thereby reducing demand from the parallel market. This is possible provided that the beneficiaries benefit from it. In view of the coming situation of increased economic activities requiring cash outflows, the local currency should be allowed to depreciate to a reasonable extent to keep inflows from different sources to upward movements.
The depreciation of the price of the local currency has a negative impact on imports. How to solve it is a challenge. Low-cost import financing can be a support. But financing from local sources is not cost effective. It can be settled through external financing at a prescribed rate of interest. The facilities should be extended to (a) commodity traders importing intermediate goods for domestic industries, (b) importers of essential consumer goods for a credit period of 120 days or for the required period.
Import price foreclosure is a system of hedging the risk of price volatility in international markets. The products are traded in commodity exchange houses or over the counter. In both cases, products can be purchased by reservation in advance, either by purchase of “futures”, or “forwards”, or “options”. Such purchases should be allowed to importers to cover fluctuating commodity prices.
Support policies as stated can reassure importers. However, the customs valuation value will be higher if the local currency depreciates. But it will lead to increased government revenue due to import duties. These additional revenues definitely help the government to cope with the increase in public purchases like fuel.
Adjusting the exchange rate in accordance with international scenarios makes it easier for exporters. But many experts believe that undervalued exchange rates are not playing an effective role. The argument on this issue is that ready-to-wear, Bangladesh’s main export product, provides little added value. This is true for woven garments, but whatever remains as added value brings in an increased amount in local currency. This supports the increase in profits which encourages entrepreneurs to invest, resulting in increased employment.
Adjusting the exchange rate can work as an alternative to the cash incentive. The benefits in the form of cash incentives for exporters represent a budgetary cost to the government. As previously stated, the benefits of the exchange rate will increase the income from export sales. The export sector is vulnerable because its customers are foreign. Exporters send goods but bring jobs. Therefore, volatility in the sector can have a negative impact on the economy. In view of the situation, an adjustment of the exchange rate becomes necessary. In addition, there is a need for support in the form of (a) foreign currency financing facilities for working capital needs to cover salaries and various utility payments, in addition to supplier / buyer credit for imports of inputs, (b) enabling bilateral trade by exporters with unexploited countries with inadequate banking arrangements, (c) overseas warehousing facilities to accommodate business-to-consumer (B2C) exports and business-to-business-to-consumer (B2B2C) exports.
The benefits of the exchange rate will allow employees’ beneficiaries to receive an additional amount in taka. This can remove the supply supports in the illegitimate forex market. The increase in the local currency amount due to the exchange rate adjustment will encourage inbound remittances. As a result, support through an exchange rate adjustment will surely help the government to set up a cash incentive program available against inbound remittances sent by Bangladeshi nationals working overseas.
Adjusting the exchange rate without a monitoring mechanism can encourage traders to manipulate the market. Therefore, the market surveillance system must be operational for protection against undue manipulation. In this context, relevant issues to consider may include (a) continued market surveillance, (b) adjustment of the mismatch between the haves and have-nots of foreign exchange in the market, (c) provisions for real-time observation of the foreign exchange position with the maturities of assets such as purchases of foreign currency notes and others, (d) regular monitoring of the reconciliation between local and foreign books of foreign currency assets, ( e) regular monitoring of off-balance sheet exposures of banks in foreign currencies.
We know that technological advances are replacing jobs. Low-cost foreign products destroy domestic industries, leading to unemployment. There are many situations in which those unable to meet the challenges experience negative effects without being limited to unemployment. It is the reality in the changed situation that is protested by different quarters. But the change of situation is costing the government the extension of safety nets to the displaced people.
Various indicators show that the economy of Bangladesh is growing. The trip requires investment, including the outflow of foreign currency for payments for capital goods. Support for the foreign exchange requirement will be fluid provided entry windows are aligned with the banking system. Managing exchange rates is part of the flow of the system. Management without fine-tuning will move influx windows to illegitimate locations away from the banking system.
Theoretically, both currency senders and importers will face difficulties, as noted above, if the exchange rate is adjusted to keep inflows at the desired level. But the illiquid position of the foreign currency in the market ultimately administers the market with the depreciation of the local currency. If such a situation arises, non-recipients such as importers sending remittances out will be severely affected. This situation must be avoided by political support such as the adjustment of exchange rates.