Maintaining Taka's value

Maintaining Taka's value

The Bangladesh currency 'Taka' has recently come under pressure in the foreign exchange market, losing value of more than 3.0 per cent in the last few months against the main reference currency, US 'Dollar'. For long, the exchange rate of Taka against US Dollar was between Tk.79.50 and Tk.80.50. But in the recent months it is being exchanged at Tk.83.50 or above. The erosion of the value of Taka in the exchange market should not make people raise their eyebrows if that happens very slowly and then stabilise at certain level. But if Taka continues to lose value in the foreign exchange market against the main reserve currencies like US Dollar, it will become a matter of concern.

There are many who fear that Taka may lose value further in the coming days at a faster rate. They argue that, when current account deficit widens as is the case with Bangladesh now, no country can maintain its currency value in the foreign exchange market. Bangladesh's current account deficit - the difference between the value of export and import, is going up. It rose to US$ 15 billion in the last 10 months. As the growth in exports is not taking place at the expected rate, this gap is feared to widen further in the coming days. But an economy cannot survive with an ever-increasing current account deficit. The solution lies in more exports and less imports by the concerned country.

However, the current account deficit may not be that threatening provided the overall balance of payments, which include remittances from abroad and foreign direct investments in the economy, remain in favour of Bangladesh. But continuous deficit in the current account may throw the whole balance of payments situation into jeopardy.

Normally, exchange rates among currencies are fixed by their respective purchasing powers. If, for some reasons, a currency loses its purchasing power, its exchange rate will go down against other currencies. Theoretically, if all the reserve currencies lose proportionate purchasing powers, the value of Taka would not erode against them in foreign exchange transactions.

As far as the purchasing power of Taka is concerned, it seems to have maintained a stable value as there is no unexpected inflationary pressure in the economy. Inflation rate in the economy is used as the yardstick in measuring the purchasing power of any currency. As Bangladesh has experienced a kind of price stability over the last few years, there is no reason for fearing that Bangladesh currency would lose its value against the US dollar because of price rise at home.

Then, what has caused the recent slide in the value of Taka against the US$? The cause, we presume, is the simple demand and supply of the US Dollar in the market. Importers are demanding more US Dollar for import payments, but the supply of the same is more or less static. As a result, the price of Dollar is going up. How to fill up this gap between the demand and supply of the US Dollar? One way is market intervention on a temporary basis by Bangladesh Bank with additional supply of US Dollar from its foreign exchange reserve.

Meanwhile, Bangladesh Bank should see how far the demand for US Dollar is real and how far that has been created by the vested quarters who want to smuggle out money from Bangladesh in the name of imports.

Bangladesh Bank should try to maintain the purchasing power and exchange rate of Taka. This is necessary to retain the confidence of the people in the value of Taka which, in turn, will encourage domestic investment and inflow of foreign direct investment (FDI).

The only way Bangladesh can maintain the value of its currency is to match its imports with exports. If it cannot increase its exports to the desired level, it will then have to cut its imports. The good advice is: Cut your coat according to your cloth.

Abu Ahmed is Professor of Economics at University of Dhaka.

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