How to overcome the dollar crisis
In a roundtable organised by The Business Standard on 3 December 2023, speakers said that ensuring predictability of the economy is of urgent need
Once we reached the threshold of $48 billion in forex reserves, it started falling without pause. At the end of December last year, the gross reserve stood at $21.7 billion and the net reserve was close to the IMF set ceiling of $17.78 billion.
Impacts are already being felt, by business people while opening LCs, by bankers while responding to clients' demand for dollars, even by the government while repaying project loans or paying the power producers or footing fuel import bills. Worse still, people are feeling the pinch of inflation, which keeps creeping up, as weakening taka makes imported items costlier in the local market.
In a roundtable organised by The Business Standard last month, speakers said predictability of the economy is of urgent need, without which businesses are struggling to import raw materials and intermediate goods required for running their factories. Such crises would compel foreign lenders to shy away from investing, further compounding the problem.
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They were speaking at the inaugural session of a series of Focus Group Discussions as part of the fourth anniversary celebrations of The Business Standard.
Dollar reserve during Covid-19 was artificially built
Dr Monzur Hossain, Research Director, BIDS
The dollar reserve during Covid-19 was artificially built: aggregate demand was low, imports were almost nil, some exports continued, and there was an over inflow of remittance.
As the supply of dollars was good, the exchange rate should have been appreciated and the dollar price should have been allowed to fall. Instead the Bangladesh Bank opted to buy more dollars. And against this reserve, we allowed short-term lending to the private sector. Currency flights through hundi might also have a role in the current crisis. If we cannot improve governance, capital flight won't stop.
To remedy this, economic fundamentals need to be set right. Still there may be some scope for devaluation. After bringing inflation to a lower level, then the exchange rate can be opened to the market gradually and it will stabilise at a certain level.
A currency basket with euro, yen, even yuan along with dollar, may offer short or medium term solutions. But we need to seriously think about short-term foreign loans and find ways to defer the repayment of such debts.
Remittance earners should be treated as CIPs
Masud Khan, Chairman, Unilever Consumer Care
Things started going south when the government set tariff value for imports. If some product is valued at $40, you are officially allowing importers to open LCs for $50. Huge amounts of money has flown out of the country in this way.
Number two is under-invoicing. A newspaper report shows the international price of T-shirts is 86% higher than that of Bangladesh, meaning we are under-invoicing (during exports).
Moreover, in Bangladesh, the cash dollar market is very small, while the hundi market is very vibrant and big. Hundi transactions have been on the rise because of the complicated process of sending money through a formal process.
MNCs have been struggling to remit dividends and technical assistance fees for more than a year. When devaluation takes place rapidly, MNCs have to close foreign currency loans quoting the latest exchange rate.
For remittance, the difference between official and unofficial rates has to be low. Another important issue is that those who remit money from abroad should also be treated as CIPs. There should be a separate desk for them at the airport. They can be ceremonially honoured as valued remittance earners.
And we should keep it in mind that the law of demand and supply is universal. You can never check it artificially. In fact artificial interventions in the exchange rate have led to today's situation.
All-out efforts needed for rapid disbursement of foreign loans
Nurul Amin, former chairman, ABB
The problem is with the supply side and the artificial management of exchange rates. The crisis is a result of mismanagement.
Moreover, in the past, all banks were compelled to send reports to Bangladesh Foreign Exchange Dealers Association (BAFEDA) every morning. Then Bafeda, on the basis of rates quoted by individual banks, would set an indicative rate in coordination with the Bangladesh Bank. It was the everyday job of BAFEDA, 365 days a year.
That was the time we could say this one is official rate, that one is unofficial. Now, we cannot say which is the official or unofficial rate. Because we now see multiple rates. Now there is a rate for import, for export, for remittance, and a rate for hundi.
Because of exchange rate volatility, foreign investors are taking away portfolio investments. There has been a remarkable shift in major sources of money coming to Bangladesh. Now Hong Kong, Malaysia, Singapore, Dubai, Canada have emerged as new hubs.
Increasing the supply of the US dollar is the key to addressing the ongoing dollar crisis. Also, the country can bolster the supply by diligently securing committed foreign loans from the World Bank and the Asian Development Bank through strong efforts
Trust is key to overcome dollar crisis
Anis A Khan, banker
There is a big crisis of trust, a crisis of confidence in macroeconomic management. One cannot predict anything, one cannot draw a scenario — what could be worst case scenarios, what would be the internal rate of returns?
10 years ago, a commodity exchange market was planned. If it comes to existence, it will be very helpful for producers, farmers to find the right prices.
Exchange rate should always have its freedom. Eight to 10 years ago, we used to get 44 INR for a dollar, it is now 64 INR. Our exchange rate was Tk82, Tk83, Tk85 for a long time. If we could have set the rate free on the basis of REER earlier, increasing Tk1 in three months or Tk3 in six months, then the exchange rate would have settled at a tolerable level in a year or so.
During the Asian financial meltdown in 1998, Thailand's currency fell to 52 baht per dollar from 25 baht. Then they made it full-float and the currency gained its strength further, now 32-34 baht per dollar.
Let it flow, let the market find its own pace. If it happens, I firmly believe, remittance will come in a bigger way through formal channels. We also need to have such strict measures to monitor money transfers.
Crisis intensified by hoarding of dollars, gold
Atiar Rahman
Head of Finance, Omera Petroleum
While official inflation figures may appear low, the impact is significantly greater for the masses, primarily driven by the 3Fs: fuel, fertiliser, and food, which are contributing to persistent inflation. There has been a shift in the import dynamics, with Bangladesh now importing food commodities like eggs and green chilli, which were not imported before. This change is attributed to active cartels in essential commodities, prioritising guaranteed profits.
The present crisis is intensified by the hoarding of dollars and gold adding another layer of complexity to the economic challenges faced by the country.
When we go to banks to open LCs, they decline saying they lack dollars. They offer us support if we can arrange dollars ourselves. How will we get dollars? Banks advise us to talk to exporters. When we find some garment exporters or others, they would not sell dollars at bank rate. Then we have to negotiate the rate until they agree. They charge Tk8-10, even Tk15 higher than the set rate per dollar.
How big is the challenge to survive can be felt in the declining number of operators in the business. There were some 25 operators, roughly half of them are inactive now. For every 12-kg cylinder, we face a loss of about Tk100 in the current situation.
Exchange rate stability urgently needed
Lutful Bari
General Secretary, BBPMEA
Determining the appropriate exchange rate for offering quotes to foreign buyers has become a challenge. The prevailing uncertainty in exchange rates and the ongoing dollar crisis hinder our ability to formulate future investment plans.
When there is delay in opening LCs (for accessories and raw materials), buyers sometimes refuse to take deliveries. Then we suffer huge losses. The sector experienced 47% negative growth in the last quarter. Exchange market has become as unpredictable as the stock market — we cannot understand which rate will be applied when.
We need short-term stability of the dollar rate, so that we can forecast costs accordingly. The export support fund support that we got from the government has now become a burden on us; when we go for repayment after six months, the amount becomes terribly big.
There is an urgent need for stability and policy predictability in foreign currency and exchange rates to instil confidence and facilitate strategic decision-making for businesses.
