Daunted By Dollar

Growing strength of US dollar against Bangladesh taka has been a concern amongst the economists since its impact is simultaneously hurting inflation. 

The growing might of the greenback against taka has been a cause

The economy of the country is suffering setbacks due to continued devaluation of taka against US dollar until recently when taka appears to have regained its strength to some extent. Still, analysts believe the price of dollar is too high compared to the post and it continues to have a negative effect, not only on inflation but also on others aspects of the economy including import and investment. The government has been compelled to hike the price of fuel oils due to the strength of dollar. Economists and businessmen of the country have asked the government to take steps immediately to address the issue.

Zayed Bakht, an economist and researcher of the Bangladesh Institute of Development Studies (BIDS), believes that the gain of dollar against taka will have a huge negative effect on the level of investment in the country. "The continued strengthening of dollar against taka is the main problem of our economy at the moment. The price of dollar is increasing almost every day until now, which is into only worsening the inflation scenario but also negatively affecting investment," he says.

Zayed explained, "Due to the strength of dollar the import cost has gone up significantly.l Therefor, the industrial entrepreneurs have cut down import of capital machinery and raw materials which will reduce industrial production and industrial growth. So, there will be a negative effect on overall investment as well as the economy. 

"As a result, the country may not achieve the target of seven percent economic growth this year," he added.

The price of dollar went up as high as 85 taka, although it is now hovering around 82 taka. In January 2011, one dollar was sold at between 70 and 70.25 taka. The floating exchange rate was introduced in the country 2003. Before that, government or the central bank used to fix the price of dollar against taka and dollar used to be sold and bought according to that rate.

It is found from the latest data of Bangladesh Bank that the opening of letters of credit (L/Cs) for import of most needed machinery to set up industries has gone down by 38/ percent in first five months of the current fiscal (2011-12).

But during the same period of the last fiscal (2010-11), L/C opening and increased by 105 percent. And, the import of capital machinery had gone up by 40.2 percent during the whole fiscal year. On the other hand, during July-November period of 2010-2011 fiscal, the import of raw materials had increased by 65 percent compared to the same period of the previous fiscal. This time around, the import of raw materials has not increased, rather it went down by about eight percent. 

In the last fiscal (2010-11), the import of raw materials increased by 47 percent. The some year, taka was devalued by more than 15 percent against dollar. It was the highest percentage of taka devaluation in the history of the country. 

It is worth mentioning that the price of dollar is always higher at private banks than the rate shown on the website of the central bank, Bangladesh Bank. According to statistics of Bangladesh Bureau of Statistics, the rate of inflation in November 2011 on a monthly point-to-point basis was 11.58 percent. During the last nine month, the inflation always stood at double-digit.

AB Mirza Azizul Islam, the fine adviser to the immediate-past caretaker government, said that the price of dollar was increasing at an alarming rate. Until recently, the price was increasing by almost one taka per day. This increase was shaking up the very fundamentals of the economy of the country, he added.
"I the trend of increase continues, the crisis of economy will deepen even further," Mirza Aziz observed. He further said, "The government was forced to increase the price of fuel oils due to the strengthening of dollar. This reason was also shown in the government explanation (press note on the increase of fuel oils). The gains from last two price hikes have been eaten up by taka devaluation."

AK Azad, president of the Federation of Bangladesh Chamber of Commerce and industry (FBCCI), the apex trade body of the country, expressed deep concern at the continued increase of the price of dollar. "Th strengthening of dollar against taka is having a negative effect on all the aspects of economy and emergency measures are essential in this regard," he said at the inaugural ceremony of Dhaka International Trade Fair, which was attended by prime minister Sheikh Hasina as the chief gust.

Azyed Bakht said that taka was being devalued because the reserve of the central bank was under strain. It is a is a matter of concern as to how far the local currency will be devalued although it looks like it looks like it has been contained for the time being. Since the economy of the country is import-based, the strength of dollar has put the whole economy in crisis, he said.

Asked how taka can be strengthened again, he said, "The flow of remittance form the expatriates will have to be increased alongside increasing export. The amount of foreign aid will have to be increased. Foreign aid that is in the pipeline has to be released. If these things can be done, reserve will be increased and only then the price of dollar will come down."

The foreign currency reserves at the central bank stood at USD 9.63 billion in the month of January 2012 while the reserve was more than USD 11 billion even two months ago. Asked why the reserve was decreasing even after reduction in the import of capital machinery, food grains and industrial raw materials, Zayed Bakht replied, "Though the import of these things had declined, the import of fuel oils increased abnormally. This is why the pressure on the reserve has not been easing."

According to available imformation, the opening of