Economists taken aback by rate-cut moves even amid market volatility
Economists taken aback by rate-cut moves even amid market volatility
JUBAIR HASAN
| Published: November 30, 2023 23:35:03
Yet another appreciation of the local currency against the US dollar surprises money-market analysts who see the cuts in exchange rate as ‘artificial’, not driven by market dynamics.
Raising question over frequent depreciation of the greenback at a time when Bangladesh’s foreign-currency reserves are depleting and the deficit in the financial account keeps widening, they see the depreciation as a strategy of artificially control the volatile forex market by sending a negative signal to the dollar hoarders.
Such a ‘strange move’, they fear, could further accentuate the prevailing dollar dearth through slowing the forex flow into the economy-principally from two major sources: remittance and export receivables.
The foreign-exchange market takes a u-turn after the country’s foreign- currency dealers and banks raised the value of the taka by 75 basis points in a span of a week by citing improvement in the market situation.
On justification for the developments in exchange-rate regime, Bangladesh Bank spokesperson Md. Mezbaul Haque cites some interventions that drive down dollar demand.
He says the central bank, as part of government’s belt-tightening move, has been monitoring import of essential items and services to see whether proper pricing is followed. Simultaneously, import of non-essential products is also being discouraged.
On the other hand, significant changes in the interest rate and supply- chain distortion were globally observed. As a result, the demand for the US dollar declined significantly in recent months.
“And that’s why our current account turned into positive direction having US$ 1.0 billion surplus,” the BB spokesperson told the FE writer.
Turning to the financial account on the macroeconomic front-which remains a major challenge for the economy-he said the financial account was found negative right at the moment but it would start coming to a tolerable level slowly.
He said the country’s financial obligations like short-term debts in banks have come down to the equivalent of $6.91 billion now from $16.41 billion recorded in 2022.
“So, we have cleared payment of almost $10 billion and the liabilities are expected to squeeze to only $49 million by September next year,” said Mr. Haque, also an executive director of the central bank, taking the long view of the forex scenario.
Seeking anonymity, a top executive of a private commercial bank expressed his dismay over frequent cuts in the exchange rate of the greenback.
“I don’t find any logical reason behind ongoing cuts in exchange rate,” the banker said, adding that there is a report that a good number of individuals and institutions hoarded dollars to gain more on assumption of the upturn in dollar prices to be continuing in coming days.
“With the frequent rate cuts, the Bangladesh Foreign Exchange Dealers’ Association (BAFEDA) and the Association of Bankers’ Bangladesh (ABB) might be giving a negative signal to them and force them to sell those to avert further loss,” the experienced banker said.
Contacted over the conundrum, ABB Chairman Selim R.F. Hussain said the decision to slash the rate comes considering overall macroeconomic situation as the volumes of imports plummeted significantly over the last one year because of government’s prolonged belt-tightening move.
“Look at the current-account position, which is in the positive territory now, while allover dues with the foreign correspondent banks had been cleared,” he says to underpin justifications for their action.
At the same time, NOP (net open position) of almost all the banks improved in recent times because of growing dollar cash-holding position of the banks.
Responding to a question, he said if the rate continued falling, those who hoarded the greenback would, of course, rethink holding the forex in order to avert losses.
As per the latest decision that came into effect Sunday, exporters and remitters will be receiving Tk 109.75 per dollar, down from the existing rate of Tk 110.
On the other side of the transaction front, importers will require to spend Tk 110.25 to purchase an American greenback from banks, compared to the previous rate of Tk 110.50.
Former lead economist at World Bank’s Dhaka office Dr Zahid Hussain also seems to be in a quandary over the move. He says it is not clear on what basis the local-currency appreciation is being done.
“If the forex situation is really improving, then why the central bank is selling more than US$1.0 billion dollars to the commercial banks per month,” he adds.
Responding to the recent explanations by the central bank about the exchange-rate cuts, the noted economist said the BB explained that the current account turned $1.0-billion surplus while the deficit in financial account keeps squeezing as the short-term debts in banks continue falling.
“To get expected level of improvement in the financial account, we need forex. Where is that? So, it is a strange logic.”
About the dollar hoarders, Mr. Hussain said the people or institutions that hold the greenback are smarter enough to analyse or understand the market dynamics. “The hoarders must be aware that revaluation in a shortage situation exacerbates the shortage. Consequently, it may incentivize even more hoarding, contrary to what BB is expecting.”
Chairman of the Policy Exchange of Bangladesh Dr M. Masrur Reaz says the forex-reserve size is going down while financial account turned negative by around $18 billion compared to the data of the FY’22.
On the other hand, the inflation differentials with the trading partners are getting bigger. “All of the indicators show that the supply of the greenback is under immense stress and the market is still not in condition to lead the appreciation of local currency against the US dollars,” he adds.
The economist also feared such steps might affect the supply of forex, especially through the remittance.
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