Exporters unable to fully benefit from taka devaluation

Exporters in Bangladesh are unable to take the full benefit of the devaluation of the taka against the US dollar amid ongoing inflationary pressure and rising production costs, according to industry people.

The devaluation of a country's currency can increase its export earnings as manufacturers can take orders even though buyers offer lower rates than in the past, making them more competitive on the global market.

Recent data shows that taka, the local currency, has depreciated by about 28 percent as the government is adjusting the exchange rate in line with its strength against the US dollar.

As such, the official exchange rate now stands at Tk 110.50 per US dollar in case of import payments while it is Tk 110 when it comes to export earnings.

The exchange rate between the taka and the US dollar was around Tk 85 up till January last year, after which the local currency began its steep descent into the current range, as per central bank data.

Bangladesh's taka has been facing volatility for more than one-and-a-half years as external payment pressure continued to grow while export and remittance did not grow as required.

Previously, local exporters had urged for the devaluation of the taka against the US dollar as some competitor countries were enjoying the benefits of devaluing their respective currencies.

And in the face of increased external payment pressure, Bangladesh started to see its foreign reserves fall, with the taka losing strength against the US dollar and other major currencies.

Exporters said Bangladesh's exports became more competitive following the devaluation of the taka, while the exporters themselves enjoyed higher returns in terms of taka against each greenback.

Besides, this allowed manufacturers to enhance their earnings from products made using locally-sourced raw materials considering their increased prices abroad.

However, elevated inflation, which has been hovering at around 9 percent for nearly one year now, eats up much of the gain.

Exporters said the cost of doing business and production rose as prices of raw materials, transport and fuel rose by nearly 100 percent each, alongside the increasing price of food in the domestic market.

Still, local value addition increased by nearly 71 percent over the past year due to the growing use of locally-sourced raw materials.

This is because producers are opting for more readily available raw materials rather than importing them in order to maintain the shorter lead times set by international clothing retailers and brands.

As a result, garment makers have been reducing their overreliance on imported yarn and fabrics to ensure quick delivery of goods year-round to remain competitive in the fierce business.

"So, we are definitely getting the advantage of the devaluation but we cannot retain the benefit due to high inflation and rising production costs," said Faruque Hassan, president of the Bangladesh Garment Manufacturers and Exporters Association.

Hassan informed that another reason for exporters not being able to retain the benefit was that local raw material suppliers were also increasing their prices.

He said competitor countries like Vietnam, Pakistan, India and Turkey have significantly devalued their currencies and were subsequently enjoying greater competitiveness in the global supply chain.

Hassan explained that the primary textile sector was the ultimate beneficiary of the competitive edge brought on by currency devaluation as garment makers increase their purchases from local millers and spinners.

"But we are not enjoying this benefit as banks are charging high interest rates while fuel and energy costs have risen significantly," said Mohammad Ali Khokon, president of Bangladesh Textile Mills Association.

Md Saiful Islam, president of the Metropolitan Chamber of Commerce and Industry, said the taka's depreciation by 28 percent does not mean that exporters are getting Tk 28 extra for each US dollar.

This is because inflation is nearly 10 percent and the cost of doing business has increased 25 percent because of a big jump in fuel, power and transportation costs coupled with high bank interest rates and raw material prices.

Had the currency devalued earlier, such as during the time of the immediate past governor of Bangladesh Bank, local exporters would have been able to avail more benefits as inflation and utility bills were lower at the time, he added.

From the perspective of local value addition, the currency devaluation of taka against the US dollar has helped exporters, said Mustafizur Rahman, a distinguished fellow of the Centre for Policy Dialogue (CPD).

Exporters became more inclined to purchase raw materials from local markets and, from this perspective, they became competitive due to the depreciation of taka, Rahman said.

Obviously, he said, cost of production soared because of inflation. But had other costs remained unchanged, the exporters' competitive edge due to devaluation of taka would have been significant, added Rahman.

"Exporters claim that they could not retain the benefit owing to cost escalation. But that is not fully true," he said.

CPD Research Director Khondaker Golam Moazzem said any depreciation of local currency increases the negotiation capacity of exporters as they can take orders even though buyers offer lower prices than in the past.

This increases competitiveness of exporters, he said.

Moazzem acknowledged that cost of production has increased due to higher fuel, energy and other costs. Even after that, overall earnings of exporters have increased, which is why they are able to accept fresh orders by covering additional expenses, he said.