Dollar crisis and rise in call money rate: Where lies the problem?
Dr. Muhammad Mahboob Ali
THE US dollar rate against Bangladesh Taka is rising in an alarming way. Further, on March 30, 2006 Inter bank call money rate was raised to a new record level of 150 per cent though Bangladesh bank proved their efficiency by promptly advising different commercial banks to curtail the call money rate to the maximum level of 50 per cent on the same day. US dollar crisis and the rise in the call money rate are symptoms of a malady. Some money market players try to artificially create acute volatility in the market. They do so by safely arranging for capital flow from the official channel to unofficial channel for making some quick money. These happenings indicate how weak is the monetary management of the country. Not only oil price shock or inflation rate in the global financial system is enough to create monetary market instability. Rise of dollar value against BDT and call money rate are occurring due to various reasons.
Though some persons are arguing that for the rise of the call money rate-reverse REPO, funding BPC with 950 crore taka by banks and also CRR at the rate of 5.0 per cent etc. are responsible but these are partially true.
We all know that there is a basic difference between free economy and capitalistic economy. In case of free economy though it is not possible to control the economy with visible hand but it is possible to regulate it in invisible ways. Bangladesh bank actually did praise worthy thing on March 30, by giving telephonic instructions. If they came forward earlier, as they did in case of checking inter-bank call money rate, US dollar crisis could be controlled at least to the portion it has been due to manipulation by some banks.
Stagflation is prevailing in the economy. Stagnancy of national growth is likely. It is reported that GDP growth rate would be around 6.25-6.5%. Besides inflation, the country also suffers from currency deflation. This may create a long-term recession in the economy.
According to UN DESA (2006) the world economy is expected to continue to grow at a rate of 3.0 per cent during 2006. The United States economy remains the main engine of global economic growth, but the growth of China, India and a few other large developing economies is becoming increasingly important. On an average, developing economies are expected to expand at a rate of 5.6 per cent and the economies in transition at 5.9 per cent, despite the fact that these economies may face larger challenges during 2006. Driven by higher oil prices, inflation rates have edged up world-wide. Core inflation rates, which exclude the prices of energy and food, have been more stable, indicating that the pass-through of higher oil prices to over-all inflation is limited. But in Bangladesh inflation rate is much higher than the official rate which is around 7.07 % (Point to Point on December 2005). Due to inflation home currency value is decreasing against USD and it is one of the reasons for increasing of dollar price.
As the financial economic situation of the country is very much volatile, not only monetary or fiscal policy is responsible for the problem but some financial institutions, organisations and individuals have created a unholy nexus in the economy which is pushing the country towards a catastrophe. If the government is not alert and does not take proper steps without delay then the country will face a greater problem within a short period of time.
As quoted from Dudley Baker(February 28,2006), Stephen Roach, Managing Director, Chief Economist, and Director of Global Economic Analysis of Morgan Stanley, has stated that "America's record trade deficit means the dollar will keep falling, interest rates will rise further and U.S. consumers, in debt up to their eyeballs, will get pounded with no better than a 10 per cent chance of avoiding economic Armageddon." But in foreign payments Bangladesh still heavily depends on the US dollar and alternative foreign currencies are playing a fewer role. In the year 1973 Japan and Germany's central Bank moved to floating exchange rate. The Bank of Japan and Bank of Korea both are now worried about the future of the US Dollar and they are giving greater emphasis on gold stock.
On the contrary, the value of dollar is rising in our country. According to Bangladesh Bank web site, US dollar rate in taka (weighted average) as on February 28,2006 was 67.7455 while it became 71.5458 on March 30,2006..Only in 30 days the value of USD in terms of BDT rose by 5.61% .As per the foreign exchange rate of Uttara Bank Ltd.as on 2nd April, USD was equivalent to BDT 72.1000 (B.C. rate) while 71.0400(T.T. Clean ) and on the same day USD(Cash) buying rate was BDT 68.5435 and selling rate was BDT 70.1435.Still now difference between buying rate and selling rate in Bangladesh is very high.
According to NetIndia123.com (Mumbai | April 01, 2006 1:30:53 PM IST) following are the indicative currency notes and travellers' cheques buying and selling rates per unit as supplied by Thomas Cook India Ltd on April 01, 2006: (figure in rupees) currencies buy and sell US dollar 42.95 and 46.15, Sterling pound 74.85 and 79.85, Euro 51.85 and 55.70 and 100 Japanese yen 35.85 and 38.90.
In Bangladesh, fiscal deficit is creating a problem for the nation as a whole .During the period July 2005 to February 2006 only 13.0 per cent increase in revenue receipt occurred in nominal terms. This is far below the expected revenue receipt. The flows of foreign aid and loans have reduced. Donor agencies are placing such condition which are against the interest of the nation. The government has already curtailed development and non-development expenditure by 8.0 to 9.0 of the current fiscal period. The government should rethink about alternative strategies and borrowing from the banking sector should be avoided.
The writer is a Financial Economist and Associate Professor, Department of Business Studies of the State University of Bangladesh