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Exchange rate and adverse move of price level

Published : Thursday, 8 August, 2024 at 12:00 AM  Count : 258
Money brings prices to move upward provided that too many a money is behind few goods and services. This is the situation for which money supply is held responsible. It is in the sense that money is injected in economies for capital expenditure which is flowing as operational expenses. During the stage of capital expenditure, production is not coming out. As a result, money in the hands of mass people drives price at upward level. But money in few hands unless utilized widely can never bring inflation or change price level adversely. Inflation comes across when money goes to people who are under the class of high propensity to consumption. 

In theory, inflation may occur either by cost-push or by demand-pull. Demand-pull inflation is generated by increment in money. This may be temporary up to the time of completion of productive infrastructure. On induction of output in the economy, situation becomes new normal. But cost-push inflation is detrimental to the economy. 

It is said Bangladesh has started crawling to the development path with the export of garment products. How this product is produced can be reviewed. Garment products need different inputs contents from fabrics to accessories. Most of the items are sourced from external sectors. One can disagree with the said statement. Fabrics are produced in local factories which are used for garments. How all inputs are imported is a question. It is true apparently. But reality is that basic content: cotton needs to be imported for fabric production. This becomes converted into fabrics through use of different items including human labor. Local manufacturing industries are not free from external dependency; rather they need to depend on imported contents. Agro processing industries including fisheries are reported to add high value because of local contents usages. But they are not completely free from import items such as fuel, chemicals, accessories, etc. It is said Bangladesh is an agricultural country. It is true in the sense that this sector contributes a lot to the national income. But it also depends on imports for seeds and other items. It is unbelievable, despite it is the reality except seeds for few crops like paddy.

With the outbreak of Russia-Ukraine conflict, global supply chain became disrupted, leading price level to move adversely. This impacted negatively on the price level of the economy. As a result of unexpected outflows of money, foreign currency market became volatile and affected due to mismatch between inflows and outflows. Taka lost substantial value, as a consequence. Once the price of each greenback exceeded 100 Taka from below 90 Taka. In theory, it is said that foreign currency earners become benefitted by local currency depreciation. But the increment in foreign currency substantiates the enhanced needs of outflows required for imports. As such, text book solution is rarely workable in practice. 

Adverse impact of upward move in price level went to fixed income earners, it is true. But corporate bodies became affected also. The result is found in increase in non-performing assets in banking industry. How they are affected is a question. As said earlier, the economy is dependent on inputs contents including infrastructure imports which are executed on credit terms. The payments need to be settled at future date. An example can be shown in this regard. Import credit is drawn of around 10 million US dollar. The exchange rate is 90 Taka per US dollar. Since foreign currency market is stable, the risk of fluctuation is insignificant. But it becomes 110 Taka as selling price per US dollar all on a sudden. It means that the importer needs to make additional payments of 200 million Taka. As a result, banks need to create forced loans. Cash flows of previous sales would not support to pay off loans, leading to loans default. 

Exchange rate of foreign currency is a factor for price hike in domestic market. Monetary phenomenon does not play role in this regard. Given the import needs, exchange rate needs to be managed in any way. Otherwise, the economy is to suffer a lot. These are different talks considering income in foreign currency. Whatever experts and theories say, market driven exchange rate cannot bring benefits for economies like ours. Local currency depreciation does not benefit all evenly; it creates worse situation for fixed income earning people. Very recently, central bank introduced crawling peg exchange rate system with a set mid rate at upper level. Such setting is another jump for price level.  

Monetary phenomenon can do nothing for inflation if it is due to loss of value in local currency. Rather its impacts are of many folds. Economic theory does not hold true in all cases as experienced in recent past. Hence, exchange rate warrants prudent management considering relevant factors of economic parameters. At the same time, policy supports are in need to maintain upward trend in income from external sources.

The writer is a teacher


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