BB prefers pro-active forex rate policy
Wednesday, 3 December 2008
Shakhawat Hossain
Bangladesh Bank (BB) prefers introduction of a pro-active foreign exchange rate policy to spur competitiveness of priority export sectors and create better employment opportunities in the country.
The central bank in a policy paper also suggested maintaining a balance between exchange rate and negative impacts on local trade from the global business trend.
The paper styled 'Employment Promoting Growth in Bangladesh: Monetary and Financial Sector Issues' said: "A pro-active foreign exchange rate policy is required."
While the BB attaches importance to a properly aligned exchange rate for the growth of domestic production it suggested for the balance to keep local production competitive in world market.
The paper said since exchange rate movements are an important dimension of the traders' business environment, "a properly aligned exchange rate would be of significant importance in supporting competitiveness of priority export sectors."
"For the purpose, a pro-active foreign exchange rate policy is required," it said.
In fact, the country has been maintaining almost similar type of exchange rate policy for the last two years although it is supposed to follow a floating currency exchange rate, sources said.
Such policy coined as 'managed pegged' has cost the country more than $ 800 million provided to the commercial banks as overdraft payments during the last two years, they added.
Since the major export-oriented sectors (such as RMGs) are also employment intensive, improvements in net export position would support an employment intensive growth of the economy.
"A competitive real exchange rate, along with improvement in net trade balance, would therefore support the growth of domestic production activities creating better employment opportunities." it said.
The BB said two structural features of the country's trade regime pose important challenges.
First one is limited export base and second is high reliance on imported raw materials and capital goods.
The first limitation implies that other factors (such as shift in commodity prices) could be more important in determining export success than the real exchange rate.
"The second feature means that a weaker Taka would raise the cost of production for import-dependent sectors," it said.
For exporters who rely on imported intermediate goods, the net impact depends on several factors, such as exchange rate spread (e.g. the difference in the buying and selling price of Taka) and its volatility between the time when the inputs are purchased and the final products are exported.
"This shows that measures to keep the exchange rate competitive should be balanced with the potential negative consequences of such actions," it added.
Bangladesh Bank (BB) prefers introduction of a pro-active foreign exchange rate policy to spur competitiveness of priority export sectors and create better employment opportunities in the country.
The central bank in a policy paper also suggested maintaining a balance between exchange rate and negative impacts on local trade from the global business trend.
The paper styled 'Employment Promoting Growth in Bangladesh: Monetary and Financial Sector Issues' said: "A pro-active foreign exchange rate policy is required."
While the BB attaches importance to a properly aligned exchange rate for the growth of domestic production it suggested for the balance to keep local production competitive in world market.
The paper said since exchange rate movements are an important dimension of the traders' business environment, "a properly aligned exchange rate would be of significant importance in supporting competitiveness of priority export sectors."
"For the purpose, a pro-active foreign exchange rate policy is required," it said.
In fact, the country has been maintaining almost similar type of exchange rate policy for the last two years although it is supposed to follow a floating currency exchange rate, sources said.
Such policy coined as 'managed pegged' has cost the country more than $ 800 million provided to the commercial banks as overdraft payments during the last two years, they added.
Since the major export-oriented sectors (such as RMGs) are also employment intensive, improvements in net export position would support an employment intensive growth of the economy.
"A competitive real exchange rate, along with improvement in net trade balance, would therefore support the growth of domestic production activities creating better employment opportunities." it said.
The BB said two structural features of the country's trade regime pose important challenges.
First one is limited export base and second is high reliance on imported raw materials and capital goods.
The first limitation implies that other factors (such as shift in commodity prices) could be more important in determining export success than the real exchange rate.
"The second feature means that a weaker Taka would raise the cost of production for import-dependent sectors," it said.
For exporters who rely on imported intermediate goods, the net impact depends on several factors, such as exchange rate spread (e.g. the difference in the buying and selling price of Taka) and its volatility between the time when the inputs are purchased and the final products are exported.
"This shows that measures to keep the exchange rate competitive should be balanced with the potential negative consequences of such actions," it added.