The seesaw of forex trade

| Updated: May 28, 2022 13:22:30

The seesaw of forex trade

A seesaw allows a short-term perpetual motion of equal distribution of highs and lows for both ends. If we take a closer look at how taka’s rate influences trade, the seesaw has been more in favour of the buyers of foreign exchange (forex) compared to its sellers in recent times.

Of late, it has become apparent that the seesaw of the forex trade in Bangladesh has a more powerful third party, which dominates the scale and advantages of it.

In theory, the Bangladesh taka or BDT is a free-floated currency. In reality, however, it is a managed floating or pegged floating regime.

The real effective exchange rate (REER) is the weighted average of a country's currency in relation to an index or basket of other major currencies. The weights are determined by comparing the relative trade balance of a country's currency against that of each country in the index.

The real effective exchange rate of taka in 2021 averaged 110 BDT to 1.0 USD, whereas bank rates were between 84-86 BDT to 1.0 USD. This means, those who were spending and buying USD were enjoying a benefit of 25-26 BDT per USD.

The flip side of this equation is that dollar earners of Bangladesh were being stiffed by that very huge margin. The seesaw of currency was tilted towards those who would spend and buy dollars compared to those who would earn and sell the forex.

The main spenders and buyers of the greenback are importers, who include even the government, as well as Bangladeshi international medical and leisure tourists. The main earners of forex in the country are exporters and remitters, who also include government departments such as peacekeeping forces.

Until the year 2021, it seemed that exporters and remitters were getting a raw deal as they were being given a forex rate that indirectly taxed them 25-26 BDT per USD only to indirectly subsidise importers and global tourists from Bangladesh.

However, the system seems to have become unmanageable in recent times as banks are overcharging importers to settle their import bills at a substantially higher rate than the one set by the regulator, Bangladesh Bank, without having to pay a higher rate to exporters and remitters.

If 2021 saw the seesaw to have become lopsided in favour of importers, the current 2022 has seen the forex seesaw being dismantled and converted into what seems to be a slide towards banks and other financial institutions.

If our currency was truly free-floated, many feel it could trigger inflation that might be heavy on the poorer segment of society, for whom the government can always subsidise directly. That would be more effective than subsidising the entirety of all imports, as we must subsidise food, transport, education and shelter for the less-advantageous instead of subsidising cowhead milk, Mercedes SUVs and other luxury imports.

We must not be a nation that privileges the rich at the cost of hard-working remitters and exporters. If not anything else, we should build a fairer economic society where the forex seesaw can be a balanced equaliser.

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