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Tuesday, March 07, 2006

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EDITORIAL
 
Fixing troubles in the forex market
3/7/2006
 

          THE ongoing volatility in the country's foreign exchange market is not showing any sign of subsiding. The depreciation in the value of the taka vis--vis the greenback has been continuing unabatedly, leading to serious concern among the businesses and the consumers as well. The US dollar has been gaining almost everyday in both the inter-bank and the kerb markets on the plea of its short supply. As an obvious consequence of the continuous erosion in the value of taka, the prices of the imported goods, which are plenty in numbers, have gone up in the market. The prices of goods which do not have any imported elements are also experiencing a sympathetic rise.
The governor of the central bank a couple of days back had expressed the optimism that the volatility in the forex market would ease shortly. But he did not explain how it was going to happen. But his optimism, apparently, has failed to create any impact on the situation and the restive mood in the forex market continues. In the inter-bank market, the greenback gained further Sunday and was quoted at Tk. 68.05.
The predicament of importers of all types of goods, starting from capital machinery down to essentials, is understandable under the prevailing circumstances. For opening of letters of credit (LCs) against imports, the public sector banks quoted dollar at Tk 69.97 while the private and foreign banks sold the same in between Tk 71.50 and 71.90. There exists strong fear in the market that if the situation continues like this, it would not take too long for the greenback per unit to reach Tk 100. Meanwhile, the president of the country's apex chamber body -- the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI) -- Sunday while expressing serious concern over the developments in the forex market urged the government to pump certain amount of dollars into the market to restore stability. Whether the central bank should or should not intervene in the market under existing free-float exchange rate regime remains to be a matter of debate. Introduced from May 31, 2003, the system of fully market-based exchange rate in place of a policy of occasionally adjusting the exchange rate had been going well until the middle part of the last calendar year.
The public sector banks and a few private and foreign banks used to meet the demand for dollars in the market without much trouble. But the situation deteriorated when the public sector banks ran out of surplus forex funds after meeting huge demand for the same from the Bangladesh Petroleum Corporation (BPC) for meeting fuel import bills. To make the situation worse, some private commercial banks opened LCs indiscriminately without looking into their own fund positions or taking into consideration the possible forex market scenario. With a view to meeting import payment obligations, these banks became desperate for forex funds, thus, contributing to the build-up of volatility in the market. Under the prevailing circumstances, the central bank which is, obviously, in a dilemma because of a number of reasons needs to act promptly to restore stability in the market.
The depreciating exchange rate of Taka is not only hurting the consumers but also affecting investments. In addition to steps to discourage imports of non-essential and luxury goods, the central bank needs to stop flight of capital under various mechanisms. The bank has no reasons to feel itself complacent over putting in place all the safeguards against siphoning off ill-gotten funds out of the country by the influential quarters. It is also imperative to constitute a strong and dynamic economic intelligence unit in the central bank with officials of high integrity and honesty without further delay.

 

 
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