Devaluation of taka
Is it really necessary?
Anwar Faruq Talukder
In the recent time some internal and external pressure groups are pressing for devaluation of Taka which is a stronger currency of the region for past few years. Exporter wants to devalue Taka by showing the reason that the currencies of some competitor countries have depreciated considerably over the past few years and they are falling behind while competing with them.
They also urged that their export earnings will increase significantly if Taka devaluated. Some other said our remittances will boost if the Taka is being devalued. Most recently UK-based banking giant Standard Chartered Banks research team said in a press conference that some degree of depreciation is both likely and desirable.
The question obviously comes why devaluation? It depends why the currency is being devalued. If it is due to a loss of competitiveness, then a devaluation can help to restore competitiveness and economic growth. If the devaluation is aiming to meet a certain exchange rate target, it may be inappropriate for the economy. Hence the matter of devaluation required a thorough examination of the economy-wide impact of devaluation.
Essentially devaluation is changing the value of a currency in a fixed exchange rate. A depreciation is reducing the value in a floating exchange rate. Devaluation on modern monetary policy is a reduction in the value of a currency with respect to those goods, services or other monetary units with which that currency can be exchanged. It is most often used for the unofficial increase of the exchange rate due to market forces, though sometimes it appears interchangeably with devaluation. Note that monetary policy is the process by which the monetary authority of a country controls the supply of money, often targeting an inflation rate or interest rate to ensure price stability and general trust in the currency.
It is assumed that the best monetary policy can support long-term growth of the economy and maintain price stability. The central bank uses interest rates, its main short-term monetary instrument. This all are the theoretical views of the devaluation. But in our country we have commendable reserves (around USD 32 billion) which is equivalent to seven to eight months import payment of the country. Export earning is not in bad shape.
Devolution of Taka may not increase the export in the real terms. It may increase the volume of Taka which is not absolute increase. In the short run, this may help to increase its exports and boost national income. However, in the long run, this policy would be expected to negatively impact economic growth.
Moreover, most of the empirical results to date do not support the conclusion that exchange rate undervaluation is helpful for growth. A policy might have a good and bad side, thus it is important to focus on the good and avoid the bad thing to happen. Undervalued currency also has the few advantages but more disadvantages.
Currency should be undervalued for initial period of 15 to 20 years to enhance exports. But we have already passed the initial days so our currency should be valued by the market forces.
On the other hand dropping of remittances inflow is not for overvalue of Taka but the reason remains elsewhere.
We need to find out the reason for dropping of remittances inflow. Devaluation may not increase the inflow of remittances. Thus we may conclude that devaluation may not necessary at this moment.
The writer is Executive Vice President of Shimanto Bank Ltd
