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 3/6/2012 2
Objectives � Evaluation of Exchange Rate Regimes in Bangladesh: Fixed to Float Bangladesh: Fixed to Float � Analyze It’s Impact on Macro Economy: Export, Workers Remittance and Foreign Reserve. � Exploring the Reasons of Present Currency Situation 3/6/2012 3
Exchange Rate Regimes In Bangladesh :An Overview Fixed (1972) to Float (2003) 3/6/2012 4
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 ' ‘Conditional ity’ 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 31 st 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. Figure: Exchange Rate Movement immediately after inception of Floating Exchange Rate Movment 58.7 58.65 /$ K 58.6 T 58.55 te 58.5 a R 58.45 e g 58.4 n n a a 58.35 58.35 h xch 58.3 E 58.25 58.2 1 4 8 1 5 8 2 5 9 3 7 0 4 7 1 4 8 1 '-0 '-0 '-0 '-1 '-1 '-1 '-2 '-2 '-2 ly'-0 ly'-0 ly'-1 ly'-1 ly'-1 ly'-2 ly'-2 ly'-2 ly'-3 n n n n n n n n n Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Ju Banking days After the introduction of free floating exchange rate system, there was no unusual raise of exchange rate till mid 2004. 3/6/2012 7
Growth rate of GDP (% per year), Current Account Balance as Percentages of GDP, Inflation : Comparison with some neighboring countries Source: ADB Outlook’2011 GDP 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 5.3 4.4 5.3 5.7 6.0 6.6 6.4 6.2 5.7 5.8 6.3 Banglade sh 5.8 4.0 8.2 7.4 7.6 9.7 9.2 6.7 8.0 8.6 8.2 India � Growth rate of GDP (% per year) -1.5 4.0 5.9 5.0 5.5 7.7 6.8 6.0 3.5 7.6 8.0 Sri Lanka C/A 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 -2.3 0.4 0.5 0.0 -1.5 1.3 1.4 0.9 2.7 3.7 0.2 Banglade sh 0.2 0.8 0.7 0.3 0.3 -1.2 -1.4 -2.4 -2.8 -3.0 -3.5 India -1.5 -1.8 -2.2 -3.0 -3.5 -5.3 -4.3 -9.5 -0.5 -3.8 -4.0 Sri Lanka Inflation 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 1.6 2.8 4.4 4.7 5.2 7.2 7.2 9.9 6.7 7.3 8.0 Banglade sh 4.7 3.4 5.3 5.0 5.0 5.2 5.0 8.7 2.1 9.2 7.8 India 11.0 10.2 2.6 - - 10.0 15.8 22.6 3.4 5.9 8.0 Sri Lanka 3/6/2012 Source: ADB Outlook: 2004-2011 8
Impact on Macro Economic Fundamentals Export, Remittance, Reserve (FY 02-FY11) 25000 20000 15000 Export in mil US$ Export in mil US$ in million US$ 10000 Workers Remittance in mil US$ 5000 Reserve in mil US$ 0 FX Rate 3/6/2012 9
FOREIGN RESERVE 12000 Period Reserves Reserves($) ($) 2002-2003 2469.6 10000 2003-2004 2705 8000 2004-2005 2930 6000 2005-2006 3483.8 4000 Reserves($) 2006-2007 5077.2 2000 2007-2008 6148.8 0 2008-2009 7470.9 2009-2010 10749.7 -reserve position increased over the years from 2003-2011 2010-2011 10911.6 3/6/2012 10
Impact on Macro Economic Fundamentals : The Growth Rate of GDP 3/6/2012 11
Impact on Macro Economic Fundamentals: Relationship FX rate and Remittance Correlation Matrix: Correlation Export Remittance Reserve Exchange Rate 0.928315219 0.859373146 0.825444493 Regression Analysis: Regression Model Y=66.15+.010385 remittance The value of R square is .37 which means that the regression model explains 37% variation in exchange rate. The coefficient is very low which is and P value is quite high that is 3.74. So, the remittance does not show any significant impact on foreign exchange rate. 3/6/2012 12
Summery of Empirical Evidence 1. There is strong evidence that exchange rate regimes have a clear, significantly negative impact on growth. William Miles, 2006 Regime change has no statistically significant impact on the value 2. of Bangladesh currency once foreign exchange reserve is incorporated in the regression model. Asad Karim Khan, June 2009 2009 3. High seasonal demand for foreign currency because of increased import bills, systematic withdrawal of excess liquidity by Bangladesh Bank, relatively faster expansion of credit and higher interest rates on various national savings instruments are the reasons behind the interest rate hike in the money market and depreciation of the nominal exchange rate. Rahman and Barua (2006) 3/6/2012 13
3/6/2012 Present Currency Situation 2010-January 2012, from Tk 70 to Tk 86 -- a depressing 23% fall down. In the recent Taka depreciates against US$ drastically: Over the period, July 10 20 30 40 50 60 70 80 90 0 1/1/2003 4/1/2003 7/1/2003 10/1/2003 1/1/2004 4/1/2004 7/1/2004 10/1/2004 1/1/2005 4/1/2005 7/1/2005 10/1/2005 1/1/2006 4/1/2006 7/1/2006 10/1/2006 1/1/2007 4/1/2007 7/1/2007 10/1/2007 1/1/2008 4/1/2008 7/1/2008 10/1/2008 1/1/2009 4/1/2009 7/1/2009 10/1/2009 1/1/2010 4/1/2010 7/1/2010 10/1/2010 1/1/2011 4/1/2011 7/1/2011 USD/BDT 10/1/2011 1/1/2012 14
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. 3/6/2012 15
Reasons for Currency Depreciation High Inflation: 14 12 10 10 8 6 point to point 4 12 months average 2 0 3/6/2012 16
Trade Deficit 60000.0 50000.0 40000.0 30000.0 20000.0 Import Export 10000.0 0.0 Figures: In million US$ IMPORT >EXPORT:CREATES DEMAND FOR FOREIGN CURRENCY 3/6/2012 17
3/6/2012 Low Foreign Direct Investment: -150.00% -100.00% 100.00% 150.00% 200.00% 250.00% 300.00% 350.00% 400.00% -50.00% 50.00% 0.00% Jul/96-Dec Jan-Jun Jul-Dec Jan-Jun Jul-Dec Jan-Jun Jul-Dec Jan-Jun Jul-Dec Jan-Jun Jul-Dec growth rate Jan-Jun Jul-Dec Jan-Jun Jul-Dec Jan-Jun Jul-Dec Jan-Jun Jul-Dec Jan-Jun Jul-Dec Jan-Jun Jul-Dec Jan-Jun Jul-Dec Jan-Jun Jul-Dec Jan-Jun July-Dec. growth rate 18
Recommendations 1. Control Inflation 2. Reduce Trade Deficit 3. Enhancing Foreign Direct Investment 4. Short Term Foreign Borrowings 4. Short Term Foreign Borrowings 5. Effective Capital Market 6. Derivatives Market 8. Autonomy of the Central Bank 3/6/2012 19
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. 3/6/2012 20
Thank You Thank You Thank You Thank You Thank You Thank You Thank You Thank You 3/6/2012 21
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