Taka Devaluation
By S.H. Zahid
Everyone concerned knew it was coming. The
question was how soon? With the country’s foreign exchange reserve reaching a
precariously low level of only 1.18 billion US dollar, not enough even to meet
one and half months’ import requirement, the central bank could not wait any
longer. It announced on 24 May the second biggest devaluation of taka by 5.5 per
cent since 1975 and the 18th devaluation during the five-year rule of the
present Awami League Government. The biggest devaluation (5.8 per cent) was in
August last year.
But was the latest devaluation a risk worth
taking particularly when the general election is round the corner and
presentation of the budget for the fiscal 2002 only a couple of weeks away? Past
experiences with such devaluation under the present government are not at all
encouraging. Gaining external competitiveness was cited as the major reason
behind all devaluations. But the real intention was something different,
improving the external balance. In practice the authorities could not contain
the slide in foreign exchange reserve mainly because of higher imports, decline
in the growth in exports and remittances by Bangladeshi expatriates and slow
disbursement of aid by the donors.
With the latest devaluation, the government has
taken the risk of destabilizing the internal fiscal balance with possible
decline in revenue earning and consequent increase in fiscal deficit. In spite
of a bumper food production, the price of essentials such as edible oil, pulses,
imported finished goods and locally produced goods dependent on imported raw
materials will shot up. Already prices of few products have marked a slight rise
after the latest devaluation.
The revenue earning from imports may decline if
the volume of export falls. In such a situation the government may resort to
large-scale bank borrowing. Moreover, the government, which unlikely to increase
the price of petroleum products before elections for obvious reasons, would have
to spend more on subsidies due to increased import cost of petroleum products.
Election budget
Since the ruling Awami League this time presents
an election budget, it would try to appease various quarters in the form of
tax-cuts and pecuniary benefits. This may ultimately lead to stagnation in
revenue earning and increase in revenue expenditure. "Whoever comes to
power next time, it would be really difficult to manage the situation,"
said a keen observer of the economy of the country.
Some noted economists feel that the devaluation
was inevitable but they are unanimous in their observation that the economy has
been made more vulnerable than before by the latest devaluation. According to
them, the devaluation was inevitable because the forex reserve dipped to a
record low with exports slowing down by 10 per cent in the third quarter of the
current fiscal year, remittances turning negative by three per cent and import
rising by 24 per cent. Meanwhile, export prices of many commodities including
RMG and frozen food registered a 20 per cent decline.
Governor of Bangladesh Bank Dr. Farashuddin
though admitted pressure on the reserve position due to the recent deceleration
in export growth and negative flow of remittances said the latest devaluation is
premised on strong theoretical justification.
Dr. Debopriya Bhattachariya said the devaluation
may give a short respite but what is needed now is to shore up forex reserve.
But according to him it would be very difficult to do that under the prevailing
circumstances. An increase in the flow of foreign direct investment or increased
disbursement of foreign aid accumulated in the pipeline can improve the
situation. . In addition to this, the government could arrange BOP support from
IMF or other donors. But neither of those is likely to happen. Increased FDI or
enhanced disbursement of the aid in pipeline cannot be materialized within a
very short time. As the country moved away from commodity aid because of the
improved trade balance, any BOP support from IMF or any other bilateral donor
remains a remote possibility.
Looming crisis
Prominent business leaders also apprehend a
crisis in the economy by the latest devaluation of taka. They fear that the
inflationary pressure, which has been very low in recent years, may reach the
double digit within a very short time.
President of the Metropolitan Chamber of Commerce
and Industry (MCCI) Latifur Rahman maintains that the devaluation will have a
negative impact on the import substitute industries. "Ours is an import
dependent country and raw materials and intermediate goods will be similarly
affected and the ultimate burden will be borne by the consumers," he said.
The MCCI President said protection to local
industries should be given through fiscal measures not through devaluation.
President of the Bangladesh chapter of the
International Chamber of Commerce (ICC) Mahbubur Rahman also felt that the
devaluation would have a substantial impact on the import- dependent industries
of the country. Prices of some finished products and consumer goods have already
registered a rise, he said.
President of Bangladesh Chamber of Industries
(BCI)
Khandaker Mosharraf Hossain observed that the objective of the devaluation, to
beef up forex reserve, would not be attained. The situation in Bangladesh is not
similar to that of India and Pakistan since industries here are dependent on
imported raw materials. Locally produced goods will be costlier creating
inflationary pressure on the economy.
Devaluation hailed
Two chamber leaders-President of the Federation
of Bangladesh Chambers of Commerce Industry (FBCCI) Yussuf Abdullah Harun and
the President of the Bangladesh Garments Manufacturers and Exporters Association
(BGMEA) - however, found positive signs in the devaluation. The BGMEA leader has
reasons to be elated for import of goods for RMG sector does not cost any money
rather they would earn more in local currency in the event of a devaluation. But
Harun, who is an office-bearer of the ruling Awami League and aspires to contest
in the upcoming general election with AL ticket, found the devaluation timely
and appropriate though most of the chambers and associations affiliated with
FBCCI feel otherwise.
Source : Dhaka Courier
