Inflation And Exchange Rate Worsen Further

Fall of taka continues unabated, Frequent interest hike is what we needed.

Bureau of Statistics own estimation reveals that food inflation rose to 12.56% in October. General inflation also increased to 9.93% during this time.Purchasing power of the mass people takes a nosedive while prices of kitchen items skyrocket. Earlier Bangladesh Bank raised the repo rate by 75 basis points to tackle the inflation. More frequent raises are needed.

Meanwhile, taka continues to lose its value against USD. Foreign remittance houses charge taka 123 for 1 USD.Official exchange rate is taka 111/USD. In an earlier post, I wrote how USD was being traded on the streets in Motijheel like cinema ticket.

Government however decided to fix the exchange rate instead of market mechanism of fixing the rate and announced taka 5 incentives for remitters. In October, Bangladeshis working abroad sent $1.97 billion , a record in the last 4 months. Government boasts it as a success for its ongoing policy.

If we take a look at the top 10 countries for the remittances, then we will see UAE,UK,USA top the list. These countries are the places where many of our opaque capital found sanctuary. The cash incentive is only propelling the profiteering activities. One businessman in a TV interview disclosed that many apartments in posh areas of Dhaka are being bought and sold in these countries. Transaction of this kind hinges on dollars purchased from migrant Bangladeshi workers. In addition, interest rate was also hiked in these countries, prompting some quarters to invest in dollar deposits / interest bearing assets in these countries. Apart from that, organized criminal groups also procure dollar earned by migrant workers through various channels. Recently ,I have come across a news report that says Russian/Chinese billionaires want to hold and swell their dollars¹*. These factors along with others could come into play for high exchange rate for taka in foreign remittance houses.

Bangladesh Bank has to focus on its monetary policy to address the challenges of inflation and falling taka against USD. As I advocated earlier, frequent small increase in interest rate could at least check the inflation. As inflation is higher ,taka continues to depreciate against USD. Until real interest rate becomes positive, things are not going to improve much. Moreover,the incentives, subsidized exchange rate may risk in falling wrong hands. This money may later be used for profiteering activities. In Bangladesh,we witness how commodities which are not supposed to register high prices see unusual hike. Online gambling and ponzi scheme invade the society. Earlier I hinted how trouble ridden banks could easily exploit the cash incentives for the remitters. Similarly, individuals with short selling knowledge and prior information about decision making in the power corridor may exploit the situation to make a fortune. To prevent a Black Wednesday like situation, credible interest rate hike in future is a must. Promising inflow of remittances ushers hope Bangladesh may get second part of IMF credit by meeting reserve target of $18 billion by December. Further increase in rates and abolishing incentives could further aid the policy of economic recovery.

Notes And References

1. "China's Economy Is So Uncertain That The Wealthy Are Turning To Underground Network To Secretly Move Cash Out Of The Country", Phil Rosen,October 10,2023.Market Insider.Here is the link: https://markets.businessinsider.com/news/currencies/china-economy-wealthy-investors-markets-rich-cash-banks-secret-transfer-2023-10

[*Update: This piece has been updated by me on November 12,2023 at 11:03 AM.Update includes references.]