At present, according to the exchange rate of the Bangladesh Bank, every dollar is being exchanged at 92.80 takas. On the other hand, in the open market or kerb market, every dollar is being exchanged at 94 to 97 BDT. Even in the 3rd week of May, the kerb market was trading at 101-102 BDT per dollar. In the last one year, The taka fell by 4.7% against the USD. However, in the nine years from May 2012 to May 2021, the value of the taka has decreased by 3.37% against the dollar. Not only the Bangladeshi Taka but also the currencies of the world’s top economies like the UK & Germany, including the neighboring countries like India, Pakistan, Sri Lanka, and Afghanistan, have also lost their value against the US dollar. For example, within the last one year, the GBP in the UK and the EUR from various European countries have lost 14.29% and 15.7%, respectively, against the US dollar. But why are most currencies, including Bangladeshi Taka, losing their value against the dollar?
Due to the pandemic effect which began in 2020, the import and export-oriented activities all around the world have severely hampered production. And because of that, global inflation was also increasing. Inflation refers to the loss of purchasing power over time. Due to the pandemic, every economy in the world increased the money supply in their economy through stimulus packages or financial assistance to keep the economy moving. As a result, the purchasing power of the people has also increased. But the global supply chain was disrupted by pandemics, and inflation continued to rise due to insufficient supply. Although the world’s economies began to return to normal by the end of 2021 and in March of 2022, Russia invaded Ukraine. As a result, the global supply chain has been messed up once again. As an effect of this war, the supply chains of the fuel sectors, such as oil and gas, are impeded. Various precious metals and minerals; wheat, corn, barley, sunflower seeds, nitrogen, potassium, and phosphorus fertilizers are also on the same track. However, the price of oil and gas continues to rise due to this disruption. In addition, supply chain issues in agricultural products and fertilizers are also creating suspicions about global food safety. This is causing a hike in the living expenses in all countries across the world. The inflation rate in the USA reached 8.5% in March 2022, the highest in the country’s history since 1981. The country’s latest Consumer Price Index (CPI), which basically indicates the prices of various goods and services, rose to 7.9% in February, the highest annual inflation rate in the country’s 40-year history. Inflation in the country’s gasoline index rose to 18.3% in March. On the other hand, the index shows that the inflation rate in the food index in March has increased by 8.8% compared to the last 12 months. As a result, the country’s Federal Reserve system, or central monetary policymakers, decided to raise interest rates. Since then, the currencies of other countries worldwide have been losing value against the US currency.
The exchange rate of the Sri Lankan rupee was 199.5 against the dollar in May 2021 (31/05/21), which lost 44.5% of its value and is now at 360.99 Sri Lankan Rupees as of the exchange rate of 15 June 2022. However, Sri Lanka is going through one of the biggest financial crises in the country’s history due to several government policies, including declining tourism revenue due to terrorist attacks, the Corona epidemic, and the global supply chain issue caused by the Russia-Ukraine conflict. In the last ten years, from May 2012 to May 2022, the country’s currency lost more than 63% of its value (63.29) against the dollar. The Pakistani rupee, on the other hand, lost 39.21% in the period from 2012 to May 2021 but lost more than 23% (23.1%) only in the last year. The country’s currency is in crisis as the country’s reserves have been reduced due to the long-running balance of payments crisis. In this context, many economists are worried that Pakistan’s situation will be similar to that of Sri Lanka.
Even in India, the largest economy in South Asia, the Indian rupee is depreciating against the dollar. While the Indian rupee has lost 22.20% of its value against the dollar in the nine years from May 2012 to May 2021, it has lost another 7% (6.5%) within the span of one year, according to the reports of 2022. On the other hand, Vietnam, Commonly known as the “future Asian tiger,” has seen an appreciation in its currency. Although their economy is somewhat comparable to Bangladesh’s, the Vietnamese currency has strengthened against the US dollar over the past year. However, in the nine years from May 2012 to May 2021, the country’s currency also lost more than 11% (11.54%) of value against the US dollar. On the whole, the country’s currency has risen over the last one year, losing more than 9.52% of its overall value between 2012 and 2022. The Maldives is the only South Asian country that is a complete exception. Although the country’s currency has lost 0.60% of its value against the dollar in the past year, the Maldivian currency has strengthened against the dollar in the ten years from 2012 to May 2022. Again, the two most powerful currencies in the world, the GBP, or the pound, and the euro, have lost 12.5% and 13.7%, respectively, in the last one year. Within the year, The Chinese currency, the yuan, and, the Japanese currency, the yen have lost about 5% (4.8%) and 14.3%, respectively. But what exactly is the reason that currencies around the world are losing their value against the dollar? Or is the US dollar getting stronger against all currencies?
Why Are Other Currencies Losing Value?
The US Federal Reserve System raised the short-term interest rate by 0.75% on May 4, the highest increase in the country’s 20-year history. Basically, by increasing interest, the country is trying to encourage people to save money and discourage spending. In doing so, the country’s Federal Reserve has reduced the dollar’s global circulation. In addition, the Biden administration is going to take several more steps to reduce the cost of living by reducing oil, gas, and energy bills. However, these efforts to control the inflation rate by reducing the US dollar supply are affecting other economies around the world. As the import cost of each country has increased due to inflation, the demand for dollars has risen too. On the other hand, the dollar circulation is decreasing due to the policy of dollar supply reduction. As a result, the dollar has strengthened against almost all currencies in the world, and many countries, large and small, are losing value against the dollar.
This decision by the US Federal Reserve has also had a major impact on the stock prices of companies listed on US stock markets. Tech companies like Apple, Microsoft, Google, Amazon, Tesla, and other companies like Disney, Netflix, and Ford continue to lose stock prices. On 20th May, the Dow Jones Industrial Average fell more than 15% from its Historical High of 36800 On January 4, 2022. Similarly, the S&P 500 reached a historic high of 4698 points on January 3 of this year, but by May 20, it had yielded about 19% (18.66%). Since January, these indexes have been losing points but began to recover in late March. But then, the US Federal Reserve began to rise again based on the news of a rise in interest rates. At the same time, the share price of various companies listed in the market also decreases. Although each index is currently recovering slowly, no index has yet returned to its previous position.
Why is BDT Losing Value?
According to an article by a former governor of Bangladesh Bank published in The Daily Star, Bangladesh currently has a trade deficit of 25 billion and a current account deficit of 14 billion. In addition, remittances have declined by 18% this fiscal year. As a result, the country’s foreign exchange market has come under pressure. The central bank has released about 6 billion of its reserves to keep the value of money high, and thus the foreign reserve has been reduced to about 42 billion. But economists say that while all economies, large and small, have devalued the value of their currency against the dollar, increasing the supply of dollars from foreign reserves and maintaining the value of artificial money could have a negative effect on the economy in the future. On the other hand, the central bank is also reducing the value of money against the dollar step by step so that there is no adverse reaction in import-export trade. Taka has been devalued against the dollar in seven steps this year.
Furthermore, the central bank, as well as the government, have taken a number of measures to reduce the pressure on the foreign exchange market, and several more are in the process of being implemented. The government has already increased taxes on imports of 135 products to a maximum of 20%, up from zero to 3%. The government has also issued restrictions on foreign travel to officials of government, semi-government and autonomous organizations. On the other hand, the Bangladesh Bank has also imposed restrictions on unnecessary foreign travel of bank officials. However, bank officials will be able to travel at their own expense to attend training and seminars. In addition, taxes on imports of luxury goods, such as cars and electronic appliances, may increase. The National Board of Revenue has also proposed to impose a 5% VAT on manufactured smartphones and refrigerators in Bangladesh. In addition, to reduce the trade gap, the government may take steps to increase the number of import-prohibited products. The government is also considering canceling taxes on refined soybean and palm oil and banning the export of rice bran oil to boost food safety. There are also plans to import wheat from India through G-to-G management.
In addition, some more steps may be taken to increase the amount of dollars in the country’s reserve bank. In this context, Mr. Atiur Rahman also gave some suggestions, such as boosting the cash incentive amount by 0.5% to increase the remittances in legal channels. To improve the flow of remittances, the obligation of documents to send money to the country has already been removed for non-resident Bangladeshis and migrant workers. As a result, they will no longer need to submit any documents to send $5,000 or more.
Besides, like other central banks in the world, the Bangladesh Bank has also increased its policy or interest rate. On January 5, 2012, the Bangladesh Bank raised the policy rate by 0.50% and set it to 7.75%, which has been reduced several times and was reported to be at 4.75% in July 2020. On May 29, 2022, the Bangladesh Bank again raised the policy rate to 5%.
By raising the policy rate, the government can motivate people to save money by reducing unnecessary expenditure and thus try to bring inflation under control by managing the country’s overall money supply.