Economist Dr Debapriya Bhattacharya on Tuesday said the Taka needs to be devalued now, in line with its real exchange rate, before higher inflation in the future makes it difficult.
At present, the artificial value is negatively impacting the country’s international trade figures and depleting the country’s foreign exchange reserves, as the central bank is forced to sell dollars in the market.
Debapriya, a distinguished fellow at the independent think tank Centre for Policy Dialogue (CPD), was speaking at a press conference on “Review of National Economy and Ensuing Budget” at the city’s Cirdap auditorium.
“The taka is overvalued by three percent,” said Debapriya.
Dollar is selling at Tk 85.11 at the banks. But the Real Effective Exchange Rate (REER, a measure of taka’s value in comparison to the currencies of Bangladesh’s major trading partners) shows the price of dollar should be over Tk140.
Debapriya said although the government is worried that if Taka is made cheaper it will push up the price of imported goods, and subsequently inflation, yet inflation is still at a comfortable level to absorb spikes.
“We think inflation is now fairly under control - 5 and 6 percent. If inflation goes up, it will be difficult to devalue Taka.”
Debapriya lamented the impact artificial valuation was having on the balance of trade.
The country’s forex reserve is equivalent to five months’ import bill. “Only a few days back, it was equal to eight months’ import bill.”
Bangladesh Bank (BB) sources confirm that foreign currency reserves have come down to $30 billion from $30.99 billion on May 8. This is the first time since 2016 the reserve has gone below $31 billion.
Bangladesh has to import a large amount of raw materials and capital machineries for industries. In the readymade garment sector 70 percent to 80 percent of raw materials are imported. Finished products are also import dependent to a large extent.
To meet the large import bills, the central bank has been selling dollars to commercial banks from the reserve for the last two years. About $4.5 billion has been sold between FY2017-18 and FY2018-19.
Meanwhile, Bangladeshi exporters are being affected due to the higher value of Taka against the dollar. As a result, different trade bodies - including Bangladesh Garment Manufacturers and Exporters Association - have demanded devaluation of the local currency.
However, instead of devaluing Taka for fear of inflation, the government is going to provide a further 1 percent export subsidy in the upcoming budget to reduce the loss of exporters. It will require Tk3,000 crore.
“There is no logic behind keeping Taka stable forcibly,” Debapriya said, adding Taka has to be devalued to maintain its competitiveness. “India and China have devalued their currencies.”