Can dollar rate be stabilised within next few months?

Since 2022, the exchange rate between the US dollar and Bangladeshi taka has been volatile and continuously rising. The relentless fluctuation in the dollar rate has made the nation face economic uncertainties. In 2021, US$1 was exchanged for Tk 80-90 in general. But since the Russo-Ukrainian war started in 2022, the exchange rate has increased rapidly, crossing over Tk 100 for US$ 1. Even a few days ago, banks and forex traders were selling one dollar for Tk 118-120, which was a record high.
The alarming increase in the dollar rate has profoundly affected the economy, prompting policymakers to seek solutions urgently. This trend has wide-ranging consequences, impacting various aspects, including inflation and import expenses. The economy of Bangladesh has been affected by rising inflation, increased import costs, and a widening trade deficit.
Bangladesh's economic landscape presents many indicators that provide valuable insights into the nation's financial status. These indicators include remittance inflows, export earnings, import expenditures, and cash reserves. Recent data suggest a potential positive shift in momentum, indicating a possible stabilisation of the dollar exchange rate and better economic prospects. This optimism emerges from a detailed analysis of these crucial economic indicators, each offering a unique perspective on Bangladesh's financial dynamics.
Remittance inflows have emerged as a formidable force, rising at an unprecedented level in recent times. Bangladeshi expatriates from abroad sent $15 billion in remittances in the first eight months of the current fiscal year, a stark contrast to the $14.12 billion recorded during the same period last fiscal year. The steady influx of remittances, currently exceeding $2 billion per month, serves as a lifeline for the Bangladeshi economy.
Export earnings have also witnessed a noteworthy increase. It reached $51.8 billion in February, marking a 12.4 per cent increase from the previous year. This sustained growth in export earnings, combined with remittance inflows, shows potential for narrowing the trade deficit, strengthening the previously dwindled foreign exchange reserves, and stabilising the dollar rate.
While the recent surge in remittance inflows and export earnings offers some hope, Bangladesh's journey toward economic stability is not without challenges. Structural imbalances, influenced by a widening trade deficit and escalating import costs, create significant hurdles on the path to currency rate stabilisation.
Import payments increased to $36.02 billion during this fiscal year's July-January period, reflecting a growing imbalance between import expenditures and export earnings. The cost of imports increased by 1.52 per cent in February compared to the same period last year, worsening pressures on the country's foreign exchange reserves.
Furthermore, the volatility in the foreign exchange market is worsened by fluctuations in the net open position (NOP) and informal exchange rates of banks. The NOP of banks in foreign exchange reached $606 million on March 11, 2024, indicating the need for proactive measures to manage liquidity and mitigate risks in the forex market.
In post-pandemic times, the economy of Bangladesh had to pass the hard test of averting a potential crisis. Considering these challenges and complexities, many experts have devised some ideas on how the Bangladesh government can tackle soaring dollar rates to restore the economy.
The suggestions include creating a government import fund to alleviate pressure on private sector demand for the dollar, reducing the Export Retention Quota (ERQ), immediate reduction of the current Net Open Position (NOP) of banks by 50 per cent to increase forex flow, injecting USD 1-2 billion from reserves, devaluing the taka, using forex reserves wisely, improving remittance flow, and establishing links with future commodities markets to enhance trading capacity.
A few policies adopted by the government of Bangladesh show similarities with those suggestions, hinting at the possibility of stabilising the dollar rate by April. The recent decline in the value of the dollar in remittances reflects shifting market dynamics. The exchange rate of dollars decreased by 6 to 8 taka from the first week of March until March 15, which indicates reduced demand for foreign currency.
The intervention measures taken by Bangladesh Bank, including the injection of US$5 billion into the forex market during the 2021-22 fiscal year and the introduction of the dollar-taka swap, have provided much-needed liquidity and stability to the local currency market. Banks have deposited about one billion dollars with the central bank since the inception of the dollar-taka swap, emphasising the effectiveness of these measures in managing foreign exchange reserves and mitigating currency volatility.
Moreover, the cash reserves within the banking sector have seen steady growth. The cash reserves increased from $28 million to $32 million in a month, which indicates better liquidity management and financial stability. Loan commitments for the current fiscal year have amounted to $7.2 billion, signalling growing confidence in the economic prospects of Bangladesh among international lenders, further reinforcing the financial resilience of Bangladesh.
Considering the economic indicators and the complexities that influence the economy, the question remains: can the dollar rate stabilise by April? The answer lies in a delicate balance of optimism and caution, influenced by the realities of the economic situation.
The rise in remittance inflows and export earnings could help reduce trade deficits and increase foreign exchange reserves. However, structural imbalances, rising import costs, and market fluctuations pose challenges. To navigate these challenges effectively, proactive government intervention and policy measures will be essential. Addressing trade imbalances, enhancing export competitiveness, and managing liquidity in the forex market will be key priorities in stabilising the dollar rate and ensuring long-term economic resilience.
As Bangladesh moves towards economic stability amidst global unrest, proactive measures, cautious policymaking, and the ability to address structural imbalances will be most important.

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