Hiren Pandit: What is the crawling peg method? Through this, the price of the dollar increased. Bangladesh Bank has fixed the new dollar cost by increasing it to 7 taka. The central bank raised the official price of the dollar, which was at 110 takas, to 117 takas in one day. This price of a dollar is determined by the crawling peg method. The financial sector regulatory body recently announced this price by issuing a circular. A crawling peg is a method of adjusting the exchange rate of the domestic currency to the foreign currency. In this system, the exchange rate of a currency can fluctuate within a specific range.
In this case, the upper and lower limit of the currency rate is fixed. As a result, it cannot increase too much at once, nor can it decrease again. Bangladeshi traders must buy dollars from banks and open letters of credit (LC) to import daily commodities like edible oil, lentils, and sugar-onion. Generally, when the dollar’s value increases, the prices of goods in the domestic market also increase. Again, if the dollar price falls, the cost of goods will drop accordingly. The official rate differed from the actual market dollar rate in the last two years. Even before the introduction of the crawling peg system, the dollar value for remittances and imports was fixed at Tk 110. The crawling peg system directly impacts the domestic market, influencing the prices of goods and the cost of living.
But most of the banks had to buy remittances at a price of more than 115-116 rupees. Banks did not sell dollars at a loss to importers. They sold the dollar at 1-2 rupees more than that. Some banks have charged 120 rupees more than USD for the settlement of import LC. A country follows a crawling peg system when the exchange rate tends to be volatile and inflation is high. Bangladesh is now in this situation. Despite its limitations, the new crawling peg system has brought significant benefits to traders, offering a more stable and predictable market.
Importers can now get dollars from any bank at fixed rates. The dollar did not rise in the new crawling peg system. On the contrary, prices are low compared to November-December last year. To increase the supply of foreign currency, especially the US dollar. Also, remember that the current state of foreign exchange reserves may not cause danger. Bangladesh Bank has been artificially controlling the dollar exchange rate for a long time. In a free market economy, the government or any other authority cannot directly or indirectly impose any control over the market. The government can intervene in the market only when an abnormal situation arises. But from the beginning, Bangladesh Bank controlled the dollar exchange rate indirectly.
Bangladesh Bank wants to go one step further through the crawling peg system to leave the currency exchange rate to the market. The crawling peg system is a system in which a corridor will be created to fix the exchange rate of the local currency against the dollar. Banks and money changer companies must determine the dollar exchange rate within that corridor. Dollar exchange rate for Bangladesh Bank Schedule Bank If the Bangladesh Bank makes the exchange rate of the dollar based on the market at the moment, then the overvaluation of the money against the dollar will come down. The assumption that imports costs will increase abnormally even if the dollar exchange rate is market-based is invalid. At present, many importers cannot buy the required dollars from the banking channel, but they are meeting their needs by collecting dollars from the curb market at a high price. Therefore, if the dollar exchange rate is based on the market, the product price will increase abnormally. If the high dollar exchange rate increases the cost of goods in the local market, why is the price of locally produced goods increasing?
The increase in import costs is not the only reason behind the abnormal rise in the prices of various products in the local market. The government’s failure to control the market is more responsible for this. The people of Bangladesh have to import only 25 percent of the products they consume yearly. The remaining 75 percent of products are produced and marketed locally. So why does the price of these products increase? The single largest sector of the country’s foreign exchange is the export of goods. Bangladesh earned over 50 billion dollars from this sector for the first time in the last financial year. Out of this, manufactured garment exports have earned as much as 42 billion dollars.
As this sector is import-dependent, its value-addition rate in the national economy is relatively low. 35 to 40 percent of the money earned from this sector is repatriated to import raw materials, capital machinery, and intermediate goods. Besides, some foreign experts work in the garment industry. Engineers and other expert Bangladesh workers work abroad with a good reputation. Among the entrepreneurs of our country, there is a greater tendency to import skilled manpower than to create skilled manpower. Initiatives can be taken to solve this problem in the long term. Bangladesh Bank is trying to control the import of non-essential and luxury goods. As the country’s economy is currently experiencing a foreign exchange crisis, Bangladesh Bank has formulated a list of 122 luxury goods and discourages the import of these goods.
Its purpose was to bring the balance of trade to a favorable state. It was seen that the cost of import has come down a lot. We need to organize our export trade systematically. So that the potential of this sector can be fully utilized. Manpower export is the most promising sector in which to earn foreign exchange in the country. Almost a hundred percent of the money earned in this sector adds value to the national economy.
Besides, this sector has created employment opportunities for about one and a half crore people abroad. But this sector is developing completely unplanned. Last year, 1.3 million Bangladeshis went abroad for employment. But Bangladesh earned 23 billion dollars in the manpower export sector. So, did the Bangladeshis not send enough money to the country? They must have sent money to the government. But it was sent through Hundi instead of a legitimate channel. On average, every dollar remitted through Hundi is 12 to 14 taka more than through banking channels. For this reason, the dollar exchange rate can be left to the market, and the cash incentives given on expatriate income can be maintained.
Then, expatriate Bangladeshis may become interested in sending money back home through legitimate channels. Meanwhile, before the dollar exchange rate is entirely market-based, introducing this system is mentioned as a practical step related to private banks. Banks can now trade dollars below or above 117 rupees. However, the dollar cannot be traded much lower or higher than this rate. The central bank should be informed of the price at which the dollar is traded daily. Apart from this, this banker thinks that the ongoing dollar crisis will go away due to the introduction of a crawling system.
Meanwhile, traders believe increasing the dollar price will harm the import sector. They say, so far, there was some uncertainty about the availability of dollars, and the prices were relatively low. Now, increasing the price of the dollar by 7 rupees will increase the cost of imports and the price of goods. At the same time, inflation will rise. As a result, the pressure on the ordinary people will increase. It is said in the notification of Bangladesh Bank that the dollar will be traded in a crawling peg system from now on. In this method, the dollar rate has recently been fixed at Tk 117.
In monetary policy, a crawling peg system is being considered to simultaneously control the dollar’s exchange rate. A crawling peg is a financial system that allows the national currency exchange rate to fluctuate within a specified range (band). The central bank keeps the exchange rate from moving out of the band. China, Vietnam, Nicaragua, and Botswana are some of the countries that have adopted this system. They chose this system to promote stability and balance of payments. They sometimes adjust the exchange rate to increase the country’s competitiveness in the export market. Inflation is the rise in prices of individual goods and services. This can happen for various reasons. Such as rising production costs, increased demand, or government policies. If the demand for a product or service increases in the market and there is no corresponding supply, then the price increases. Again, if the price of the materials needed to make something increases, the original product’s price increases.
On the other hand, if the supply of goods and services is insufficient in proportion to a country’s population, it affects the prices. In June 2024, the monetary policy set a target of a 10 percent increase in credit flow to the private sector and a target of 27.8 percent to the public sector. Last December, the growth of credit flow in the private sector was 10.2 percent. Eighteen percent was in the public sector. A reduction in credit to the private productive sector will reduce production. As a result, many people may become unemployed. However, the debt target has been increased in the public sector. Bankers and traders said, ‘The introduction of the crawling peg system has officially increased the dollar price, but there is no opportunity to increase the cost of imported goods because the real exchange rate has adjusted to the current market rate.
According to them, the official price of the dollar is Tk 110, but it is being openly traded at Tk 118-120 or more. Bangladesh Bank has reduced this gap and fixed the average dollar price at Tk 117. The dollar price can be kept at 1 taka more or less than this. The introduction of crawling pegs will not increase import costs much or at all. Instead, this adjustment of the dollar price will contribute to keeping the market stable. Importers who have been uncertain about the dollar rate for a long time will be relieved as this uncertainty is removed. It will also be easier to determine the selling price of imported goods. On the other hand, a better value of the dollar will have a positive impact on remittance flows and export earnings.
Hiren Pandit is an essayist and research fellow.