Why is the fixed exchange rate for dollars failing?

The FBCCI president said on Monday that many businessmen have to open Letters of Credit (LCs) at dollar exchange rates higher than the rate fixed by the government. The benefit of a fixed-rate dollar has long been questioned, and the scarcity of dollars has made opening LCs more difficult for businessmen. 

We reached out to experts and stakeholders who explained the impacts of the dollar crisis on businesses with regards to opening LCs. 

'Buyers are placing advance orders, placing huge pressure on banks regarding LCs' 

Shams Mahmud. Sketch: TBS

Shams Mahmud

Managing Director of Shasha Denims Ltd and former president of DCCI

The main issue here is that there is a prominent gap between the dollar rate in the curb market and the formal rate of the BB. There is also a demand and supply issue playing here. 

During the June-July period, the RMG factories had 30-40% less orders. As the election is coming up, buyers are placing advance orders - they want to receive the December-January orders by November. As a result, we have all started to open LCs, which is putting a huge pressure on the banks. I will need dollars now. 

Back in June-July, import was artificially restricted by imposing a ceiling, which was a good step for the time as there were fewer orders anyways. But you cannot do this indefinitely. Suppressing dollar demand with these sorts of measures is not an actual reflection of the market. 

Now, as an export-oriented business industry, RMG and textile businesses can settle dollars against the dollars we earn, but what about the commodity market, which is mostly based on import? 

Now, even when a person goes to the bank for dollar endorsement for the purpose of travelling, the bank is giving him/her the seal but asking them to buy the dollar from the curb market outside. This is why the dollar rate in the curb market is high and people have to buy dollars at a higher price. 

So I will say the actual demand-supply is not being reflected in this. The non-export-based businessmen are buying dollars from the curb market at a higher price.

When this person needs dollars, he is buying a dollar for Tk118/120. This is having an inflationary effect on the economy, because he will have to earn the money back and then to continue the business; place another order. If the dollar price increases to Tk125, per se, where would he get the money from? So eventually he will sell his product at a higher price, which contributes to inflation. 

This is why we are buying groceries at a much higher price. 

And also underground markets like Hundi have become predominant now. As long as you don't give a fair exchange rate of the dollar, these irregularities will continue. 

Pakistan and Turkey also devalued the dollar but they ensured an effective rate of dollars, which is why their export competency grew. Already, we are paying 150% more price for energy, there is a wage increase coming, and on top of that, we are not getting a fair exchange rate – this will be tough for us to absorb. 

So a fair exchange rate of the dollar should be ensured as fast as possible. 

'It's importers of consumer products who are in real trouble' 

Mijanur Rahman. Sketch: TBS

Mijanur Rahman

Director, BGMEA and Managing Director, Fabrica Knit Composite

Generally, as exporters, we don't need to buy dollars. We do business with our own dollars. The dollars that we get against our exports, banks give us back-to-back privileges against our surplus dollars for raw materials, or whatever else we do. What we are importing, we export them again. We don't have to pay more or less.

So exporters don't have any problem regarding LCs. 

However, it is the people in local businesses, who are import-dependent, that the dollar crisis is impacting the most. As they import goods for local consumers, they have to pay high dollars while opening the LCs. 

These businesspeople are facing various kinds of troubles - car businessmen, for example, or businessmen who source food materials from abroad. Or any businessmen who deal with products that our people consume, which come from abroad, and they have to pay a hefty price for dollars.  

Now, will only fixing the price of the dollar (inside and outside of the bank) solve this all? Actually, it will not address the issue, because if the dollar is not available in the banks, the business people will not be able to open LCs, even if [they] want to within the fixed rate set by the authority.  

'Are any of the fixed rates doing any good to the market?' 

AB Mirza Azizul Islam. Sketch: TBS

AB Mirza Azizul Islam

Economist and former adviser to the Caretaker Government 

The reason businessmen are doing LC at a higher dollar rate is that the supply of dollars in the market is low. The remittance flow is not satisfactory, and exports have decreased. This is the reason banks are charging more for dollars. 

Bangladesh Bank should look into it and investigate if there are any motives behind this. And if necessary, they should be strict, so that the banks follow the fixed rate. 

If you ask whether the fixed dollar rate is doing any good for the market, then let me ask you if any such measures are working at all, at present, in this country. The government has fixed a particular price for eggs, potatoes and other things. Are businessmen following that? 

Because of the higher dollar rate the businessmen are paying, their import cost is increasing. Our production is highly dependent on imported raw materials and machinery. With increased import cost, production cost also increases, which eventually will swell inflation in an already inflated economy.  

This can lead to less investment, which will subsequently lead to unemployment. 

Bangladesh Bank should follow up with the affiliated banks and ensure they follow the fixed rate. If they enforce this, eventually the banks will follow, and the businessmen will be able to open LC at the fixed dollar rate.