Presented by : Liza Fahmida

Examination Committee:

Dr. Sundar Venkatesh (Chairperson)Dr. Juthathip Jongwanich (Co-Chair)

Dr. Yuosre Badir (Member)

3/6/2012 1

Outline

�Objectives of the Study�Exchange Rate Regimes in Bangladesh : An

Overview�Impact on Macro Economic Fundamentals�Summery of Empirical Evidence�Present Currency Situation�Recommendations�Conclusion

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Objectives

� Evaluation of Exchange Rate Regimes in Bangladesh: Fixed to FloatBangladesh: Fixed to Float

� Analyze It’s Impact on Macro Economy: Export, Workers Remittance and Foreign Reserve.

� Exploring the Reasons of Present Currency Situation

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Exchange Rate Regimes In

Bangladesh :An Overview

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Fixed (1972) to Float (2003)

Exchange Rate Regimes In

Bangladesh : An Overview cont.

� Bangladesh had a fixed exchange rate system from January,1972 to May 2003.

� After more than 31 years, Bangladesh Bank changed it into a floating exchange rate system in June 2003.into a floating exchange rate system in June 2003.

� The reasons behind adopting new system was:�Government’s commitment to the liberalization of the

country’s economy � IMF's ' ‘Conditionality’

Source: BB Financial Sector Review (2006)’

3/6/2012 5

Exchange Rate Regimes In

Bangladesh : An Overview cont.

1972: Taka used to float with US$ via British Pound Sterling/GBP.1975: Government adopted an expansionary monetary policy resulted high inflation and trade

deficit. 1983: Facing serious macroeconomic problems, the government, for the first time accepted

"do gooder's" i.e. World Bank-IMF's structural adjustment credit under ‘conditionality’ that involves deflationary macroeconomic policies and elimination of various subsidy programs.

1991:During this period, Government took some major reform in the exchange rate arrangements like :arrangements like :

I. Unified the exchange rate regime in January 1992 by abolishing the secondary exchange market.

II. Removed some exchange controls in current account transactions.III. In April 1994 government accepted the Article VIII obligation of the IMF.IV. The removal of exchange controls induced inflows of WR through the official channels.

2003 : To meet up the economic demand and to fulfill the aid conditionality, on 29 May Bangladesh Bank issued a circular stating- effective from 31st May, 2003, Bangladesh Bank floated its exchange rate and followed a fully market based exchange rate for Taka. Under this arrangement, exchange rate is determined on the basis of demand and supply of the respective currencies.

Source: Hossain, Aktar.2002.Exchange Rate, Capital Flows and International Trade

3/6/2012 6

Exchange Rate Regimes In Bangladesh : An

Overview cont.

Exchange Rate Movment

58.3558.4

58.4558.5

58.5558.6

58.6558.7

Exc

hang

e Rat

e TK/$

Figure: Exchange Rate Movement immediately after inception of Floating

58.258.2558.3

58.35

Jun'

-01

Jun'

-04

Jun'

-08

Jun'

-11

Jun'

-15

Jun'

-18

Jun'

-22

Jun'

-25

Jun'

-29

July

'-03

July

'-07

July

'-10

July

'-14

July

'-17

July

'-21

July

'-24

July

'-28

July

'-31

Banking days

Exc

hang

e Rat

e TK/$

After the introduction of free floating exchange rate system, there was no unusual raise of exchange rate till mid 2004.

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Growth rate of GDP (% per year), Current Account Balance as Percentages of GDP, Inflation : Comparison with some neighboring countries Source: ADB Outlook’2011

� Growth rate of GDP (% per year)

GDP 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Bangladesh

5.3 4.4 5.3 5.7 6.0 6.6 6.4 6.2 5.7 5.8 6.3

India 5.8 4.0 8.2 7.4 7.6 9.7 9.2 6.7 8.0 8.6 8.2

Sri Lanka -1.5 4.0 5.9 5.0 5.5 7.7 6.8 6.0 3.5 7.6 8.0

C/A 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Bangladesh

-2.3 0.4 0.5 0.0 -1.5 1.3 1.4 0.9 2.7 3.7 0.2

India 0.2 0.8 0.7 0.3 0.3 -1.2 -1.4 -2.4 -2.8 -3.0 -3.5

Sri Lanka -1.5 -1.8 -2.2 -3.0 -3.5 -5.3 -4.3 -9.5 -0.5 -3.8 -4.0

Inflation 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Bangladesh

1.6 2.8 4.4 4.7 5.2 7.2 7.2 9.9 6.7 7.3 8.0

India 4.7 3.4 5.3 5.0 5.0 5.2 5.0 8.7 2.1 9.2 7.8

Sri Lanka 11.0 10.2 2.6 - - 10.0 15.8 22.6 3.4 5.9 8.0

3/6/2012 Source: ADB Outlook: 2004-2011 8

Impact on Macro Economic FundamentalsExport, Remittance, Reserve (FY 02-FY11)

15000

20000

25000

Export in mil US$

0

5000

10000

Export in mil US$

Workers Remittance in mil US$Reserve in mil US$

in million U

S$

FX Rate

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FOREIGN RESERVEPeriod Reserves

($)

2002-2003 2469.6

2003-2004 2705

2004-2005 29306000

8000

10000

12000

Reserves($)

2005-2006 3483.8

2006-2007 5077.2

2007-2008 6148.8

2008-2009 7470.9

2009-2010 10749.7

2010-2011 10911.6

0

2000

4000Reserves($)

-reserve position increased over the years from 2003-2011

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Impact on Macro Economic Fundamentals :The Growth Rate of GDP

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Impact on Macro Economic Fundamentals:Relationship FX rate and RemittanceCorrelation Matrix:

Correlation Export Remittance Reserve

Exchange Rate 0.928315219 0.859373146 0.825444493

Regression Analysis: Regression Model

Y=66.15+.010385 remittance The value of R square is .37 which means that the regression model explains 37% variation in exchange rate. The coefficient is very low which is and P value is quite high that is 3.74. So, the remittance does not show any significant impact on foreign exchange rate.

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Summery of Empirical Evidence1. There is strong evidence that exchange rate regimes have a clear,

significantly negative impact on growth. William Miles, 2006

2. Regime change has no statistically significant impact on the value of Bangladesh currency once foreign exchange reserve is incorporated in the regression model. Asad Karim Khan, June 20092009

3. High seasonal demand for foreign currency because of increased import bills, systematic withdrawal of excess liquidity by Bangladesh Bank, relatively faster expansion of credit and higher interest rates on various national savings instruments are the reasons behind the interest rate hike in the money market and depreciation of the nominal exchange rate. Rahman and Barua(2006)

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Present Currency SituationIn the recent Taka depreciates against US$ drastically: Over the period, July 2010-January 2012, from Tk 70 to Tk 86 -- a depressing 23% fall down.

70

80

90

0

10

20

30

40

50

60

1/1/

2003

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2003

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2003

10/1

/200

3

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/200

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/200

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/200

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/201

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2011

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/201

1

1/1/

2012

USD/BDT

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Present Currency Situation cont�The current account balance recorded a deficit of

372 million U. S. dollars in the July-October period in the current financial year 2011-2012.

�Taka depreciates against US$ drastically: Over the �Taka depreciates against US$ drastically: Over the period, July 2010-January 2012, from Tk 70 to Tk 86 -- a depressing 23% fall down.

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Reasons for Currency Depreciation

High Inflation:

10

12

14

0

2

4

6

8

10

point to point

12 months average

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Trade Deficit

30000.0

40000.0

50000.0

60000.0

0.0

10000.0

20000.0 Import

Export

Figures: In million US$

IMPORT >EXPORT:CREATES DEMAND FOR FOREIGN CURRENCY

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Low Foreign Direct Investment:

300.00%

350.00%

400.00%

growth rate

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-150.00%

-100.00%

-50.00%

0.00%

50.00%

100.00%

150.00%

200.00%

250.00%

Jul/9

6-D

ec

Jan-

Jun

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ec

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ec

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-Dec

.

growth rate

Recommendations

1. Control Inflation2. Reduce Trade Deficit3. Enhancing Foreign Direct Investment4. Short Term Foreign Borrowings4. Short Term Foreign Borrowings5. Effective Capital Market6. Derivatives Market8. Autonomy of the Central Bank

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Conclusion� Government and Regulator (BB) should formulate

Macro Economic (Fiscal and Monetary) Policy Objectives with the consistency of FX regime.

� The development of macro economic fundamentals � The development of macro economic fundamentals does not primarily depends on FX regime.

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Thank YouThank YouThank YouThank YouThank YouThank YouThank YouThank You

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