Taka is now more export friendly
Higher currency appreciation of competitor countries narrowed the price gap with Bangladesh
A year ago, Bangladesh was losing its export competitiveness because taka was overvalued against the dollar in comparison with currencies of its competitor countries.
But the situation has changed quite a bit, thanks to the central bank's aggressive buying of dollars to banks, which has helped check taka's appreciation while currencies of major competitor countries had higher appreciation.
Taka saw only a 0.12% appreciation against the greenback during the pandemic when Chinese yuan saw the highest 8.95% appreciation and Indian rupee the second highest of 3.41%, according to Bangladesh Bank data presented at a recent bankers' meeting.
Vietnam, which is the main rival of Bangladesh in the export market and was gaining the market share fast with currency devaluation, saw a 0.38% appreciation of its currency dong since June during the pandemic.
Of other competitor countries, Cambodian currency riel gained 0.76% against the greenback when Indonesia's rupiah gained 0.85% during the period, central bank data shows.
When exporters are in short of orders during the pandemic, the higher currency appreciation of the competitor countries narrowed the price gap with Bangladesh, increasing competitiveness of local exporters in the international market, according to market insiders.
Appreciation of a domestic currency against the dollar causes a loss of export competitiveness and depreciation increases competitiveness, said Dr Md Habibur Rahman, executive director (research) of the Bangladesh Bank.
He said due to the Bangladesh Bank's intervention, the appreciation was lower than that of other trading partner countries, reducing the price gap. As a result, taka has relatively become more competitive in the export market, he said.
A domestic currency is supposed to depreciate when the inflow of foreign currency is high. Despite a good inflow of foreign currency, taka appreciated due to the central bank's interference by purchasing dollars.
The central bank purchased $5 billion, equivalent to Tk46,563 crore, in the first six months of the current fiscal year, which was nearly seven times higher than its purchases in the entirety of the fiscal 2019-20.
The dollar purchase was part of the Bangladesh Bank's intervention in the foreign exchange market to keep the dollar rate stable.
The dollar price has stayed at Tk84.80 in the current fiscal year, according to the central bank's data.
Since July last year, the monthly average remittance inflows have been $2 billion, taking the foreign exchange reserves above the $43 billion mark.
The lowest appreciation will slightly help exporters to adjust the price gap as Bangladesh was far behind in taka depreciation compared to other trading partners, said Dr Zahid Hussain, former lead economist at the World Bank's Dhaka office.
The advantage of lower appreciation than in other countries depends on inflation. If inflation remains higher than in counter trading partners, it will offset the advantage of the exchange rate. So, the real effective exchange rate (REER) matters.
Bangladesh Bank data shows that the REER remained low, which means relative inflation is low in Bangladesh.
In October, the real effective exchange rate was above 114, which came down to 110 in December.
The REER is a measure of the value of a currency against a weighted average of several foreign currencies – divided by a price deflator or index of costs.
An increase in the REER implies that exports become more expensive and imports become cheaper; therefore, decline indicates a gain in trade competitiveness.
If the dollar weakens globally, the same will happen in domestic markets, said Zahid Hussain.
He said as the dollar depreciated during the pandemic in the international market, it was supposed to depreciate in the Bangladesh market too. But, due to the central bank's intervention, the depreciation of the dollar was low.
If the Bangladesh Bank had not purchased dollars, the appreciation of taka would have been more.
In other countries like India, the appreciation was higher due to a huge fall in imports amid declining GDP growth. Moreover, the central bank of India does not intervene much in the foreign exchange market. As a result, dollar price fluctuation is high in India while it is almost a fixed rate in Bangladesh, Zahid Hussain said.
When competitor countries – like India and China – experienced substantial depreciation of their currencies against the dollar in 2019, the Bangladeshi taka saw a 1.18% appreciation.
The Indian rupee depreciated by 2.56% against the US dollar in 2019, while China saw a 1.61% depreciation of its currency. Vietnam, an export competitor to Bangladesh, saw a 0.01% appreciation of its currency that year.
Earlier in February last year, Fitch Solutions projected that taka could weaken in 2020 and the next year, making exporters and remitters smile.
According to Fitch's forecasts, the taka is expected to weaken to an average of Tk86 per US dollar by the end of the current year and Tk88 per US dollar by next year, from an average of Tk84.92 per US dollar in 2019.
"We maintain our view that the Bangladesh Bank is likely to favour a weaker taka to support its export competitiveness and also remittance inflow to boost private consumption in a bid to help achieve an 8.2% GDP growth," said Fitch, one of the top three global rating agencies.
Fitch forecasts oil prices to go down to an average of $62 a barrel from $64.20 in 2019, which may impact the economic growth outlook in the Middle East that accounted for 57% of Bangladesh's total remittance inflows.
"Therefore, we expect the central bank [Bangladesh Bank] to favour a weaker taka to support remittance inflows so as to provide support to growth," said Fitch Solutions.