On Sunday, banks operating in Bangladesh announced that they have set the maximum exchange rate of the US dollar against taka for export-import bills and remittances. The rates were fixed at a meeting between the Bangladesh Foreign Exchange Dealers Association (BAFEDA), a platform of banks, and the Association of Bankers, Bangladesh (ABB), a platform of managing directors of banks in Bangladesh.
In accordance with the meeting decision, banks in Bangladesh would offer a maximum of 108 taka per dollar to the overseas exchange houses abroad for receiving inward remittances from 12 September onwards.
Also, the banks will quote a maximum of 99 taka per dollar for procuring export proceeds from the exporters. And the rate for importers will be fixed in keeping with the weighted average rates of the exchange houses and the exporters.
So, presently there are multiple exchange rates that have complicated the management of the balance of payments. But what does this mean for the economy? Will this move really ease the pressure on depleting foreign exchange reserves and stabilise the forex market? Or will it incentivise various malpractices?
Experts believe that this multi-tiered floating rate will be confusing and will give rise to its own set of challenges.
"This most recent initiative to unify the exchange rate through the joint efforts of the commercial banking system and the Bangladesh Foreign Exchange Dealers Association (Bafeda) ends up offering three exchange rates: a lower rate for exporters (Tk99/$), a higher rate for remittance earners (Tk108/$) and a weighted average of these rates for importers. While these rates are closer to the market rate, it is puzzling how a 3-tier rate system is regarded as a uniform rate. Most importantly, it penalises exports," said Economist Sadiq Ahmed, the vice-chairman of the Policy Research Institute.
Dr Zahid Hussain, former lead economist of the World Bank's Dhaka office opined that it would be difficult to enforce uniform rates set by Bafeda as it is a peculiar system. In this system, some banks will have higher remittance inflow, while others will have more export encashment, then the LC settlement rate of the ones whose remittance is more will be higher and consumers tend to flock to where they get a lower rate.
He is of the opinion that now the malpractice of export under-invoicing will be encouraged.
"If I make an export worth $11 million, I will only get Tk99 on the dollar, but I stand to make more if I show this $11 million as $10 million and under invoice $1 million and bring it as remittance. I can do this by either showing the quantity or the price to be lower or a combination of both. I just have to have an understanding with the buyer. And figuring in the price gap and the subsidy provided by the government, I will earn TK10.75 more per dollar. I stand to make a profit of Tk 1 crore. Even if I have to share some of that money with others since there will be audits and I have to convince the buyer; I stand to gain a lot," Zahid Hussain explained.
"There will be a tendency by exporters to show their export earnings as remittance. If I am an exporter, I get (Tk99/$) while someone receiving remittance gets (Tk108/$). This is not logical. So now exports will try to not declare export earnings and pass off at least some of it as remittance," Sadiq echoed Zahid.
Sadiq is of the opinion that this move goes against the grain of the government strategy to promote exports. This according to him is the biggest issue with the strategy.
"Why do we have a deficit in our balance of payments? Because imports exceed exports. How do you correct the balance of payment from deficit? You can't do that just by controlling imports, you have to increase exports as well," said Sadiq.
According to Sadiq, the exchange rate should be harmonised and it should be market determined. It can be 108 today and 111 tomorrow. The main point is there should be one uniform rate and it should be market determined so that everybody, including exporters, importers and remitters get the same rate. This will stabilise the market.
"If we combine it with demand management through interest rate hike, it will reduce demand," said Sadiq.
"Many fear if the exchange rate is allowed to float, it will become too high. To prevent that from happening, we need to look into the interest rate," he added.
"All over the world, interest rate, exchange rate and fiscal rate work in tandem. Otherwise, you cannot get the desired results," said Sadiq, adding, "It is true that the increase in interest rates will hurt growth in the short term, but so will import and price controls. The adjustment through interest rate will be more orderly because it will allow consumers and investors only to finance the most efficient and high-return projects. It is also sustainable, while inflation control through subsidies and price controls is unsustainable."
Some also fear that since the remittance rate has now been fixed at Tk108 (it was around Tk114-15 previously) it might encourage remitters to resort to methods like Hundi.
" Since this is a sort of buyer syndicate, no one will pay more than Tk108. Exchange houses might reduce their processing fees to encourage remitters, or they might not, and pass off the expense to remitters. So, the possibility that remitters might resort to the hundi channel cannot be dismissed," said Dr Zahid.