Exchange Rate Volatility: Policy Debacle Should Be Blamed

Stockpiling of taka by Foreign exchange houses, A mean to gain more from interest rate rises.

Recently,a news report divulged that many public and specialized banks purchased dollars at higher rate than the exchange rate set by the Bangladesh Bank. Since there is unusual demand for dollars, some banks offered more than the set exchange rate to meet their dollar procurement goal.

The news report citing a public bank official reported that an exchange house based in the Middle East offered the bank to sell USD at taka 123.50/USD,which it denied. But another specialized bank accepted the offer¹. Earlier US based exchange houses and app offered higher rate for dollars.

Now government policies might play a role in deepening the dollar crisis. Earlier central bank bailed out many specialized banks that fell victims of fraudulent activities. Central bank lent them huge sum of money through promissory demand notes. The money is now being used to swell the taka reserve of foreign exchange houses. Central bank is following a contractionary monetary policy,which so far fails to contain inflation. It is likely to raise interest rate further before and after the next Monetary Policy Statement.

Another thing is that Bangladeshi credit/debit card holders can afford buying dollars at Bangladesh Bank determined rate. I think $12,000 may be the limit for individual card holder. Importers also avail the dollar at subsidized rate.Now this subsidized dollar is being spent/laundered abroad!

There is little hope that things might improve after the election and interest rate may rise significantly. If this happens then Bangladeshi taka may appreciate further. Say taka appreciates to taka 100/USD. Then these foreign exchange houses may gain taka 23.50 against 1 USD by purchasing USD with their taka reserve.

Now the things emerged out of all this debacle are:

1. Subsidized (official rate) dollar is going abroad and foreign exchange houses buy it. Some of these houses sell the dollar to local banks at higher rate and increases their taka holdings.

2. Government cash incentives to some extent play a role in foreign exchange houses’ stockpiling of taka. Many Bangladeshis purchased property in the Middle East and many of the Middle Eastern investors have/had stakes in these specialized Bangladeshi banks.

3. Future appreciation of taka as a result of significant interest rate hike may open door for these foreign houses to gain from such stockpiling.

Clearly, government’s own policy causes the trouble here. Unitary exchange rate of taka has not yet been implemented! Wide gap between multiple rates only accelerates profiteering activities. Significant rise in policy rate at frequent interval could improve the situation. Bangladesh itself is an example that higher interest rate does not work as impediment to new initiative. Micro borrowers pay more than 20% interest rate and SMEs in general pay around 20% interest rate! They keep the economy moving forward. In addition, high interest rate screens out any fraudulent initiative that flourishes under low interest rate economy. Investment will take place if return is lucrative and no matter what the interest rate is. In a country where undocumented wealth casts shadow over the mainstream economy, it is absurd to be afraid of recession or loss of employment or low investment. Rather,high interest rate will discipline the business environment by bringing money into trouble-ridden banking system and creating investment-worthy fund! Most important of all, listen to what the standard economics text book says.

Notes And References

1. “Dollar Er Dam Nie Osthirota Cholchhey(Volatility Prevails In Dollar Rate)”,Daily Prothom Alo,P-11,November 14,2023.