New Age | Competitive, market-based exchange rate needed

FOR the last couple of months, we have observed a positive trajectory in our foreign remittance inflow. Data disclosed by the central bank demonstrates that remittance inflow for the months of April, May and June 2024 has crossed the $2 billion mark for the respective months. This is not only heartening news but also a sign of optimism and a ray of hope during a pressing time when the country has been experiencing a persistent decline in foreign currency reserves and imposing rationing of imports.

This improvement is due to bold and timely initiatives taken by the government and the central bank, which economists and experts have long been requesting. These moves have enhanced the much-needed foreign remittance inflow through formal banking channels. Foreign remittances are the lifeblood of our economy. Our expatriate Bangladeshi workers, who toil hard in various countries, help sustain our economy by remitting their hard-earned money. Their foreign remittances are building our national reserves and facilitating import payment obligations.

We are an import-reliant country, as our imports outweigh our exports, necessitating the import of essential commodities such as oil, LNG, fertilisers, etc from abroad. Foreign remittances facilitate our foreign trade transactions, especially payments for necessary goods and help maintain our balance of payments.

However, we previously observed a painful slowdown in remittance inflow into the country over the last couple of years following the Covid pandemic. The pandemic, followed by the Russia-Ukraine war, led to a continuous decline in foreign exchange reserves and a plummeting of foreign remittance inflows. Many workers lost their jobs abroad and were forced to return home. Once the Covid situation normalised, many workers went abroad as the job market reopened. Despite a record number of people going abroad as workers in 2022 and 2023, remittance inflow did not increase proportionately and saw a continuous downturn. In 2021, our yearly remittance incoming was $22 billion, which decreased to $21.3 billion in 2022. In 2023, foreign remittance inflow was $21.84 billion.

Recently, our foreign remittance inflow has shown a positive trajectory since the government and the central bank have taken or have been compelled to take some effective steps. The central bank has introduced a crawling peg system following the advice of the IMF. A crawling peg exchange rate is neither a floating exchange rate nor a managed exchange rate. Instead, it is an exchange rate in between, where rates can move within a band and be adjusted over time based on market conditions. In this system, exchange rates cannot fluctuate more, and exchange rates move within a band of rates. The central bank, after implementing the crawling exchange rate, instructed the banks that the exchange rate could move Tk 1 down or Tk 1 more than the pegged Tk 117 rate. As the day of the crawling peg system comes into effect, the dollar rate has jumped to Tk 117 from Tk 110. For long, the central bank, with the help of BAFEDA, somehow managed the foreign exchange rates rather than letting them be driven by the market, although the central bank adopted a floating exchange policy long ago. The floating exchange rate is determined by the supply and demand of other currencies. Under the floating exchange rate, currencies are traded without any restrictions, unlike the fixed exchange rate.

Earlier, the central bank was forced to depreciate the taka against the US dollar after the Russia-Ukraine war, when the demand for US dollars grew and the US raised interest rates to tame its inflation. Since then, in the last 2 years, the central bank has depreciated the taka by nearly 31 per cent from Tk 84 to Tk 110, but foreign remittance inflow didn’t see a surge as per targets and expectations. Experts opined that a large portion of remittances were coming into the country through informal channels such as hundi. Hundi is illegal in our country, but expatriate Bangladeshis prefer this informal channel for myriad reasons. Most expatriate workers are less literate, so they do not know how to read and write, and many of them are illegal workers, so they are not accustomed to going to bank offices and doing the paperwork. Rather, the hundi system is a blessing for them since they get much higher exchange rates than what banks and exchange houses offer. Moreover, they do not have to face the hassle of paperwork for sending money, going to exchange houses, and receiving money from banks in the country.

In the kerb market, the exchange rates offered by hundi businessmen are higher than those in the formal banking channel, which is why expatriate Bangladeshi workers send money through informal channels like hundi. As long as formal banking channel rates are not competitive enough, it will be difficult to attract the diaspora Bangladeshi workers to send remittances through banking channels. The crawling peg exchange rate system is now…