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Let local currency be appreciated,if possible?

Published : Sunday, 24 September, 2023 at 12:00 AM  Count : 431
Dr Nasrin Sheely

There are prices for local currencies, like Taka in our case, in terms of different perspectives. Basically it is priced in two paths - domestic and global. Currency plays the role as medium of transactions, inter alia. In case of domestic transactions, price of money depends on demand of goods and services and supply therefor. Economic theories present this proposition in different graphs. Price of money is high provided that supply side is steady compared to demand side. Price of money face depreciation if demand becomes high compared to supply of goods and services.

In addition to interaction of demand and supply, money supply has a role to determine its price. It had a channel through which money is injected into economies. Banking system works as intermediaries from savers to borrowers. The system can create money out of nothing. Created money goes to beneficiaries first as loans which are used either for current expenses and/or for capital expenses. In both cases, money can be of support. New money can be used for current expenses. In such situation, money exceeding supply side of real economic activities can be depreciated in respect of its power to purchase goods and services. In the same way, money can be appreciated if created money ends up in banking system.

Economies consist of basically two sectors - internal and external. The interactions of demand and supply including monetary phenomenon as stated earlier are a part of internal economic activities. There are activities of an economy crossing borders. This is external sector in which different activities are involved without limiting to economic transactions like exports, imports, etc. Transactions are there also like transfers, financials, and so on. Investment, loans, etc. are included in financial accounts. Transactions with external sector are executed in foreign monies. Local monies are merely useable in cross border transactions.

In this case, payments are made in foreign currencies for which local currencies are converted into such currencies. On the other hand, inward receipts in foreign currencies are converted into local currencies. The rate of ratio used for conversion between local currencies and foreign currencies is considered as price. In a simple way, it can be clarified in terms of our transactions with external world which are executed in few currencies like US dollar, Euro, etc. For making a payment abroad, it costs 100 Taka (say) to purchase a US dollar. In the same way, 100 Taka (say) can fetch against inward receipt of a US dollar. In this case, one Taka is priced at 0.01 US dollar.

In the above example, if 110 Taka is required for payment of a US dollar abroad, it indicates Taka to lose value. On the other hand, Taka can gain value if 90 Taka is required for purchase of a US dollar to make payment abroad. Unless otherwise adoption of fixed exchange rate system, price of one currency in terms of others depends on demand and supply. Considering market economy in practice, it can be assumed floating exchange rate regime is in operation.

In both internal and external transactions, price of local currencies can be measured. Change in price level determines price of a currency in local transactions. Price of foreign currency in terms of local one determines price for external transactions.

Today's world is interconnected. Dependency on each other is a common issue in present day. We are not out of the range. Accordingly, Bangladesh economy needs to depend on external world for different purposes. Bangladesh is on development track for which it becomes an import dependent country both for goods and services. Presently, Bangladesh needs to pay more than 100 Taka for each green back. Why it is not 1 Taka is a question. To answer this question, we can go to mid twentieth century in which dollar-exchange rate system was introduced. As per the proposition, United States would issue dollar based on gold reserves. Price of one ounce gold was set at 35 US dollar. All countries under the arrangement would peg their legal tenders to US dollar. So, the price setting of a currency with another currency seems to be arbitrary.

There is a theory that depreciating currencies attract inflows of foreign currency by exporters and others earning income in foreign currencies. Maybe it is true in the situation of balanced trade between exports and imports. Considering the economy of Bangladesh, its imports are higher by around one and half times compared to exports. As such, depreciating trend can hit hard internal sectors of the economy resulting in price hike.

With regards to export sector, Bangladesh depends on few goods, readymade garments in particular. Export in 80s of last century showed Bangladesh to development window. In the current century, path for development became widened due to the setting up of import substitution industries. As a result, Bangladesh has improved a lot phasing out its status from LDC. Its focus on manufacturing sector is for more than a decade, substituting imports. But the economy is not resourceful by natural contents. Inputs for manufacturing industries need to be sourced from external sectors. Demand for foreign currency comes into view to support imports.

Basically export of goods and services is the major sources of foreign currency earned out of economic activities. Transfer receipts on account of wage remittances are another inflow from external sources which is an extra support. But wage earners can retain money abroad. Wage remittances are said to be sensitive to better exchange rate meaning that the more depreciation in local currency, the more remittances. With regards to exports of goods, export earnings need to be repatriated without exception. Exporters face regulatory hassles in case of non-repatriation. Like manufacturing industries, Bangladesh exports depend on input contents which need to be imported. As such, nothing but import is an inevitable part of the economy.

Inflows from exports need to be maintained at continuous upward trend. But without expansion of export sector, it is not possible to increase export income flows from exports. As said earlier, export needs input contents from external sources. Payments for this sourcing can be settled out of export earnings. Price of currency cannot play effective role in this case. But remainder after deduction of import payments is converted into local currency. Depreciation of local currency in terms of foreign currency brings benefits to exporters by incremental amounts. Appreciation results, on the other hand, in loss for exporters. Without needs of foreign currency for manufacturing industries, local currency can be kept at appreciating path. It is only possible for economies having input sourcing capabilities internally. This is possible only for bamboo economies having strong currencies.

What is to happen in case of keeping local currencies at appreciating mode? This definitely decreases import cost in local currency term, better for a time being. But it costs economies depending on imported inputs in the long run. Economies like ours need to keep price level of local currency at depreciating mode under monitoring track. Otherwise, appreciation in the value of local currency can reduce the growth path of exports, making inflows plugged in. The resultant effect is on exports to make slow, bringing low inflows. This may lead economies to backward level at poor status.  There is every scope that the situation can fuel shadow market to increase.

Whether depreciation in currency is really beneficial is a question. It is basically needed for a certain time. Bangladesh has moved forward phasing out LDC status. It is on mandate for smart Bangladesh vision 2041. Moving with slow depreciating pace of currency value can achieve the vision. The economy at rich level is another turning point to be phased out from manufacturing to service outputs. Change in value of currency is rarely needed at that level. Before being transformed, it is possible to appreciate local currencies in theory. In practice, it needs depreciation to move to upper stages.

The writer is teaching in a business school

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