The decision of Bangladeshs Central bank to devalue the taka and raise the bank rate has been criticised by business circles and bankers who feel it is an ill-advised move that would affect industrial productivity.
With the latest adjustments, the Bangladesh currency has been devalued for the 11th time in less than one and a half years of the government of Prime Minister Sheikh Hasina Wajed. The new bank and exchange rates were announced at a time when the countrys foreign exchange reserve came to an uncomfortable level while credit to the private sector was growing.
The forex reserve now stands at around $1.6 billion, which can meet the countrys import requirements for two months only.
Bangladesh Bank, the Central bank, had last weekend announced its two-pronged strategy to steady the economy.
The bank announced that the exchange rate of the taka against the dollar has been adjusted downwards by 45 paise one per cent. Buying and selling rates now stand at Taka 45.30 and 45.60 respectively against a dollar. It also announced that the bank rate the floor interest rate on which it lends to the commercial banks has been refixed at 8 per cent from 7.5 per cent.
Inflation, which was almost static at a low level for long, showed an alarming rise with the expansion of private sector credit.
Despite a series of devaluations, the government has not succeeded in building a healthy foreign exchange reserve, according to financial analysts. It had only succeeded in halting a sharp declining trend in the forex reserve.
Meanwhile, according to Oana-xinhua, the Nepali rupee was devalued yesterday by about 50 paisa following the continuous fall of the Indian rupee against the dollar.
The Nepal Rastra Bank has reset the buying and selling rates of the greenback at Rs 60.75 and Rs 61.35 respectively from Tuesdays Rs 60.26 and Rs 60.86. This is the sixth time in the past three months that the Nepali rupee has been devalued.
The countrys central bank has floated $ 44.1 million to prop up the currency. The devaluation of the Nepali rupee is the inevitable outcome of the fall of the Indian rupee against the dollar as the Nepali rupee is pegged to the Indian rupee at a fixed rate of 1.6:1. This is not a comfortable reserve position considering the countrys import requirements, said the Bangladesh Bank official. The declining trend was stopped, but the reserve is not growing.
The present reserve is almost half the $3.4 billion the country was able to build up in 1994. It rose very little recently, but a payment of $108 million at the Asian Currency Union (ACU) on November 19 eroded more than that. We have no option but to make the payment to the ACU as per the requirement, said another Central bank official. So, the latest devaluation was done to encourage exports and inflow of remittances from expatriate Bangladeshis, he said.
The official said credit to the private sector has risen by 17 per cent during the September-October period drawing down the foreign exchange reserve further and fuelling inflation. He said the central banks target was a 14 per cent growth in private sector lending. The rate of inflation rose to six per cent and was showing a rising trend, the official said.
Business leaders and bankers however disagree on the question of private sector credit. They say there is a huge unmet demand for credit and the government has been looking for avenues to channel funds to meet that gap. The bank rate rise is in clear contradiction to such efforts, they say.
Officials of the Metropolitan Chamber of Commerce and Industry (MCCI) pointed out that bank financing of investments in the private sector declined by Taka 2.3 billion during July-September 1997 and by Taka 4.3 billion during fiscal 1996-97. But the commercial banks advances to the private sector during July-September 1997 increased by Taka 15.65 billion.
After cross checking, we found that of these advances, seven billion Taka is the interest for the outstanding loans, factually this not money disbursed, said an MCCI functionary. The whole situation shows a very ad hoc and disjointed approach to tackle the economic issues, he said.
We are not against adjustment of taka value with dollar, he said. But to make it the only means of improving competitiveness of Bangladeshi export products is unacceptable to us because competitiveness in the long run depends on productive efficiency and efficiency of support services like ports and transport.
A top entrepreneur said, Devaluation means price loss of export products. A country having an adverse balance of trade cannot afford to depend entirely on devaluation for export promotion.
The dangers of such frequent devaluation are already reflected in the balance sheets of companies, said the chief executive of a leading pharmaceutical company. Our turnover has increased over the year. But our profit was not commensurate with turnover because of cost increase due to devaluations last year, he said.
