Economy and rate exchange fluctuation in the state of

Bangladesh
After the collapse of the Bretton-Woods agreement, many developing
countries decided to hold on to their official parity (fixed exchange system),
experiencing a miscalculation of their currency. In the era of free trade, Forex
liberalization and devaluated domestic currency are characteristic for a
development policy. This kind of policy targets the alignment and equilibrium
of the exchange rate, as well as an increase in the global market
competiveness. However, the balance regarding the exchange rate strongly
depends on the economy also determined by external factors such as foreign
aid, remittances and import-export rapport.
A recent study has presented three scenarios on the growth and
development of economy in the state of Bangladesh:
Optimistic, representing an 8% increase in GDP;
Usual, with 6% growth;
Base, with only 4% increase in GDP;
Alongside, there are predictions to be made about foreign investments,
foreign aid, import and export in order to achieve constant GDP growth up until
the year of 2020. The study also suggests that the integration of the Bangla
economy in the global market depends on not only on the external growth, but
also on the political ability to sustain and improve the economy through legal
reforms.
It is important to remember that the 1970s were a key period for
Bangladesh as the domestic currency underwent a considerable devaluation in
order to realign the exchange rate according to inflation. Sluggish economy
and low export levels were due to the Independence War (1972), two
consecutive droughts and flood during 1972, 1973 and 1974. The economy
was also shrugged by oil and food price shocks as well as demand shock of
synthetic substitutes (jute). All those impediments in the way of economy
made it almost entirely dependent on foreign aid in order to fulfil the necessity
of foreign currency. As a result, the domestic currency became devalued so
that the realignment of the exchange rate to be possible.
It wasnt until 1990 that the economy of Bangladesh started improving.
Legal policies and reforms pursued and supported a strategy based on exports.
As a result, some countries offered Bangladesh reduced taxes and better
market access in order to deliver commodities. Foreign investments have
increased as well as the demand for Bangladeshi workers, achieving a growth
in the section of remittance. In conclusion, the 1990s were a period of
transition from a foreign aided economy to one relying on trade orientation.

In the years to come, a new transition is expected. That is shifting from

trade orientation to foreign investment in order to achieve a steady growth in
service income and trade domains. This becomes possible when the state
creates or revises legal reforms so that the Bangla economy integrates in the
global market. When it is indeed prosperous, exchange rate equilibrium
becomes the new target.
When both the internal and the external economy are flourishing, the
exchange rate equilibrium is the dominating factor. This is determined by four
factors implemented by Montiel in 1999:
Domestic supply. An increase of productivity in the tradable sector
determines an appreciation of the domestic supply as it generates a demand
of non-tradable, balancing the trade at the same time.
Fiscal policy. If the government spending on non-tradable increases, there
would be a small demand for the latter. Otherwise would ease the process of
achieving the exchange rate balance.
International economic environment. This includes numerous factors such as
inflation, availability of transfer, interest and terms of trade. The inflation will
affect transaction costs and thus the exchange rate. On one hand, an increase
in interests would depreciate the rate, because it leads to capital outflow. On
the other hand, an increase in transfer availability requires an appreciation.
Commercial policy. Freedom of trade does not ease the access of importing
competitive industries and thus resources are focused on non-tradable, which
will affect the exchange rate in a negative way.
Commercial borrowing and private capital were absent in Bangladesh until
recent years. Thus external transfer was exogenous as it was based on
payment aid and emergency lending. In addition, there were restrictions
regarding the investment outside borders. As a result, the global interest and
the inflation became insignificant when talking about the real exchange rate.
Another important factor in the development of the exchange rate is the
debt service to export ratio. If it increases, the current account will no longer
be sustained and so requires devaluation in order to maintain a balanced
exchange rate.
In 2003, Bangladesh transitioned to a floating regime which, at first,
sustained the exchange rate but then forced it to gradually depreciate from 1%
to 20% in 2004. Reserves are expected to manifest increased nominal
exchange volatility. However, very low estimations on exchange rate volatility,
interests and reserves indicate active implication on the behalf of Forex,
making the nominal exchange fixed or able to move within a narrow range.
Forex intervention may be effective when talking about achieving economic
targets such as trade competiveness and stable inflation rate. In contrast, a
constant movement of the nominal exchange will generate increased inflation,

powerful growth and gradual overvaluation which can be harmful for an

economy as the Bangla one.
Even though a depreciation of the currency was demanded by several
foreign exporters, the state maintained a fixed currency. That is because
depreciation brings about negative effects on the economy, especially via the
pass-through. Its high levels will diminish the value of the Taka. Moreover, the
devaluation will increase the interest rates, affecting the credit channel.
In conclusion, the exchange in Bangladesh is prosperous as it has never met
a crisis. However, there is place for improvement in the areas of exchange rate
management and exchange rate pressure (depends on how the global
economy will recover) in the Bangladesh market. In the case of a strong
comeback of the world-wide economy, the fixed rate will become vulnerable
without monetary support to stabilize inflation.

Summary
This short article targets the Bangla economy and its features such as
inflation, exchange rate and monetary regime.