Crawling peg unlikely to inflate prices of imported goods: Bankers, businesses
The crawling peg system, which is poised to drive up the official dollar rate, is unlikely to inflate the prices of imported products as the real exchange rate has been aligned with current market rates, argued bankers and businesses.
According to them, although the official exchange rate for the US dollar was at Tk110, it was openly traded at Tk118-120 or even higher.
The Bangladesh Bank has taken steps to close this gap, setting the median rate at Tk117 and permitting the market to determine the exchange rate within a Tk1 margin – above and below.
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Abul Kashem Md Shirin, managing director at Dutch-Bangla Bank, told The Business Standard it would not significantly escalate import expenses. Instead, the adjustment would contribute to market stability.
"Importers, who have long grappled with uncertainty surrounding the dollar rate, would find relief as this uncertainty dissipates. Also, determining the sale prices of imported goods would become easier," he said.
In the new crawling peg system, there is no opportunity for traders to increase the price of goods. Because now the central bank is fixing the exchange rate, this is the actual market rate. However, if this rate is increased again, there will be a possibility of increasing the product price.
Rather, the veteran banker said there will be positive impacts on the inflow of remittances and export earnings as they will get better rates.
Bangladeshi traders have to buy dollars from banks and open Letters of Credit (LCs) to import daily commodities such as edible oil, lentils, sugar, and onions. Usually, when the dollar appreciates, the prices of goods in the country's market also increase. Conversely, the commodity market eases when dollar rates drop.
Siddiqur Rahman, a former president of the Bangladesh Garment Manufacturers and Exporters Association, told TBS, "Now the question of many people is that since the dollar rate has increased by Tk7, the price of goods will also surge accordingly. In fact, the official rate set by the central bank was not the actual exchange rate in the last two years. The actual rate had a difference of around Tk10 or more."
"Due to this fact, most banks collected dollars at higher rates and accordingly charged a higher price from importers for the last two years. We also heard from importers that they had to pay up to Tk120. We do not see any opportunity for traders to increase the price of imported products due to the current level of the dollar in the 'crawling peg' system," he added.
Md Monir Hossain, vice president of the Federation of Bangladesh Chambers of Commerce and Industry, told TBS, "If import costs surge, then product prices will increase – it is natural. Now the question is whether there is an opportunity for traders to increase prices due to the surge in dollar rates. I would say no."
The reason for this is that the official rate was different from the actual dollar rate in the market in the last two years, he said. "If we look at the latest, even before the introduction of the crawling peg system, the dollar rate for remittances and imports was pegged at Tk110. But most of the banks had to buy remittances for more than Tk115/116. It means banks did not sell dollars at a loss to importers. They sold the dollar at a higher rate of Tk1-2. Some banks even charged up to Tk120 per dollar."
"I would say now that the official dollar rate that has increased has not actually pushed up import costs. Traders have had to collect dollars at this rate earlier as well," he added.
Now the question of many people is that since the dollar rate has increased by Tk7, the price of goods will also surge accordingly. In fact, the official rate set by the central bank was not the actual exchange rate in the last two years. The actual rate had a difference of around Tk10 or more.
A crawling peg is a system of exchange rate adjustments in which a currency with a fixed exchange rate is allowed to fluctuate within a band of rates. The par value of the stated currency and the band of rates may also be adjusted frequently, particularly in times of high exchange rate volatility. Currently, Bangladesh is in such a situation.
The volatility in the foreign exchange market started in April 2022 following the outbreak of the Russia-Ukraine war, and the crisis intensified gradually, resulting in a shortage of the dollar. This shortage led to a surge in its prices. Various initiatives to prevent the price jump have not helped. In the end, the new pricing system has been introduced according to IMF prescriptions.
Emranul Huq, managing director at Dhaka Bank, told TBS that the dollar rate for imports was Tk110. However, this rate was available only for government imports, as the central bank supplied most of the dollars.
He said, "But the dollar rate for importers was more than this. Because most banks had to collect dollars from foreign exchange houses at a higher rate of Tk5/6. Due to this, banks had to charge traders accordingly."
"In the new crawling peg system, there is no opportunity for traders to increase the price of goods. Because now the central bank is fixing the exchange rate, this is the actual market rate. However, if this rate is increased again, there will be a possibility of increasing the product price," he added.
Speaking to this newspaper, the treasury department heads at several banks said the crawling peg system has been beneficial for importers. Now importers can get dollars from any bank at a fixed price.
They said the dollar has not appreciated in the crawling peg system. On the contrary, the prices are low compared to November-December last year, when importers had to pay up to Tk120/122.
