Wednesday, 10 August, 2022

Global Currency War: Bangladesh Must Be Extremely Cautious

The Russia-Ukraine war and global financial war have started at the beginning of the war. Now, a new addition is currency war in the western world. In fact, four dimensional wars have been going on in the world. Following the Russia-Ukraine war, financial war has also resulted from imposing widespread sanctions, freezing foreign exchange reserve and suspending from SWIFT what has resulted in financial war. Target oriented cyber war is also tacitly continuing in many parts of the world, particularly in the developed world.

Nowadays, service of some renowned companies is suddenly disrupted. Although the reason of such service disruption is not disclosed properly, yet circumstances imply that something is going seriously wrong in the cyberworld. Now currency war has emerged as the latest world problem. The Russia-Ukraine war is directly affecting the people of warring countries. Cyberwar is directly impacting the attacked company and its customers. Financial war and currency war have been affecting the whole world irrespective of developed and developing nations. However, suffering of developing counties is always worse than that of the developed world because developed nations are the creators of this crisis, so they are well-aware of the situation and its consequences.

In order to face this situation, the developed world always takes some policy preparation well ahead and thus can mitigate the suffering. Developing country’s situation is completely different because they usually take long to apprehend the actual situation. Moreover, they are always hesitant in taking decision which is not conventional in nature. Going out of the box and taking extraordinary decision required for tackling the evolving situation is very uncommon in the practice of developing countries. This problem is more acute in our country. Fortunately, our Prime Minister, Sheikh Hasina has become visionary and courageous to take some drastic decisions defying all sorts of criticism and conspiracy and resultantly country’s economy and people’s living standard have significantly risen. Otherwise, our Finance Ministry and Bangladesh Bank could early foresee the situation of dollar crisis and could take some preventive measures prior to the crisis started. Bangladesh Bank has been trying to tackle the situation in a conventional and traditional manner although the current situation is not conventional in nature.

Currency war in western world: Currency war has now started in the world particularly in the developed world. Federal Reserve, central bank of the USA, has increased their benchmark rate (bank rate) several times. Bank of Canada, central bank of Canada, has increased its benchmark rate by 100 bps in single hike which is the record in the last thirty years of history. Bank of England, central bank of UK, has also increased its bank rate. Switzerland, European Union and other developed countries have also resorted to similar measures. This aggressive rate hike is not the end because these central banks have threatened to continue rising their benchmark rate in near future. To support their decision of benchmark rate hike, they have reasoned to tame the inflation which is soaring and reached a record high in the developed world’s recent history.

However, controlling inflation with maneuvering only benchmark rate is not convincing to us. Because it is commonly known that keeping source of credit supply particularly household debt which includes credit card, car loan, and personal line of credit opened, inflation cannot be controlled. The developed world’s society has become consumption-based where people enjoy their present lives using borrowed money and inflation in that society cannot be controlled simply applying their benchmark tool. Instead, this measure will further worsen the financial burden of the common people as they will have to bear higher expense on their borrowed money due to rate hike. Inflation in this society with higher household debt can easily be managed by restricting the source of household debt. If western world decides to bring the household debt limit to half, not only inflation will be controlled but also other economic indexes will be affected due to the negative purchasing power of the common people. Nevertheless, policymakers and central bankers of developed world are not going to apply that measure, instead relying on benchmark rate hike. It is unclear to what extent inflation will be controlled because of benchmark rate hike; however, one impact is very clear that this measure has resulted in currency war in the world. 

Hard currency policy of western world: The western world particularly the USA, Canada, UK and European Union are in their efforts of maintaining their hard currencies. It is very difficult to ascertain which countries will be winners and which countries will be losers from this hard-currency policy. However, the current foreign exchange market suggests that all countries but USA have been losers. Euro, the currency of European Union, have become at par for the first time since its inception. UK pound-starling and Canadian dollar have also depreciated. Only US dollar has gained 7% what has immensely contributed to their economy. Not only recent benchmark rate policy but also all other previous policy decisions taken by western alliance have made all countries losers but the USA only winner. Nevertheless, the western nations have become blind followers of the USA, the reason of which is still beyond our understanding. Anyway, this is not our concern now, our problem is dollar crisis because we have been the victim of current currency war. Bangladeshi currency, Taka is continuously depreciating against US dollar and foreign reserve has already come down below 40 billion which calls for some drastic measures.

Limiting import from hard currency country: First of all, we have to determine whether the problem lies with US dollar crises or depleting foreign reserve because different problems require different type of policy measures. This is an exclusive area of Bangladesh Bank which is the best authority to appropriately ascertain this. However, our knowledge and media report imply that most of our reserve is retained in US dollar and very minimal amount may be retained in some internationally traded currencies viz. Euro, GBP (Great Britain Pound), Canadian dollar, Japanese yen. It is almost certain that nothing is retained in non-internationally traded currency viz. Chinese Yuan, Indian Rupee, Saudi real, Kuwaiti dinar etc. Consequently, dollar crisis and reserve have become complementary to each other, so when dollar crises arise, reserve also depletes and vice versa. So, first and foremost measure must be taken to reduce the pressure on the demand of US dollar. Keeping this in view, importation from the countries which have created currency war through persistent benchmark rate hike with threat of further bank rate hike, will have to be drastically reduced and even if possible, will be brought down to zero. If importation from those hard-currency countries cannot be avoided, importer will have to negotiate and convince the exporters to accept the LCs (Letter of Credit) in other soft currencies. How this can be done is a kind of complex issue which cannot be explained here, so intend to discuss in another article.

Interest rate rise: Another fiscal measure is inevitably required to increase interest rate on domestic savings which will change people from their consumption propensity to savings propensity. In order to facilitate the business community with cheap borrowed money, when Bangladesh Bank decided to forcefully bring down country’s interest rate to single digit, I clearly cautioned in my many articles that consequence of this measure will be fierce resulting in dollar shortage and money market crisis, what is exactly happening now. Economic theory simply states that low interest policy is followed to encourage people spending more and saving less. It is obvious that when interest rate is low, people will not find savings profitable, so they will trend to enjoy the present by consuming more with their entire earning and even from borrowing money what eventually increases country’s import turnover as most luxury items are still now import-based. Conversely, when interest rate is high, people find savings more profitable, so they drastically curtail present consumption and save more what eventually reduces country’s import volume. During the period of 2004/5, country’s money market faced similar situation when dollar crisis took acute shape triggering call money rate historically high, 50/60%. That crisis was also overcome with increasing country’s interest rate. Besides, as counter measure of the developed countries which are our foreign trading partners, we will have to follow the similar measure.

So, interest rate hike should be the measure of current situation. However, the present situation is quite different because of currency war while dollar crisis was only our internal problem during 2004-5 period. So, only interest rate hike may not produce positive result; instead some other measures including import control of non-essential items must be taken alongside interest rate hike. These measures should be taken immediately to confront country’s dollar crisis before situation goes beyond control and thus country can be kept unaffected from global currency war. 


The writer is a Banker, Toronto, Canada. Email: [email protected]