Remittance boom and export industries
Wednesday, 29 April 2009
M A Taslim
The domestic currency of Bangladesh has held up rather well against major currencies of the world during the last year. The Taka has appreciated against many currencies including such strong ones as the euro, pound sterling, Australian dollar and Swiss franc. The taka has been very stable during the last three years against the US dollar. The movement in the value of the US dollar has largely reflected the external value of the Bangladeshi taka.
Exchange Rates (Taka per unit of foreign currency)
The appreciation of the external value of the taka will be welcomed by most people since this has helped in reducing (or not increasing) the prices of imported materials and goods from overseas. However, it is bad news for the exporters. Any appreciation of the domestic currency erodes their competitive strength in the external market. It reduces their profits, and may eventually drive them out of business. The recent complaints of the apparel and textile exporters are suggestive of the competitive disadvantages they are experiencing of late.
The external value of a currency is determined by the state of the balance of payments. A surplus in the balance of payments pushes up the external value of the domestic currency, while a deficit creates pressure for depreciation.
Bangladesh has run surplus in the current account balance during the last four years - a remarkable feat for a non-resource country. The surplus has allowed the Bangladesh Bank to more than double its holding of international reserves during the same period. A robust level of international reserves has supported the stability of the domestic currency against the US dollar.
Imports of goods and services into Bangladesh have always exceeded exports, sometimes by a large margin. By itself this should have created a downward pressure on the value of the domestic currency, but this was prevented from happening by a large inflow of remittances. The outflow of workers to overseas increased very rapidly, especially since 2004-05, leading to a doubling of remittances in only three years. This has allowed the country to maintain a healthy balance of payments despite large trade deficits.
Remittances and Worker Outflow
*July-March, **July-January
The downside of this large increase in the inflow of foreign currencies due to remittances is that it has caused an appreciation (or prevented depreciation) of the domestic currency. This phenomenon is akin to the phenomenon of the Dutch Disease.
The discovery and extraction of North Sea gas in the 60s and 70’s considerably increased the foreign exchange earnings of the Netherlands. This appreciated the Dutch currency to the extent that its domestic industries, especially export industries, became uncompetitive. The resource (gas) boom actually induced a de-industrialization of the Dutch economy. This phenomenon of the decline of the domestic tradable goods industries due to a resource boom came to be known as the Dutch Disease in the economic literature. (The decline was partly caused by the shift of productive resources to the booming sector and an increase in the real wage rate).
Unfortunately there are not many unmixed blessings in economics. The rapid increase in the remittances has been hailed by just about everyone as a godsend for our economy. The dark lining on this silver cloud is that it has also caused a relative appreciation of the domestic currency that has made the export industries less competitive. (The current strength of taka is partly due to the financial crisis in other countries.)
Should the fervent hope of our policy makers and analysts of doubling remittances within a short period materialize, the domestic currency could appreciate even more. The exchange market interventions that the Bangladesh Bank has resorted to in the past would not be enough to prevent the appreciation.
This could turn many export industries uncompetitive in the world market and force them out of business. The import-substitute industries catering to the domestic market will also become uncompetitive since imports would be cheaper. The industrial growth could slow down.
An appreciation of the domestic currency could have also occurred had the export sector experienced a faster growth. However, in this case the very process of increasing the export earnings would have raised the competitive strength of the export industries such that they could operate profitably even at the higher exchange rate.
The current woes of the export industries due to the relative appreciation of the taka could be mitigated if they could raise their productivity or reduce the costs sufficiently to offset the appreciation. This would be the only sustainable way of dealing with the problem. The other option, a temporary one, would be to provide cash subsidies to the affected industries to offset their losses. (Import substitutes could be protected by raising tariffs).
The export industries of Bangladesh have been spared the full impact of the Dutch Disease because of the availability of a large pool of cheap workers. Despite the overseas labour market absorbing a large number of workers from Bangladesh (four million by some estimates) there has not been any appreciable increase in the real wage rate of the ordinary workers, and it is unlikely to happen in the near future.
The low and stagnant wage rate that is the bedrock of the competitive strength of our export industries is also sustaining them through these difficult times. An increase in productivity would have allowed a decent raise in wages of the poor workers. Skill development and technology upgrading will be essential to achieve this end in a sustainable way. (Professor M A Taslim, an economics educator, is currently the Chief Executive Officer (CEO) of Bangladesh Foreign Trade Institute.)
The domestic currency of Bangladesh has held up rather well against major currencies of the world during the last year. The Taka has appreciated against many currencies including such strong ones as the euro, pound sterling, Australian dollar and Swiss franc. The taka has been very stable during the last three years against the US dollar. The movement in the value of the US dollar has largely reflected the external value of the Bangladeshi taka.
Exchange Rates (Taka per unit of foreign currency)
| AustralianDollar | Euro | Indian Rupee | PakistaniRupee | Swiss Franc | U.K Pound sterling | US Dollar | |
| July 2007 | 59.44 | 94.13 | 1.70 | 1.14 | 56.81 | 139.55 | 68.51 |
| March 2008 | 63.29 | 106.23 | 1.71 | 1.09 | 67.63 | 137.17 | 68.56 |
| February 2009 | 44.78 | 91.84 | 1.40 | 0.87 | 59.25 | 99.47 | 68.91 |
The appreciation of the external value of the taka will be welcomed by most people since this has helped in reducing (or not increasing) the prices of imported materials and goods from overseas. However, it is bad news for the exporters. Any appreciation of the domestic currency erodes their competitive strength in the external market. It reduces their profits, and may eventually drive them out of business. The recent complaints of the apparel and textile exporters are suggestive of the competitive disadvantages they are experiencing of late.
The external value of a currency is determined by the state of the balance of payments. A surplus in the balance of payments pushes up the external value of the domestic currency, while a deficit creates pressure for depreciation.
Bangladesh has run surplus in the current account balance during the last four years - a remarkable feat for a non-resource country. The surplus has allowed the Bangladesh Bank to more than double its holding of international reserves during the same period. A robust level of international reserves has supported the stability of the domestic currency against the US dollar.
Imports of goods and services into Bangladesh have always exceeded exports, sometimes by a large margin. By itself this should have created a downward pressure on the value of the domestic currency, but this was prevented from happening by a large inflow of remittances. The outflow of workers to overseas increased very rapidly, especially since 2004-05, leading to a doubling of remittances in only three years. This has allowed the country to maintain a healthy balance of payments despite large trade deficits.
Remittances and Worker Outflow
| 2002-03 | 2003-04 | 2004-05 | 2005-06 | 2006-07 | 2007-08 | 2008-09 | |
| Remittances(million US$) | 3062 | 3372 | 3848 | 4802 | 5978 | 7915 | 7034* |
| Worker outflow (nos.) | 241425 | 272693 | 251699 | 286381 | 563644 | 981102 | 449791** |
| Current account (million US$) | 176 | 176 | -557 | 824 | 936 | 672 | 464** |
*July-March, **July-January
The downside of this large increase in the inflow of foreign currencies due to remittances is that it has caused an appreciation (or prevented depreciation) of the domestic currency. This phenomenon is akin to the phenomenon of the Dutch Disease.
The discovery and extraction of North Sea gas in the 60s and 70’s considerably increased the foreign exchange earnings of the Netherlands. This appreciated the Dutch currency to the extent that its domestic industries, especially export industries, became uncompetitive. The resource (gas) boom actually induced a de-industrialization of the Dutch economy. This phenomenon of the decline of the domestic tradable goods industries due to a resource boom came to be known as the Dutch Disease in the economic literature. (The decline was partly caused by the shift of productive resources to the booming sector and an increase in the real wage rate).
Unfortunately there are not many unmixed blessings in economics. The rapid increase in the remittances has been hailed by just about everyone as a godsend for our economy. The dark lining on this silver cloud is that it has also caused a relative appreciation of the domestic currency that has made the export industries less competitive. (The current strength of taka is partly due to the financial crisis in other countries.)
Should the fervent hope of our policy makers and analysts of doubling remittances within a short period materialize, the domestic currency could appreciate even more. The exchange market interventions that the Bangladesh Bank has resorted to in the past would not be enough to prevent the appreciation.
This could turn many export industries uncompetitive in the world market and force them out of business. The import-substitute industries catering to the domestic market will also become uncompetitive since imports would be cheaper. The industrial growth could slow down.
An appreciation of the domestic currency could have also occurred had the export sector experienced a faster growth. However, in this case the very process of increasing the export earnings would have raised the competitive strength of the export industries such that they could operate profitably even at the higher exchange rate.
The current woes of the export industries due to the relative appreciation of the taka could be mitigated if they could raise their productivity or reduce the costs sufficiently to offset the appreciation. This would be the only sustainable way of dealing with the problem. The other option, a temporary one, would be to provide cash subsidies to the affected industries to offset their losses. (Import substitutes could be protected by raising tariffs).
The export industries of Bangladesh have been spared the full impact of the Dutch Disease because of the availability of a large pool of cheap workers. Despite the overseas labour market absorbing a large number of workers from Bangladesh (four million by some estimates) there has not been any appreciable increase in the real wage rate of the ordinary workers, and it is unlikely to happen in the near future.
The low and stagnant wage rate that is the bedrock of the competitive strength of our export industries is also sustaining them through these difficult times. An increase in productivity would have allowed a decent raise in wages of the poor workers. Skill development and technology upgrading will be essential to achieve this end in a sustainable way. (Professor M A Taslim, an economics educator, is currently the Chief Executive Officer (CEO) of Bangladesh Foreign Trade Institute.)