methods to influence the exchange value of taka in bangladesh

7/18/2019 Methods to Influence the Exchange Value of Taka in Bangladesh

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METHODS TO INFLUENCE THE EXCHANGE VALUE OF TAKA IN BANGLADESH

Under certain circumstances, Bangladesh Bank may want to intervene in the foreign exchangemarket to influence the level of the exchange rate if it believes the exchange value doesn’t fulfillits’ objectives.

Exchange rate

Figure .!

Reserves and Borrowin" #f the value of an exchange rate $e.g. %aka& is falling and thegovernment $Bangladesh Bank& wants to maintain its original value it can use its foreignexchange reserves $a''roximately ()* b on )+)+*+)*& - e.g. selling its dollars reserves and 'urchase %aka. %his 'urchase of %aka should increase its value.

From the figure .!, we can see when the demand for Bangladeshi taka is falling, the emandcurve moves from ) to *. /ow what could make the demand for Bangladeshi taka lower0 #tcould be many things that attribute to the lower demand for %aka. Few main reasons areex'lained below"

Lower E!"or# de$and or %i%er i$"or# de$and

#f the demand for our ex'orts mainly garments 'roducts, jutes, leather and fro1en fishes godown2 it will translate lower income from our ex'ort 'roceedings and thus higher demand for dollar and lower demand for taka. #t could also be that our ex'ort is rising but our im'ort valueand volume is rising faster than our ex'ort value and volume2 to 'ay for that higher im'ort billswe need to s'end more ollar and thus higher demand for dollar automatically translates lower demand for taka.

emand for

%aka $)&

For %aka

3u''ly of

%aka $3)&

4uantity of %aka in

Bangladesh Economy

U 3 .

a g a i n s t )

% a k a

*

3*

()56

()7+

48

4)4*



Lower FDI and Forein Aid

Bangladesh so far has not attracted any significant amount of foreign direct investment. But with

this little over (9++ million we have seen erratic u's and downs in receiving F#. #f F# is beenreduced significantly we will see the effect on our currency value by having de'reciation. :nysignificant rise in F# will a''reciate the %aka since foreign investors would have to converttheir currency to our %aka from the foreign exchange market. %he gradual fall of foreign aid is 'utting more 'ressure on the valuation of taka.

Lower re$i##an&e

ue to ;iddle East 'olitical unrest and current global financial crisis if we see lots of our ex'atriates are returning back to Bangladesh then it will lower the value of our currency sinceinward remittance flow will be lower and thus we will have 'roblem to finance our trade deficit.: lower remittance translates lower dollar earnings for us and so will lower the foreign reservewhich could make the intervention in the Forex by Bangladesh Bank less likely.

Lower #o'ris#s

For some countries like ;aldives, 3ri-<anka or even United :rab Emirates tourism is veryim'ortant earner of foreign currency. #n Bangladesh so far it has very little im'act. But make nomistake tourists do bring foreign currencies. 3o, fewer tourists mean less foreign currencies andthus lower dollar income but if more of our citi1ens are touring more foreign destinations whichmeans they are s'ending more foreign currency and thus higher demand for ollar whichtranslates lower demand for %aka.

S"e&'(a#ion and e!"e&#a#ion

#f due to market trend or some big s'eculators are betting Bangladeshi taka is overvalued and it

will de'reciate and they become successful in forming market ex'ectation either by s'readingrumor or forming syndicate of s'eculators to attack taka. %hey may be successful given their economic mightiness $<ike =eorge 3oros& and our Bangladesh Bank’s foreign reserve. >oliticalinstability sometimes acts as a catalyst to s'eculate further.

/ow coming back to figure .!, when the demand for taka goes down it will make taka value tode'reciate from +.+) to +.+)*6 $)56 to )7+&. But if Bangladesh Bank desires to kee' theexchange rate to its 'revious level of ()56 or +.+)2 it will have to cut the su''ly of Bangladeshi taka from the currency market. 3ince Bangladesh Bank has around ()* billionforeign reserve $)!.+9.*+)*&, it may try to sell the dollar from the reserve. For exam'le, sell(6++ million and buy 56++ million B% $(6++?56@56++& from the currency market. 3o areduction in su''ly of taka means an increase in dollar su''ly. /ow all banks dealing withforeign currency will have ollars and so the value of dollar will gradually ease and BangladeshBank will use trial and error to reach that 'revious 'oint of ()56. %hat means if it is ()55 thenit will sell more dollars in the currency market and continue to do so until it reaches that desiredrate. From the gra'h .!, the new eAuilibrium is reached at the intersection of * and 3* whereBangladesh Bank got their desired exchange rate of ()56 but at the ex'ense of lower Auantity of Bangladeshi %aka 4* in our national economy.



/ow instead of intervening directly in the foreign exchange market, Bangladesh Bank can resortto other tools to have the same desired outcome.

Borrow) %he Bangladesh government can also borrow foreign currency from abroad to be ableto buy foreign im'orts. 3o there is no need to de'reciate the taka.

Changing interest rates: Even though Bangladesh is not yet the destination of hot money2 themoney that moves around the globe Auickly to take advantage of higher interest rates but when it becomes a destination2 a rising or falling interest rates will cause taka to a''reciate or de'reciate.$#n Bangladesh, interest rate is not set by BB but from time to time it 'rovides guidance tocommercial banks&. igher interest rates will cause hot money inflows and increase demand for taka. igher interest rates make it relatively more attractive to save in Bangladesh and thus lower consum'tion translates lower inflationary 'ressure in the economy and a rise in taka value.

Red'&e In*(a#ion)

%hrough either tight Fiscal or ;onetary 'olicy, aggregate demand and hence inflation could bereduced. By decreasing :, consumers will s'end less and 'urchase less im'orts and so willsu''ly less taka and less dollar will be needed to finance less im'ort. %his will increase the valueof taka. <ower inflation rate will also hel' the ex'orters because Bangladeshi goods will becomemore com'etitive in the international market. %hus the demand for taka will rise.

/ow look at the situation from :merican 'ers'ectives.

Chen the demand for U3 rising2 the increased demand will shift the demand curve from ) to* and a''reciate the dollar value against B%. From the figure .6, we can see that taka hasde'reciated from 5* to 76 against U3. /ow made in U3: 'roducts will be very ex'ensive for Bangladeshi residents and so lower im'orts from U3: to Bangladesh. /ow if the FederalDeserve Bank of U3: wants to kee' the dollar value against taka at its’ 'revious rate of 5* taka 'er dollar then it will have to intervene in the foreign exchange market and need to increase thedollar su''ly by buying u' the excess taka and thus su''ly curve will move from 3 ) to 3*. /ownew eAuilibrium will at 4 which translates higher money su''ly in the U.3 economy. 3o fromthe currency valuation we could see the entral banks can influence the valuation of their res'ective currencies. By doing so, they change the value of foreign currencies. >lease do kee' inmind that there must be some conditions met before intervening in the Forex market and onething that is necessary for a small economy like Bangladesh, it will have to have a healthyforeign currency reserves in BB’s vault. For exam'le, Bangladesh Bank couldn’t intervene in the beginning of *+)* since the foreign reserve dwindled below ()+ billion at that time from theearlier ()) billion. But when the exchange rate went u' as high as 77 B% against U3 then the

im'ort bills were reduced since foreign goods became very ex'ensive and also Bangladesh Bank took some measures to discourage im'orting luxurious goods and remittance inflow went u'shar'ly since ex'atiates got higher rate for their currencies which has hel'ed Bangladesh Bank tomanage the valuation of taka and now it is Auite stable within the range of 7*-7 B% 'er U3.Bangladesh Bank must not intervene regularly instead let the market forces eAuilibrate theexchange value of our taka and that way, it negates the 'ossibility of s'eculation about the valueof our taka.



Exchange rate

Figure .6

Ro(e o* Ban(ades% Ban+ in #%e Forein E!&%ane Mar+e#)

,- Bangladesh Bank is the sole authority in regulating the foreign exchange rates in Bangladesheconomy. #n countries where there is no free floating valuation of currency then the central bank intervenes through various monetary 'olicies.

.- Bangladesh Bank is regulating and su'ervising all financial institutions that are involved inthe foreign exchange market in order to safeguard the interests of customers and citi1ens.

/- Bangladesh Bank issues the license to become a member of B:FE:. 3ince only the banking institutions can not be the only member in the forex2 BB increased 'artici'ation byadding more 'artici'ation of other 'layers.

0- Bangladesh bank sets the minimum and maximum balance of foreign exchange whichcommercial banks and other financial institutions can hold at any one time. %hese minimum balances are reserves amount, which banks have to maintain with the central bank.

1- Bangladesh Bank may restrict the exchange s'reads which dealers in the foreign exchangemay earn and thus restricting their 'rofit margin.

2- Bangladesh Bank controls the remittances of foreign exchanges to foreign countries. #n someinstances, BB fixed the minimum amount to be remitted and the commission to be 'aid totheir licensed dealers.

emand for

dollar $)&

3u''ly of

ollar $3)&

4 of U3 inU.3 economy

% a k a

a g a i n s t )

U 3 .

3*

*

76

5*

4* 448)



3- Bangladesh bank has got the 'ower and tools to intervene in the foreign exchange market by buying and selling foreign currencies directly or through changing the money su''ly or interest rates.

4- Bangladesh Bank is the sole authori1ed regulatory financial institution who maintains aforeign currency reserve which was above ()* billion dollar on )7.+9.*+)* and it 'ossesses

the jurisdiction 'ower to use the reserve to influence the foreign exchange market.

methods to influence the exchange value of taka in bangladesh

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