USD to the moon π
Bangladesh will not suffer as severely as Sri Lanka even though BDT and Sri Lankan Rupee showed a similar trend recently. In worst case, Bangladesh's Foreign reserve will go to zero, which can lead to renaming the Padma Bridge to Guangzhou Bridge. As USD to BDT may hamper our national price, this monthβs newsletter will explain why USD went to the moon.
Lets understand the hegemony of the US Dollar
Historically the strongest economy (and army) determines the worldβs global currency. Post world war, the British Empire was over taken by US and all countries baced their currency with USD rather than gold. Thus natural goods like oil and wheat are purchased in USD dollars, making USD the most trusted currency for trade.
How Foreign Reserve impacts the USD to BDT rate?
Think of Foreign Reserve as a checking account that holds the total USD dollars available to Bangladesh. Post pandemic, Bangladesh's demand for foreign products increased to meet the growing economy. But with global inflation, supply chain problems, and rising oil prices, Bangladesh needed to pay more in USD this year than last year for the same goods and services.
On the other hand, remittance has dropped 15% post-pandemic, exacerbating our reserve to lose 6B in a single month. As the foreign reserve drops, retail customers need to pay a high price to get hold of dollars.
The trend shows Bangladesh needs a loan within 6 months if the trade deficit does not improve.
Why remittance dropped 15% in 2022?
We have always seen that selling dollars at the airport is much better than converting from a Bank.
Bank Rate: 1 USD sells 95 Taka
Open Market: 1 USD sells 110 Taka
The demand for USD in an open market is driven by retail customers who cannot send money abroad through legal channels like banks (Banks are super inefficient). Even students who study abroad load their pants with USD from the open market, circumventing the banking system. In addition, the Hundi system incentivizes remittance providers to use non banking channel to facilitate money out of Bangladesh. Thus the demand for dollars in the open market is always higher than the exchange rate provided by the banks.
Unfortunately, banks cannot match the open market rate as Bangladesh Bank made it mandatory to follow a fixed rate. Thus foreign workers use the open market to send money to Bangladesh. As a result, USD did not add to our foreign reserve, even though the remittance send by Bangladeshi was unaffected.
Too much Bangladeshi Taka in circulation devaluing its worth
To sustain a growing GDP government often prints money out of thin. Yes, this is weird, but even US prints in USD. Similarly, the Bangladesh government printed Taka to keep up with significant development projects like the Padma Bridge. With all the growth, the average income of Bangladeshis has grown in money terms, but the real income has not increased due to high inflation. The increased salary and inflation have created an over-supply of Taka compared to Dollar. As more Takas chase after a few dollars, the USD price increases.
Taka Circulation in the economy
My two cents:
Government is chasing after foreign exchanges to deviate the blame from its economic policy failures. Regulation is never a solution as free market to determine a price always wins. The austere measures to slash on imports, tax on foreign products with hurt small enterprises and halt economic growth.
Three things government should audit to improve our dollar reserve
Keep our mega projects on budget: The current government should plan our ambitious projects efficiently and accurately. Padma Bridge, which was estimated to be $1.16 billion in 2007 costed us $3.6 billion. Similarly the Metro Rail project ballooned to $3.3 billion from its original estimate of $2.1 billion.Β It is a surprise that government fail to account for inflation and other costs.
Make our financial system stronger: In 2019, when the Central Bank claimed that the total amount of defaulted loans was $11.11 billion. Default loans are total economic loss and must be stopped to keep our capital market strong.
Stop money laundering through Customs: More dollars have been laundered through technically legal channels like customs than illegal channels (Hundi System). According to Global Financial Integrity, Bangladesh lost USD 8.27 billion annually between 2009 and 2018 from mis-invoicing of values of import-export goods. By catching the big fish Bangladesh can curb capital flight.
Reference
https://www.bloomberg.com/news/articles/2022-08-02/bangladesh-cracks-down-on-money-changers-to-curb-dollar-crunch
https://www.thedailystar.net/business/news/bangladesh-loses-827-annually-over-trade-mis-invoicing-gfi-report-2919786
https://tradingeconomics.com/bangladesh/imports-by-country
https://thefinancialexpress.com.bd/economy/bangladesh/central-bank-will-print-1200m-currencies-and-banknotes-1530251803
https://www.thedailystar.net/frontpage/default-loan-in-bangladesh-is-more-than-double-reports-imf-1805437
https://www.atlanticcouncil.org/blogs/southasiasource/bangladeshs-economic-crisis-how-did-we-get-here/#:~:text=Bangladesh%20received%20at%20least%20%241.7,adverse%20impacts%20of%20the%20pandemic.