The exchange rate of the dollar depends on the demand and supply dynamics. When the demand for dollars increases, the rate goes up accordingly. When the supply of the currency increases, the price of dollars goes down.
The primary reasons behind the general stability of the price of dollars in Bangladesh are twofold:
1) The remittance inflow has been good and exports were increasing,
2) The central bank kept the dollar price stable by selling dollars so that the taka does not lose value.
There are a few things that need to be taken into consideration to understand the dollar price hike. Recently, the remittance flow has come down as migrant workers have already sent the money from their savings.
Moreover, now that there is a possibility of a third wave of the Covid-19 pandemic, migrant workers are opting to not send money, and instead save for the rainy day. Additionally, most international borders are open for travel, so many opt to carry money when they travel.
Furthermore, our exports have come down recently. Finally, imports have increased, though the increase is not that dramatic, it still has increased to some extent.
As travel is now open, many people are taking up the restriction-free opportunities to go to Western countries. At the same time, India too opened borders and lifted travel restrictions. Many Bangladeshis go to India for medical treatment.
All these things have put pressure on the dollar. However, I will not say it is scarcity.
Again, in many cases, migrant workers send money through unofficial channels. As a result, the amount of dollars flowing through the official channels has decreased. These are the reasons responsible for the dollar price hike in relation to the Bangladeshi taka.
Bangladesh Bank has sold dollars in the market, recently, to keep the market stable. Bankers have their own dynamics and their own calculations. Bankers are selling dollars for more than one taka profit. That is, the difference between buying and selling is more than one taka, meaning bankers are trying to make a profit out of this situation.
Theoretically, when the dollar price goes up, exporters will definitely be happy because they get incentives. However, last year, the Indian rupee, Pakistani rupee and Sri Lankan rupee devalued in relation to the dollar. When their currency devalued, their exports became more competitive in terms of price relative to our own. The foreign buyers also got more benefits.
The dollar price hike is not only the issue.
Another important issue that demands our attention is our capacity to export and getting the orders for export. There are many competitors like Vietnam, India and Cambodia and others, who we need to watch out for.
In the past, we have observed that an increase in exports does not correlate with the taka devaluation as much as it is supposed to by general estimation. For this reason, the central bank remains strict regarding dollar price regulation.
Exporters request to devalue taka for ease in doing business. There had been pressure from BGMEA, in the past too, for this reason. I said if we devalue taka, then the import costs will go up and it will hurt importers. In effect, the price of machines will go up, the price of raw material will go up and the price of intermediary goods will consequently go up.
I think there is no point in worrying about it now. There will be no impact on the foreign reserve. The foreign reserve we have now is good enough. What Bangladesh Bank will have to do right now is to allow market dynamics to play out as much as possible.
The central bank should not do much buying and selling. There had been many incidents, in the past, when Bangladesh Bank bought dollars when the demand for dollars fell. Again, the bank would sell dollars when the demand for dollars rises. It will not be beneficial to keep the market stable in the long run by the central bank's buying and selling of dollars as a means to regulate dollar prices.
When I was in the central bank, I never sanctioned the buying and selling of foreign currency to this extent. We bought as much as we needed and sold as much as well. We have to keep the foreign currency market in a position as neutral as possible. The less the market intervention, the better.
Bankers often keep dollars with the hope that the prices will increase further so that they can sell at a profit. It is also true that they cannot keep dollars for too long, based on the conditions set out by the net open position limit.
Now, Bangladesh will have to observe the situation. If the dollar price increases fast, Bangladesh will have to look into the matter and find out why banks are quoting such high prices, whether any bank has kept more than the amount they should, and other issues pertaining to the dollar price hike. We should investigate whether any manipulation is involved.
If Bangladesh sees that the rate is going up fast and there is really a shortage of dollars, our central bank can sell dollars to keep the market stable. Readymade garment factory owners will be silently happy with this scenario, as they get export benefits when the price of dollars increases.
Like the industry, the common people will also have to bear the brunt of the increasing dollar price. There are lots of people going abroad for medical treatment as well as education. They will feel the pinch. The price of commodities will also increase. We have to import edible oil, wheat and sugar. The price of these products will go up.
This gives more reason for the commerce ministry to increase the monitoring of the dollar price in the market.
The author is a former governor of Bangladesh Bank