As Bangladesh is losing its competitiveness in the global apparel market due to slow devaluation, main competitor Vietnam is gaining market share fast with significant devaluation
Bangladesh Bank devalued the taka against the US dollar late last week due to growing pressure on the current account balance with exports being stretched thin.
The central bank devalued the taka by 20 basis points in two phases, raising the inter-bank exchange rate to Tk84.70 from Tk84.50.
In March this year, the taka saw a slight devaluation by 10 basis points.
Central bank intervention kept the inter-bank exchange rate stable at Tk84.50 for the last five months, after the rate shot up to Tk87 on the informal market.
Moreover, Bangladesh Bank's own calculation shows that the nominal exchange rate – which represents the current value of one currency against another – is above Tk90.
Falling exports in the last two months raised concern at the central bank, prompting it to go for devaluation, said a senior Bangladesh Bank official.
The central bank feels the need for further devaluation, but it moved slowly because the government does not want to impact imports, he said. There is also political reasoning behind this reluctance as nobody wants to see a weak taka.
"The exchange rate in the informal market and the nominal exchange rate show that there is more space of devaluation," said Zahid Hussain, former lead economist of the World Bank.
He also said Bangladesh lagged by 5.8 percent in price competitiveness compared to our trading partners in the last one year, and the country lost competitiveness by 36 percent since 2013, compared to trading partners.
"It is only due to not adjusting the exchange rate with the market demand," he said.
Despite pressure for currency depreciation, Bangladesh Bank did not let it happen, resulting in the loss of competitiveness in the global market.
Though currency depreciation has inflationary pressure, Bangladesh Bank has alternative instruments to adjust it, Zahid stated.
"For instance, the government can compromise on import duty to reduce risk of imported inflation," he suggested.
The central bank perceived that the downward pressure on exports will remain in coming days due to the weak demand of apparels in the global market. Although remittance inflow is still strong, a global crisis may hit the flow.
On the other hand, the rising trend of imports will continue amid implementation of megaprojects.
Although depreciation of the local currency will put pressure on inflation, it is manageable, the central bank observed.
Export earnings during the first quarter of the current fiscal year (FY2019-20) plunged by 2.94 percent to $9.65 billion, compared to $9.94 billion during the same period in the previous fiscal.
The authority wants to emphasise foreign exchange earnings as a part of its preparation to face the upcoming payment pressure of foreign loans taken against megaprojects.
Payment of most of the foreign loans taken against the mega projects are due to start from the end of 2021.
However, as Bangladesh is losing its competitiveness in the global apparel market due to slow devaluation, Vietnam, our closest competitor in the same market, is gaining market share faster than Bangladesh due to significant devaluation of its currency.
In the last eight years, Bangladesh saw its exchange rate grow by 19.8 percent, but Vietnam saw a 21.4 percent growth during the same period.
The World Bank, in its latest report titled "Bangladesh Development Update," observed that interventions by Bangladesh Bank have kept the inter-bank exchange rate within a range of Tk83 to Tk85 for the last two years.
The intervention significantly weakened the incentive to remit money through informal channels, the report said.
However, the use of crawling peg with the US dollar led to appreciation of the taka against the currencies of other important trading partners.
Consequently, the real effective exchange rate appreciated, leading to a loss of price competitiveness internationally, according to the report.
The ready-made garment (RMG) sector has been provided with cash subsidies to offset competitive disadvantage. However, non-RMG sectors which have no easy access to export incentives have lagged behind.
Moreover, foreign exchange intervention contributed to a liquidity shortage of the taka in the money market, the World Bank observed.