The Bizarre Case Of Exchange Rate Fixing

Bizarre fixing of exchange rate Only changes few people’s fate. Reconciliation is a must To bring confidence and trust.

IMF has cleared second tranche of $4.7 billion credit package for Bangladesh. In addition to this $689 million, Bangladesh Bank also confirmed that this month the country would receive $90 million as budget assistance from South Korea.

No sooner the decision has taken Bangladesh Foreign Exchange Dealer’s Association (BAFEDA) and Association of Bankers Bangladesh (ABB) raised value of Taka against the US dollar by 25 paisa. It is still unknown what is the rate outside Bangladesh. So far no information indicates that exchange rate of taka against major currencies appreciated in the unofficial market. International money transfer companies like Western Union and other similar companies have not yet updated their exchange rate. Bangladesh Bank has not been raised the policy rate again. Most important thing is that demand for dollar is still high. This decision is not market based and undoubtedly will give benefits to ABB and BAFEDA, which for a long time enjoy the privilege to fix the exchange rate. Taka's interaction with major currencies could be the determinant for the exchange rate. However, this latest development will pave the way for BAFEDA and ABB to make some gain: they may buy the USD at official rate from Bangladesh Bank and sell it at a higher rate (most likely the unofficial rate) to the clients. Not only the few foreign remittance houses ,Bangladeshi platforms of foreign exchange dealers join the club of exploiting the currency market.

I think Bangladesh Bank should monitor taka's value against the major currencies of major trading partners plus the rate offered by major international banks and money transfer houses and project an uniform rate on its website everyday (if possible)/every week.

It has widely been reported that reduction in tax rebate is on the table as part of the IMF conditionalities. For far too long corporate tax has been kept low,around 22%. In many countries, it is around 40% or 35%. Meanwhile, country is facing a budget deficit. What is the point of keeping it low while you are borrowing from abroad to finance the deficit here. Think of an individual household on a tight income. Any spending increases in one month forces it to borrow from somewhere else. To keep the debt low and to keep the spending-earning gap low, it has to cut spending and/or increase the earning. Same holds true for a government. In the face of growing budget deficit, it has to raise taxes and cut spending to narrow the budget deficit. If the government kept the tax low for some period, then it has to raise the taxes later to maintain at least an affordable level budget deficit. As our budget deficit is growing year after year, our taxes (including corporate tax) are also kept low. It only contributes to worsening the problem. It appears govt shelves the unpopular part of raising the taxes for future generation/government. In future,we have to pay more taxes just to keep the budget deficit low or zero. The longer this issue remains unaddressed, the higher the magnitude of the taxes we have to pay later. This is as simple as that. And standard economics text book corroborates this.

The budget deficit is growing because there is no reconciliation between the two major political parties. Amid this if one sided election is held there may be a silent capital flight. Because capital associated with the main opposition party may find it difficult to operate here in this country. Domestic investment may become sluggish. So government’s revenue collection target may hit a dead end because of lack of economic activity. In this backdrop, it is worthless to go ahead with an election that has a price-tag of taka 14/20 billion. Government needs to curtail its spending amid austerity instead of amplifying it.

A quick economic recovery demands government settle electoral issues with the main opposition party. Bypassing it may widen our deficit and delay the recovery.