Exchange rate has gained a lot of attention in recent months due to its unrestrained movement. Policymakers, businessmen and others have expressed concern over the persistence of the volatility in the forex market of Bangladesh. The trade war between China-USA, along with the deficit in the overall balance of payments has destabilised the exchange rate in Bangladesh, in spite of numerous interventions by the central bank.
Balance of payment (BoP), along with the current account, is used by experts to analyse exchange rate movement. The balance indicates the changes in reserve, and a deficit indicates higher outflow of domestic currency than inflow of foreign currency into the country. This, as a result, allows local currency to depreciate against the foreign currency. For example, if US dollar is the intervention currency, a rise in the deficit of the BoP is likely to weaken Taka against the US dollar. Unfortunately, Bangladesh's balance of payment entered the negative territory after six years in the last fiscal year. This adversely affected the value of taka, making it weaker against the major currencies since then. This trend is persistent on the back of trade deficit of USD 18.25 billion in fiscal 2017-18, the highest in Bangladesh's history. Accordingly, rise in imports is affecting the current account and the exchange rate. However, ahead of the national election next month, trade deficit has widened slightly during the first quarter of the fiscal year as imports of major goods, including capital machinery decelerated.
On the other hand, remittances, one of the key sources of our foreign reserve, after showing erratic movements last year, has seen an upward trend in recent months, narrowing the country's deficit in the current account. However, according to Bangladesh Bank statistics, in Nov'18 overall remittance inflow was $ 1.17 billion-- 3.14 per cent less than the remittance inflow of Nov'17. As a result, relying on remittances is highly uncertain, as the inflow of remittances depends on external factors that are not under control of the monetary authority or government in Bangladesh.
The imminent hike in interest rates by the US Federal Reserve in the coming year, as a result of low unemployment in the USA, will continue to strengthen the dollar. This will further exacerbate Bangladesh's exchange rate situation next year. The move can affect the country's import payments and as most imports contribute significantly to Bangladesh's exports, the cost of production will go up and so will the prices of Bangladeshi products. This will definitely put pressure on exports and might have a significant impact on the overall economy. Likewise, the upcoming national election is likely to put pressure on inflation. This can slow down the growth of small and medium businesses in the country.
Though Bangladesh has a flexible exchange rate regime, interventions by Bangladesh Bank can hedge the exchange rate to some extent. If the BB takes out money from the banks, there could be a liquidity crisis in the money market, like the one around the beginning of the year. Therefore, the government should come up with policies that will create a balance between real and nominal exchange rates. It should also find new ways to diversify the country's exports and overcome heavy dependence on remittance inflow.
Mohammad Nahian Mursalin is a senior credit analyst at a leading non-banking financial institution in Bangladesh.