Taka Is On Free Fall Again

Expansionary measures and less commitment on aid Maybe the cause for depreciation great.

Head of interim govt in a televised address hinted the possible timing of next general election,which will be held between December 1,2025 and June 30,2026. The much awaited announcement will definitely give a positive signal to the economy by ending the uncertainty about the interim govt. However, BNP is not happy with the announcement as it is expecting roadmap of the election.

Luckily, edible oil prices in the international market register a fall. It will contribute positively to bring down the inflation. However, USD is being sold at Tk 127 at some exchange houses and banks since govt instructed all banks to clear all international dues by December. Govt is also ready to swell forex reserve to get the next instalment of the IMF credit package. Govt also reintroduced a regulation that slaps 20% tax on interest payment on foreign loan in a bid to discourage private borrowing from abroad and augment its revenue earning. Despite the assurance of bankers that the high prices of USD are temporary, dollar rate may depreciate instead of appreciating. Why? The IMF revised its inflation forecast to 11% for 2025. It also lowered GDP growth forecast to 3.8%. Central bank needs several hikes in policy rate to surpass the inflation. Under the policy of gradualism, it takes time to raise the policy rate. So for a good amount of time inflation will remain elevated unless govt drastically addresses the issue,which is highly unlikely because of increasing strain on businesses for credit on working capital and on consumers for paying housing credits or consumer credits. The IMF also expressed concerns over liquidity support worth of Tk 220 billion to trouble ridden banks as it may aggravate the inflationary pressure.

Govt is also not prepared for restoring the law and order, prerequisite for improving business environment at home.Moreover, Trump administration's tough stance on foreign aid and downgrading of Bangladesh's credit ratings will make foreign credit and assistance more costly. Despite the higher pace of remittance inflow,market is not convinced that USD inflow will surpass the USD outflow.

The IMF also revised the revenue target to Tk 4.55 trillion from Tk 4.8 trillion. For the rest of the remaining fiscal year, govt will be desperate to attain the target. So, govt's fiscal and monetary expansions amid contractionary policy,lack of revenue, less prospect for foreign credit and poor law & order condition are contributing to Taka's depreciation.

Stick To Adjustment

Pursue crawling peg and fuel price adjustment, For early economic settlement.

According to a news report, exchange rate of Taka against USD in settling LCs reached Tk125/USD. Bankers fear it may increase inflation slightly(See "LC Settlement Dollar Rate Reaches Taka 125", Tonmoy Modok, The Business Standard,December 13,2024.Link: https://www.tbsnews.net/economy/lc-settlement-dollar-rate-reaches-tk125-demand-rises-1017321). Earlier, the visiting IMF team expressed dismay over not pursuing the crawling peg diligently as the exchange rate pegged at the official rate for more than 3 months and the gap between official rate and unofficial reached more than Taka 2.

I do not know why the govt is bothering about the pass through effect so much when the policy rate is on the rise,holding back unnecessary imports and domestic spending. Seasonal vegetables keep entering the market,registering a downward pressure on price levels. Moreover, remittances are keep coming as confidence on govt is back. Law enforcement is still weak but gradually comes into some kind of shape.

Not only the crawling peg, govt is not following the monthly fuel price adjustment. The two practices are good for monitoring the cost of living.

Even if crawling peg depreciates Taka by 2%, it will have no major impact. Why? Currencies of our trading partners are weak. Both the Rupee and Yuan witness significant depreciation. That means import from these countries will be cheaper.And Chinese policy rate is set to be lowers ahead of a potential trade war. This is also helping Bangladeshi importers to import from China in Chinese currency. In addition, Trump administration is in no mood to raise the Fed policy rate to make the domestic investors content. The US consumer spending will go up and investment will flow to Saudi mega projects that will recruit more foreign workers,further boosting remittances. If much needed trade war will come into effect, it will be a good news for global consumers as major kitchen commodities' prices will see large decline.

The OPEC+ coalition decided to up the oil production from April next year. It will further lower fuel prices. So the remaining months of this fiscal year sets the context for containing the inflation. In this backdrop, I do not think depreciation of Taka to Tk 125/USD would cause a lot of trouble. Rather it will boost the remittances and bring more export orders from abroad.

Sloppy Management May Cost The Progress

Sloppy management and resources into wrong hand May cause the progress to hit a dead end.

Current account balance became positive in July-November period of this fiscal year since Bangladesh adopted contractionary monetary policy. In 2022,Bangladesh experienced a current account deficit of $5 billion. Meanwhile, in the said period Bangladesh registered $579 million current account surplus. And the balance is improving week by week. In January this year, RMG export registered 11.45% growth compared to January 2023. This is a great news as RMG export registered negative growth for the last three months.

Gradually, govt’s reform programs become visible: central bank has already lowered cash incentives to exporters by 1%; last week, Bangladesh Energy Regulatory Commission (BERC) increased LPG prices by Taka 41,costing an LPG cylinder Taka 1474. I think more utility price hikes are on the way.

Government has not published yet the January inflation data. But egg prices marked a Taka 5 increase. Rice prices remain stable after frequent surveillance operation by the consumer rights. Liquid milk and flour/atta prices lowered. A month ago unpacked flour/atta cost more. Now in some cases unpacked flour is being sold at Taka 45 /kilo. Liquid milk registered Taka 5 decrease. Potato price has also registered Taka 10 decrease after news broke out that govt allowed import from India. However, prices of onion and winter vegetables are unreasonably high. So are the meat prices.

If pass-through effect--inflation worsened by depreciation-- reigns hard on any item, then it will be wheat followed by milk. Why? Because we import them and domestic production is not sufficient to meet the domestic need. But here we see the complete opposite: seasonal crops and perishable commodities, which are hard to store, are competing with each other in terms of increase in prices.

Amid the improvement of current account balance, Bangladesh announced to adopt “crawling peg”,an exchange rate mechanism that sets lowest and highest exchange rate of the local currency against USD before moving to fully floating exchange rate mechanism. I have come across a book written by Paul Krugman. Krugman cites example of Argentina that once adopted crawling peg and improved current account balance significantly. But it could not hold that healthy position. Capital and money came from abroad as a result of better macroeconomic situation fell into crooked management of financial institutions and groups. They misused the money and ruined the economy again. We have to capitalize the improvement from ongoing monetary policy. Letting sloppy management to reap the benefit of the better situation is equivalent to doing the same mistake again!