Last month, I borrowed some money from one of my Bangladeshi friends. As I am living in India and there is no proper
channel of bringing money from Bangladesh, he sent me the money through his elder brother from Canada. I received the amount in Indian Rupee. As a foreigner I have to continuously look over the currency market and I saw since last month the Indian currency has been depreciating gradually against Dollar and Bangladeshi Taka. As a petty scholarship holder from Indian government paid in rupee I feel a bit lucky that, we counted the transaction amount in rupee!
When I shared this fact on my Facebook wall, one of my friends Ab Niloy commented that, He would like to go to Bangladesh to enjoy shopping. Another friend, Nahid Hasan commented that, He is happy to be a Bangladeshi citizen because his national currency is now more powerful than before.
In fact if we think the issue from academic perspective and economic point of view, the depreciation and appreciation of currency doesn’t have any single side effect and in the long run it is not a signal for economic strength. There are several criteria based on which the currency get stronger/weaker depending on some circumstances. Both Niloy and Nahid are right in some senses and both may be wrong in on the other. Indeed there is no right or wrong, it depends on the source of money for them as well as in the broader sense the source of earning in an economy. I replied Niloy that, now if you ask your mummy to send the same amount of money as before then you can buy less from Indian market at the same time if you go to Dhaka with your scholarship money you can buy less than that in Indian market! As a whole this is the puzzle of currency strengths sometimes pronounced mistakenly by the masses.
As long as the GDP growth matters and in the global market exports and remittances is the two strong sources of earnings for any developing economy; the price of domestic product in foreign market is quite important. At the same time, the import of foreign goods can be encouraged or discouraged due to the change in the value of currency. Simply, appreciation of currency makes foreign goods cheaper in domestic market and domestic goods costlier in foreign markets. Similarly, depreciation of domestic currency makes foreign goods costlier in domestic markets and domestic goods cheaper in foreign markets. So, appreciation of domestic currency may have a negative impact on overall export.
When we should be happy on the appreciation of our own currency? Only if we love to consume foreign goods or we can’t produce at all and there is no other ways without consuming foreign goods.
Now we can look at the overall macroeconomic scenario of Bangladeshi taka’s case to get the impact on us as well as on overall economy. The Bangladeshi Taka has been gradually appreciating against the Indian Rupee over the past year and converging towards equality with the Indian rupee. The Bangladeshi Taka, which was more than BDT 1.70 against a Rupee in early 2012, continued to appreciate against the Indian currency since then and last week, it reached, BDT 1.19 a Rupee to register some 30 per cent appreciation in Mumbai inter-bank trade.
From this fact, it is true that, Bangladeshi currency is appreciating against Indian currency, but it is not because of Bangladeshi currency is getting much stronger against the common currency dollar. In fact, Bangladeshi currency against dollar is appreciating in a slow manner; from 80 in 2012 December to 77 in 2013 August, but the Indian currency is depreciating so quickly against Dollar which makes Bangladeshi currency stronger against Indian currency. I can say that it is the relative depreciation if Indian Rupee against Dollar, which in turn gives some benefits to Taka (Not depreciating against Dollar in the same proportion) to appreciate against the India Rupee.
What is the economic consequence of Bangladeshi Taka converging to equality with Indian Rupee?
At present India is the largest trade partner of Bangladesh and currently the value of Bangladeshi imports from India is worth $4.5 billion per year. In contrast, Bangladesh exports nearly $600 million a year in Indian market. Due to this appreciation common trends show, Indian export to Bangladesh will increase and Bangladeshi export to India will be decreased. And, this new direction of trade may widen the existing huge trade deficit further for Bangladesh.
According to the newspapers, the depreciation of Rupee has already slowed down the Indian imports of fish and other edibles from Bangladesh, as importers in India do not find trading on Bangladeshi goods viable in their domestic retail markets especially in northeast states of India. Most of these Indian states depend on imports of some essentials from Bangladesh. Volume of trade between northeast Indian state of Tripura and Bangladesh fell by 85 per cent in July last due to the escalating exchange rate of the US dollar, which remains almost unchanged against BDT in inter-bank foreign exchange trade.
As Bangladesh received a record $14.46 billion in remittance in the fiscal year (FY) 2012-13 which was 12.6 per cent higher than the previous FY; the export income in the 2012-13 fiscal was $27.02 billion, 11.18 per cent higher than the year before, clearly the appreciation of Bangladeshi taka is a signal of the continuous economic progress of Bangladesh. But, Bangladesh bank has to intervene effectively in foreign exchange market so that the process of export growth and import discouragement can sustain.
So, there is nothing absolute goodness in appreciation of domestic currency though sometimes it may help us to consume more or favour us like my borrowing case. But, for a developing economy which mainly depends on its emerging export to the foreign market it is pretty tough to continue economic growth with such an appreciation of domestic currency.