Volatile Exchange Rate: Time to take precautions?

23 December, 2018 12:00 AM printer

Volatile Exchange Rate: Time to take precautions?

Exchange rate, one of the major macroeconomic policy concerns of Bangladesh, gained a lot of attention in recent months due to its unrestrained movement. Policymakers, businessmen, and others have expressed their concern over this persistence of the said volatility in the forex market of Bangladesh. The trade war between China-USA, added to the deficit in the overall balance of Balance of Payment, the exchange rate has become rather unstable in Bangladesh, regardless of having numerous interventions by the central bank to stabilise our currency against the greenback.

The overall balance of Balance of Payment, along with the current account is used by experts to analyse exchange rate movement of the country. The overall balance indicates the changes in reserve, and a deficit certainly indicates higher outflow of domestic currency than the inflow of foreign currency in the country. This, as a result, allows the local currency to depreciate against the foreign currency, i.e. considering US dollar as the intervention currency, a rise in the deficit of the overall balance is likely to make Taka weaker against US dollar. And, unfortunately, Bangladesh’s balance of payment entered the negative territory for the first time in 16 years in July last year. This adversely affected the value of taka and started making it weaker against the major currencies since then. Besides, this trend is still persistent on the back of trade driven deficit of USD 18.25 billion in fiscal 2017-18, the highest in our history. Accordingly, our rise in imports is affecting the current account and the exchange rate. However, ahead of the national election next month, the trade deficit widened slightly in the first quarter of the fiscal year as imports of major goods, including capital machinery decelerated.

On the other hand, remittances, the key source of our foreign reserve, after showing erratic movements and problems in the last year, have kept up an upward trend in recent months, narrowing the country’s large deficit in the current account. However, according to Bangladesh Bank Statistics, in November ’18 overall remittance inflow was $ 1.17 Billion, which is 3.14 per cent less than compared to that of November ’17. As a result, relying on remittance is highly uncertain, as the inflow of remittance depends on external factors which are not under the control of the monetary authority or government in Bangladesh.


Adding to this, imminent FED rate hike in the coming year as a result of outstanding job growth in USA, surging dollar is likely to exacerbate our exchange rate situation further in the coming year. This will, in turn, shake our import payments and as most of our imports contribute significantly to our exports, the cost of production will go up and so will the price of our products. This will definitely put pressure on exports and might have a significant impact on the overall economy. Likewise, the upcoming national election, which will be held on the end of the year, is likely to push pressure on inflation, and therefore people will crave for imported goods rather than local goods, which might slow down the small and medium businesses of the country.

In addition, albeit we have a flexible exchange rate regime, interventions by Bangladesh Bank may hedge the exchange rate to some extent, but it will take out money from the banks and might create a liquidity crisis in the money market like the way it did at the beginning of the year. Therefore, the government should come up with policies which will create a balance between Real and Nominal exchange rates while finding new ways to diversify our exports and overcome the dependency over remittance inflow.


Mohammad Nahian Mursalin, Senior Credit Analyst,  a leading NBFI of Bangladesh