Cushioning Fall Of Taka

Allow businesses to transfer money abroad To keep the incentive spending short.

The uncertain situation about Non Performing Loans casts serious doubt about Taka's stability next year. Exchange rate of Taka against US dollar in this week is Tk 122.46/USD ,which was Tk 121.75/USD a month ago. Though this depreciation is within the tolerable limit and the expected range of Bangladesh Bank,a big fall may cause serious trouble. As I have mentioned several times in this space, Bangladesh can afford depreciation of Taka between 5%(Tk127/USD) and 10%(Tk 133.1) in a year. Transitory effect of depreciation will be manageable and less severe given more forex making entry into the country. Otherwise, it will make lives miserable by pushing up the prices of essential goods and services and accelerating capital flight from the country. A macroeconomic nightmare for any govt.

The chance is high that after the election when many restrictions will be relaxed a fresh round of capital flight may be observed. The volatility of local currency in short span of time increases the risk for fund management of the companies as it shrinks their assets if those are denominated in Taka. Unfortunately, Bangladesh Bank has stricter policy to transfer money abroad through official channels. For this reason, many opt for clandestine means to launder money abroad. If these companies have means to invest their money into foreign resources through legal channel , I think incidence of money laundering could be [curbed] to a great extent. One way is to set a ceiling on investment abroad and provide some quota on foreign investment by a Bangladeshi company. Another approach is to allow investment on commodities, foreign bonds through Bangladesh. Soon commodity exchange market will be operational in Bangladesh. If local companies can invest part of the assets in gold,silver,platinum, copper ,then part of the money they launder abroad will stay at home. Similarly, if we allow them to invest in foreign bonds through local stock exchange or by any other means then that will add great value to their investment. At the same time, purchase of foreign real estate should be legalized inside Bangladesh. The central bank can have a clear tab on investment on such property and repatriation of capital gain from resale of such property. At the moment,Bangladesh Bank remains in the dark about [laundered] money caused by political uncertainty and currency volatility. The measures suggested here will give the central bank some idea how much money will go abroad and how much proceed/ return on investment will come back to home. Most importantly, it will hold back to some extent the capital flight.

Nonchalance stance to take money abroad legally puts pressure on government incentives. When these companies will fall into trouble due to currency volatility ,they usually seek public incentives. In most of the cases govt complies to their demand, costing tax payer's money. Allowing businesses to transfer money abroad for investment purposes legally discards the need for such incentives.

The $800 million Chinese investment pledges,which is likely to happen in next 12/24 months in the textile and RMG sector, is mostly influenced by global tariff debate, China's shrinking opportunity to invest in Occidental countries and not by uncertainty about Taka's value. China has excess capital of more than three trillion dollar. They have a controlled money market and problem-stricken property market, denting in their returns. The Chinese does not spare opportunity to invest this money abroad. This is why they aggressively invest in the RMG sector in this country. The volatility of Taka has little impact [on] their business decision because in any such case they will simply convert it into Yuan and repatriate the money back to China. And the Chinese central bank is willing to lend Bangladesh more Yuan when the Chinese investments will be in trouble in Bangladesh. The point is instability of Taka poses serious threat to future FDI and local investment given Chinese investment is an exception.

To protect domestic companies from currency volatility risks, the central bank should allow them to invest abroad. Or let them purchase foreign assets from Bangladesh. The move is aligned to check public spending and keep the private business balance sheet healthy without the need for govt intervention.