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Bangladesh Needs to Readjust the Taka

Chu V. Nguyen
Associate Professor and Chairman
Dept. of Economics and Finance, FACIS Department, College of Business, University of Houston-Downtown, Texas, USA

Geungu Yu
Associate Professor
Dept. of Finance, Jackson State University, Jackson, Mississippi, USA

Muhammad Mahboob Ali
Professor
Department of Business Administration, Daffodil International University and Chairman of Center for Breakthrough Thinking, Bangladesh

Abstract/ Executive Summary:

An exchange rate system is important for a country to maintain economic stability. The objective of this study is 1) to calculate the Bangladeshi real exchange rate, 2) to analyze the competitive position of Bangladesh in the bilateral export market, and 3) to make recommendations for Bangladeshi policymakers and others who may be interested in the impact of the implied foreign exchange rate of the Bangladeshi Taka on international trades. The empirical results of this study indicate that Bangladesh’s competitive position in its bilateral export markets with the US has deteriorated since the beginning of 2013. Considering the significant devaluation of the Chinese yuan and Indian rupees in recent years, this study finds that Bangladesh needs to readjust the Taka to maintain its competitive position in export markets.

Keywords: Exchange rate, Bangladesh Taka, Export markets

Location: In Bangladesh

Start Date:

End Date:

Program Area: Comparative study

Commodity: Trade, Accountability, Market analysis

Objectives:

The objective of this study is to calculate the Bangladeshi real exchange rate to analyze its competitive position in the bilateral export market.

Methodology:

As always, monthly data contains a lot of noise. Additionally, there is some degree of rigidity in business operations, i.e., their business plans cannot be changed monthly; therefore, there is time lag in export markets’ reactions to changes in the monthly real exchange rate. Also, the above-calculated q, using monthly data, should be expected to be different from unity. This study examines whether the calculated real exchange rate, q, is statistically different from unity at any conventional levels of significance. To address the excessive noise in the monthly data and the rigidity in business operations, this study will calculate and analyze the 12-month, 24-month and 36-month moving averages of the q in addition to its monthly values. To scientifically substantiate the conclusion whether or not the calculated real exchange rate, q, is statistically different from unity at conventional levels of significance, this study calculates the ±2 standard errors of the 12- month, 24-month and 36-month moving averages of the q to determine if the band of the ±2 standard errors of any of these moving averages contains the unity, i.e., the line q =1. As described by equation (1), under PPP, the real exchange rate is expected to be unitary, q = 1. Therefore, if the band of the ±2 standard errors of any of these moving averages series q contains the unity, the probability for that series to be statistically equal to 1 is 95.4 percent and to be different than one is 4.5 percent. Statistically, the aforementioned can be restated as if the band of the ±2 standard errors of any of these moving averages series q contains the unity, the hypothesis that the series q is different from one should be rejected at 5 percent level of significance. It should be noted here that this methodology uses a simple concept discussed in any introductory level statistics textbook to scientifically and elegantly substantiate results of a fairly relevant and complex international financial question. Also, as far as it may be ascertained, this elegant procedure has not been used in this type of investigation before.

Source of Information: IJMS Vol.-V, Issue-2, December- 2015; EISSN 2231-279X Impact Factor(GIF): 0.645 ISSN 2249-0280

Article Link (Online Journal):

Funding Source:

1.

Budget:

Total Budget (Tk.) :

Achievement/Findings:

It is very important to observe that the above-calculated q’s are statistically different from one, as the bands between their ±2 standard errors do not contain the unity. More specifically, they are much greater than one, and in fact are higher than those observed during recent history. These empirical results indicate that the Bangladeshi competitive positions in its bilateral export markets with the US have recently deteriorated. Additionally, Bangladeshi exports are mainly labor-intensive, low-tech commodities which can be produced by other countries in the region. Finally, the recent significant devaluation of the Chinese yuan which almost certainly be followed my the devaluations of many other currencies by countries in the region to maintain their competitive positions in the export markets. To restore its competitiveness, the Bangladeshi policymakers should tighten monetary policy to reduce inflation. Alternatively, it should allow its currency to depreciate faster. Both entail short-run pain and long-term gain. The policymakers may articulate that this is necessary to create jobs to Bangladesh in the age of globalization. Given, the current international financial market condition and the gradual appreciation of the Taka/USD exchange rate since 2013, Bangladesh needs to readjust the Taka against the USD through depreciation to persevere in aligning the rates of change in nominal exchange rates between the Taka and the currencies of its trading partners with their inflation rate differentials so that it can be competitive in the area of exportable commodities.

Knowledge Management: Report/Proceedings