Bangladesh maintained its taka value by continuously intervening in the forex market by pumping in dollars at the immediate cost of depleting forex reserves
When something needs to be done in its natural course, and if you don't want that to happen, you will need to expend a lot of energy and costs to fulfil your wish. Sometimes it is worth it, but often the incidental costs may overturn logic.
Finance Minister AHM Mustafa Kamal's assertion that the government will not devalue taka and would rather give subsidy to various sectors is one such action. It can be done but at an enormous cost that may prove counterproductive.
And his argument that devaluation of taka will lead to import inflation may be right in its fundamental logic – because we import more than we export – but there are ways to offset that inflationary impact through fiscal and monetary measures.
But the first thing is the value of taka against dollar has hardly moved in recent times while all our neighbours and competitor countries, such as Vietnam, have devalued their currencies. They too are large importers. How come devaluation is not inflationary in these countries?
Bangladesh maintained its taka value by continuously intervening in the forex market by pumping in dollars at the immediate cost of depleting forex reserves. It sold over $4.6 billion in FY18 and FY19 and another $383 million in FY20 so far.
But while taka remained stable, the currencies of top trading partners of Bangladesh have depreciated. This has made our export and import substitutes even less competitive.
All this has necessitated taka devaluation. However, the finance minister digs his heel against such suggestion and wants to offer subsidies.
It is fine, except for a few things.
First, if taka is devalued, the market would take care of the competitiveness factor. It would be like following the natural course of the economy.
Now if subsidy is offered instead of devaluation, it is the taxpayers' money that would go to keep the exporters alive. The subsidy would come from the revenue we all generate for the government. This would put further pressure on the government's already stretched budget and would require more revenue collection.
But as the indications go, we are going to face a record revenue shortfall this year again. So, where would that subsidy come from? From the banking system, we guess. That would open up another Pandora's Box of problems. Just one reminder: we have already exhausted the whole year's projected borrowing from banks in just five months.
So, the subsidy would fuel inflation anyway, just as the finance minister fears devaluation would.
Next is the inherent problem of leakage linked with subsidy. In recent times, we have seen the Bangladesh Bank unearthing one after another case of misuse of subsidy. The case of Crescent Leather is just one such example.
The idea of giving subsidies to "numerous sectors" would only intensify the theft of public money.
In addition, giving subsidy would certainly raise many questions among our competitors who may go to the World Trade Organisation with complaints about undermining the market. The Tk2 subsidy to remitters has already rustled quite some feathers among the manpower exporting countries, and as we understand, at least one country is planning to complain to the WTO for introducing dual exchange rates.
Finally, the minister's fear of imports becoming costlier because of devaluation needs to be addressed.
It is true that the same good would become costlier if taka is devalued. But there are fiscal mechanisms to deal with it. For example, customs duty is a strong tool to control price of a commodity.
Duty could be reduced to counteract the incidence of devaluation. One may argue that reducing duty would erode revenue, but that won't happen because the landing price of the goods would anyway go up with devaluation. So, a lowered duty would not erode revenue earning, it will only require forgoing the additional revenue from the impact of devaluation on the dutiable price of imports.