Correcting the dollar’s price is the only medicine we need
A good doctor usually does not prescribe too many medicines. Once, the maharaja of Cooch Behar was suffering from various ailments. He invited the noted doctor of the time, Dr Bidhan Chandra Roy from Kolkata, to prescribe him medicines. Dr Roy saw the patient and left a single piece of advice for the maharaja: quit smoking as soon as possible. The ruler was not amused by the doctor's suggestion. Nor was he satisfied to see that no medicines had been prescribed. However, he eventually recovered from all ailments simply by abandoning his habit of smoking, all while no other medicines were needed.
Economic policymaking often works this way. A single, sensible policy can make a motley of weird prescriptions totally redundant. The wrong exchange rate – simply the undervaluation of the US dollar or an artificial overvaluation of the Bangladeshi taka – is the single culprit behind the country being pushed to the edge of the forex reserve crisis. Our forex reserve, which peaked at $48 billion in August 2021, has come down to as low as around $21 billion in September 2023. The figure by August should have been at around $60 billion, had the reserve maintained its normal growth trend observed since 2009. Moreover, the trend of workers' migration has seen an uptick recently, but this is not reflected in the recent remittance inflow, which was awfully low last month. This is nothing more than a result of the egregiously low valuation of the dollar. Russia's attack on Ukraine is responsible for this decay.
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Both the finance ministry and Bangladesh Bank (BB) must be serious about averting the reserve crisis, no matter how they wish to downplay the matter on the surface. This is not only about poor growth in remittances, but also three other worrisome developments that threaten the country's economic stability: 1) forced squeezing of imports, which retards industrial growth; 2) lacklustre performance of exports; and 3) the unprecedented collapse in financial accounts, which has dehydrated the balance of payments and drained forex reserves. The single practice of fixing the dollar's price is responsible for these many ailments.
The theory suggesting that a higher dollar price will stoke inflation further through the import channel is partly true. But the main inflation, which makes the poor suffer the most, is originating from the high prices of necessities, which do not relate to import channels as much. Inflation remains stubbornly high because of incorrect policy rates and fiscal incapacity.
The finance ministry's peanut-sized incentive on remittance has proven to be worthless, and has actually weakened our already beleaguered fiscal capacity. Remittance senders do not want any sort of grace from the ministry. Rather, they need to get a fair value of their hard-earned money. On the one hand, the ministry wants to look like it's helping BB with the incentive. On the other hand, the ministry is also forcing BB to print more notes to fill up its own revenue gap. These are unnecessary for and harmful to the proper functioning of a market economy.
Various sources suggest that the dollar's price is close to Tk 120 in the street market, while the central bank is offering only Tk 109.5 to remitters. This obviously fails to convince the migrant wage earners to send their money through the official channel, which is financially punitive and still bureaucratic. As rational economic agents, wage earners resort to hundi, which is comparatively more rewarding, faster, and more accessible. But why do policymakers find remitters' use of hundi unpatriotic? Why should migrant workers be responsible for paying out of their pockets for incorrect rates manufactured by policymakers?
Losing almost Tk 8 per dollar naturally does not make any sense to migrant workers. Engaging the police or the intelligence department to chase down hundi or money-changing agents is a complete waste of energy on the government's part. But this hunt will never end if the Bangladesh Bank keeps picking the wrong exchange rates. The central bank governor should coordinate with researchers, economists, and market experts to take knowledge-based actions, rather than employing the police to chase down petty margin-makers who have, in fact, been created due to BB's market-unfriendly dollar prices.
In the central bank's last monetary policy announcement in June, the governor vowed to make the exchange rate market-based. But the governor seems to be depending on oxygen provided by the Bangladesh Foreign Exchange Dealers' Association (BAFEDA) to set the exchange rate. This reflects the lack of confidence that breeds policy hypocrisy. BB seems to be afraid of standing on its own feet. Hence, its claim of policy independence is flimsy. It has incorporated the fixing of interest rates with treasury bill rates, which are mainly controlled by the finance ministry, indicating that the country's central bank cannot operate independently.
If BAFEDA can fix the exchange rates and the finance ministry can fix the interest rates, do we really need a separate institution like BB? Instead of fighting for independent policymaking based on knowledge and research, BB is making its job unnecessarily complex. Our central bank could outsource some of the tasks which its own machinery or manpower cannot support, and BAFEDA can be a secondary source of suggestions on exchange rates. But recent activities do not shine a light of reliability on BAFEDA's exchange rate recommendations. The underpricing of the dollar is pushing our overall financial position from bad to worse, without any sign of recovery.
There are three reasons why BB is not catching up with the actual price of the dollar: 1) fear of inflation; 2) fear of excessive volatility of the exchange rate; and 3) the typical mentality of making taka's depreciation equivalent to the economic weakness of the regime. The theory suggesting that a higher dollar price will stoke inflation further through the import channel is partly true. But the main inflation, which makes the poor suffer the most, is originating from the high prices of necessities, which do not relate to import channels as much. Inflation remains stubbornly high because of incorrect policy rates and fiscal incapacity. The finance ministry failed to collect taxes from the superrich and resorted to making the central bank print extra notes. This has made inflation furious through the multiplier.
Second, any rate that is surrendered to the hands of the market will be subject to volatility in the initial months, but the price will settle over time and make the economy safer than before.
Finally, relating the taka's weakness to the weakness of the economy is a fundamentally flawed exercise. Rather, a market-based rate will increase both exports and remittance inflow, which will be the protagonists in terms of improving Bangladesh's balance of payments, and eventually bring the forex reserve back to a comfortable position.
Dr Birupaksha Paul is a professor of economics at the State University of New York at Cortland in the US.
Views expressed in the article are the author's own.
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