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Practising policy duality |
Govt backed dual system may be present in many areas. But exchange system is the area where it is present conspicuously and does much harm than benefit. Last week the central bank verbally notified all the banks not to trade US dollar above Tk 123.82 after the greenback witnessed increase in demand (for more read"BB imposes informal cap on dollar rates amid rising pressure",ASM Saad,The Business Standard, July 29,2026,https://www.tbsnews.net/economy/banking/bb-imposes-informal-cap-dollar-rates-amid-rising-pressure-1500561). Sudden rise in import bills caused the demand for USD to soar. In the foreign currency market, the USD is being traded at more than Tk 124 on some occasions. Govt is still following the crawling peg system, allowing the exchange rate varies between lower limit and higher limit with the difference with the market rate no more than a Taka. Yet setting another exchange rate is not unprecedented.
During the Awami League govt,we saw multiple exchange systems. Importers paid for dollars one exchange rate while exporters paid other exchange rate and remittance earners faced another exchange rate plus the incentive.The incentive was 5% initially and later reduced to 2.5%. Exchange system for the remittance was the highest offered by the govt including the incentive. Mr Ahsan H Mansur,the central bank governor during the interim govt,in an interview revealed that govt annually spent Tk 7000 crore to support the remittance incentive.
Having too many systems have downsides. Those who have access to subsidized official rate of USD could easily sell part part of the USD holdings in the unofficial market where the rate was high and made windfall gains. Credit was cheap back then as the central bank was pursuing a flawed 9% lending rate and 6% deposit rate. Money laundering soared. Part of the laundered money brought back under the cover of remittance,reaping benefits like incentive. So people with easy access to USD laundered it abroad and brought them home later to take the incentive money plus the extra money the exchange system offered for remittance. Police even arrested a chairman who turned out to be highest remittance earner in a given year and thereby highest recipient of the incentive. Even news reports showed parents of a student studying abroad stashed USD under floor. USD hoarding became a booming business back then.
Venezuela is perhaps the perfect example that shows the consequences multiple exchange system brings. Back in 2016 and 2017, the country introduced multiple exchange systems for foreign currency market. Politically connected rich people took full advantage of it. They availed the cheap subsidized dollar from the govt. Some importers also got hold of this cheap subsidized USD. Then they resold the USD in the black market where the exchange rate was staggeringly high. Importers found the arbitrage opportunity increasingly profitable. So they used a big part of the USD meant for importing essential goods to trade in the black market. Venezuela, which imports almost everything from abroad, witnessed shortage of essential goods as less goods imported. Bolivar was losing its value against other currencies. At one point, 1 Euro fetched 35000 Bolivars. This hyperinflation impoverished ordinary Venezuelans but enriched the elite of the society(for more read "Venezuela’s hyperinflation fuels misery for poor but enriches elite through currency exchanges",Jay Weaver and Antonio Maria Delgado,September 13,2018,Miami Herald, https://www.miamiherald.com/news/local/article217868465.html#storylink=cpy https://www.miamiherald.com/news/local/article217868465.html).
This is why multiple exchange and pegging currency at fixed value ignoring the market value is bad. And ultimately people pay the price for belated adjustment and correction. Foreign currency market often sees upward or downward pressure on major currencies, resulting from sudden import surge or record remittance inflow ahead of major festivals. In a bid to control currency exchange rate , any unconventional intervention like capping the rate through verbal notice is not desirable. By doing this kind of act govt is introducing some sort of dual policy into the system. It will ultimately benefit few but hurt a great lot of people. Apart from currency exchange, we see central bank plays a dual role in the credit market too. Central bank's policy rate was 10% and now it becomes 9.5%. Central bank in a latest move offered Tk 2000 crore at 7% interest rate to the people involved in leather industry. Earlier it had made subsidized interest rate offer to other sectors as part of the stimulus package, bizarrely managed by the central bank. Remember it is the central bank,not commercial banks, that offered this subsidized interest rate much below the inflation rate, which is still hovering around 9%. By offering such move, the central bank is undermining its policy rate and its inflation containing effort. And it is doubtful whether central bank can achieve the stated objectives from subsidized interest rate when high interest bearing assets like treasury bills may easily draw this money. While ordinary citizens and SMEs are paying higher rate of interest , policy duality creates opportunity for some people to make money through arbitrage.
Policy duality should be avoided. As it is seen,less accountable society has policy duality that ultimately hurts the ordinary citizens. If we are a democracy , then any kind of duality in policy should be discarded.