Impact of the exchange rate on export of Bangladesh
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Abstract:
This academic research paper is based on the exchange rate and its volatility that affect on the export growth of Bangladesh. This paper consists of four parts. In first part we will give a short description of Bangladesh and its export industry. In second part we will focus on previous research. In this part we will critically evaluate other researchers work along with their point of views. In the third part which is our evidence part we will give example as well as cite from previous established research to support our statement. And in the fourth part we will set some recommendation and conclude our paper.
All the information we use here is secondary data. As our time is limited and collecting data was not an easy process so we rely on our previous researcher. We collect data from different resources like newspaper articles, journals as well as research some reputed nonprofit organizations like USAID and IMF.
Introduction:
Exchange rate is the value between two currencies shows how much one currency is worth in terms of other currency. The value of exchange rates affects the demand for exports and imports. An appreciation of the dollar will lead to exports becoming more expensive and imports cheaper. This will harm exporters and increase the leakages from the circular flow of income. Were the dollar to depreciate the opposite effect would occur.
There is a traditional view that exchange rate depreciation improves exports for developed countries.. But is it also true for mid developing countries like Bangladesh? In this research paper we will discuss on such issues like exchange rate volatility and its impact on the volume of international trade of Bangladesh.
Bangladesh is a low-income third world country. According to IMF Mean wages were $0.58 per man hour at 2009 in Bangladesh. Since the independence on 16th December 1971 Bangladesh economic ground is not sufficient enough to fulfill its huge number of population with its basic needs. Bangladesh is a very small country with a population of 160 million. GDP in Bangladesh has more than doubled since 1975, and the poverty rate has fallen by 20% since the early 1990s. The country is listed among the “Next Eleven” economies. Dhaka, the capital, and other urban centers have been the driving force behind this growth. From 1971 to 2010 Bangladesh economy has gone through several major policy changes. In early 70’s it was dominated by socialist ideologies, then in late 70’s with IMF- World bank suggestion it jumped in to market economy.
Eventually its export sector was also given a break-through with policies like reducing/ demolishing maximum amount on private borrowing and investments, export-led industrialization etc. Exchange rate policy in Bangladesh also change progressively. Since independence Bangladesh export earnings increased and Bangladeshi currency which call ‘Taka’ also depreciated significantly. But how much contribution this depreciation has to the export growth of Bangladesh is not clear. From 31st May, 2003 Bangladesh has introduced free-floating exchange rate system. Naturally depreciation is expected to be more free and frequent under free floating exchange rate system. And the pattern and destination of our export expected to change significantly due to free floating exchange rate system.
Literature review:
The literature on exchange rate depreciation favors country’s export or not may depends on country’s economic concerned, technique they used, content consider and so other factors. According to Junz and Rhomberg (1973) and Wilson and Takacs (1979), using data from a fixed exchange rate period, and Bahmani-Oskooee and Kara (2003), using data from a flexible exchange rate period, proved that depreciation improves exports for developed countries. In 1993 Arslan tried to find the causes of export growth of the Turkish at mid 80’s, and he find that an export rate depreciation robust their export growth recover them rapidly from the debt crisis that they are facing from late 70’s. Same result was found by Nabli and Marie at 2002 when they tried to found the causes of huge lose in the export of Middle East and North African countries. They found that an appreciation of their currency caused this huge lose by decreasing their export competitiveness. According to Thapa (2005) ” a depreciation of real exchange rate enhances international competitiveness of domestic good and net export of Nepal”
However many researcher are not agree with this statement. At 2004 Fang and Miller conducted a research on Singapore where they found that in Singapore depreciation doesn’t improve export. Moreover this exchange rate risk slow down their export rate. In their research paper they suggest Singaporean policy maker to promote export goods by stabilizing the exchange rate rather than depreciating their currency. A similar research conducted by Fang, Lai and Miller at 2005 where they shows that in 8 Asian countries including Malaysia, Indonesia, Singapore, Japan, korea, Taiwan and Thailand currency depreciation have a weak contribution on their export growth. In their research both researchers show that exports are not negatively affected by an appreciated currency because the lower import price due to appreciation reduce the cost of export production.
Devkota (2000) pointed out that in Nepal export is dominated by imported raw materials. So depreciation their currency might increase export but cannot decrease their trade shortfalls. In Bangladesh circumstance this trade deficit also differs but dominated by the pessimist views that depreciation has little effect on export earning or trade balance.
Evidence:
According to Ahmed. M (2009) “In 2004-05, Bangladesh exported largest volume of merchandise and commodities to US and held the top position in respect of importing Bangladeshi commodities. During this period, goods worth of US$ 2,412.05 million were exported to the US, which was 27.87 percent of the total export of the country.” It’s a remarkable improvement for a low developing country like Bangladesh.
More than a decade Bangladesh followed a free floating exchange rate policy. Beforehand, the exchange rate of Taka used to be attuned from time to time to keep it competitive based on the rate of inflation and movement of exchange rates as well as trade weights with partner countries. As we mention earlier In recent times, the Government has taken an audacious step in exchange rate management. According to Ahmed. Md.(2009) “Although the US dollar linger stronger against Taka during the period of late 2003 through April 2004 but the situation after that did not aggravate and the value of Taka remained stable between May 2004 to August 2004. Since August 2004 Taka showed stability and from August 2004 to March 2005 Taka showed some flexibility against US Dollar. Despite the rapid development of private sector with increasing credit flow; much higher growth in import of capital machinery and primary goods due to devastating flood and hike of the oil price in international market were mainly responsible for the fluctuation of exchange rate. Due to constant monitor and supervision by the central bank of Bangladesh and booster of greenback into foreign exchange market the exchange rate remained stable. On June 30, 2004 the official and interbank market exchange rate of Taka-Dollar remained firm, whereas, the value of Taka was 59.30 and 61.50 correspondingly. Even though, in open market the dollar was charged comparatively more than interbank market exchange rate. However, on June 30, 2004 the exchange rate of dollar was moving upward slightly from Tk. 61.00 to 62.20 in this market.” According to IMF(shown in appendix table-1) at 2005 the exchange rate against dollar was 63.92 which depreciated significantly and at 2008 it jumped to 68.65.
This rate of deprecation has a little impact on Bangladesh export industry. A research was conducted by Rahman. M from CPD( central policy Dialogue) at 2006 where they argue that a real exchange rate depreciation might not have played a significant role in boosting exports in Bangladesh. This statement is also supported by many researchers over the ages as reported in Hossain (2000).
There is a common believe that although a deprecation will led a country to a high volume of export but import will become more expensive and it will affect the specific country’s trade balance. But in their research paper Rahman. M (2006) proved that no visible correlation is present between the movements in the REER( real effective exchange rate) and the growth rates of either Bangladesh’s exports or imports. They argue that instead of exchange rate other structural factors like supply side constraints and global market dynamics play a more important role in stimulating exports and improve the balance of payments position. In order to support their statement they provide a statistical document which was cited from IMF, Bangladesh Bank and EPB.
From the above graph we can see that during 2005 when the value of ‘Taka’ was depreciated most the export and import growth was lower and at 2010 when the currency was appreciated a bit surprisingly both export and import growth significantly become higher. In order to support our statement we need to go much deeper in Bangladesh export industry.
Bangladesh’s textile industry, which includes knitwear and ready-made garments along with specialized textile products, is the nation’s number one export earner, accounting for 80% of Bangladesh’s exports of $15.56 billion in 2009. Bangladesh is 3rd in world textile exports behind Turkey. China is the first in the world textile export with a amount of $120.1 billion in 2009 The main importer of Bangladeshi Textile goods are US an EU nations. Bangladesh’s expedition to increase the quantity of textile trade is supported by US and EU caps on Chinese textiles. The US cap restricts growth in imports of Chinese textiles to 12.5 per cent at 2007 and between 15 and 16 per cent in 2008. The EU deal similarly manages import growth until 2008. This statement is also supported by Gajewski and Riley ( Bangladesh export trade practices and their effect on the competitiveness on the garment industry) where they mention that The Multi-Fiber Arrangement (MFA) and the WTO Agreement on Textiles and Clothing contributed to Bangladesh’s greater trade integration with world markets and a rapid expansion of garment sector exports, which showed increases from USD$866 million in 1991 to USD$5.8 billion in 2004. And Bangladesh has enjoyed sustained rates of overall economic growth during the last 15 years. So we can argue that it the global political and supply side constraints that are playing more important role rather than exchange rate velocity in Bangladesh export industry.
Another factor that are affecting Bangladesh export sector is its low labor cost and government policies. According to USAID(Bangladesh export trade practices and their effect on the competitiveness on the garment industry) “After massive labor unrest in 2006 the government formed a Minimum Wage Board including business and worker representatives which in 2006 set a minimum wage equivalent to 1,662.50 taka, $24 a month, up from Tk950. In 2010, following widespread labor protests involving 100,000 workers in June, 2010, a controversial proposal was being considered by the Board which would raise the monthly minimum to the equivalent of $50 a month, still far below worker demands of 5,000 taka, $72, for entry level wages, but unacceptably high according to textile manufacturers who are asking for a wage below $30. On July 28, 2010 it was announced that the minimum entry level wage would be increased to 3,000 taka, about $43”. This amount of low production cost gives Bangladesh’s textile industry a competitive advantage to compete with other country in global market. So we can say that its not only the currency depreciation that improve Bangladesh’s export industry but some political and supply side constrains along with low production cost and government policy plays a motivator to boost up the export.
Conclusion:
According to USAID the total export of Bangladesh was $14.11 billion which increase to 15.56 billion at 2009. Although some researcher argue that it’s the currency deprecation that led Bangladesh into this export boosting but our findings shows that instead of currency deprecation low labor cost and some external environment factors like global politics and local government policy help Bangladesh to improve its export volume. Although Bangladesh have some limitation like poor transportation and a volatile currency but we hope with a strong government and free floating currency exchange policy Bangladesh will able to continue its export boosting.
Reference:
-Ahmed. M (2009) “Exchange rate volatility and International Trade Growth: Evidence from Bangladesh” Munich Personal RePEc, Paper No. 19466
-Arslan,I,1993, Export Inmcentives ,Exchange Rate Policy & Export Growth in Turkey.
The Review of Economics and Statistics,vol-75,No.1(Feb.1993) pp-128-133.
-Bahmani-Oskooee, M. and Kara, O. (2003) “Relative Responsiveness of Trade Flows to a Change in Prices and Exchange Rate,” International Review of Applied Economics 17, 293-308.
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Nepal. Internet Slide ,http://129.3.20.41/eps/it/papers.
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http//www.nrb.org.np/red/publication/Economic Review
-Wilson P. and Tat, K. C. (2001) “Exchange rates and the trade balance: the case of Singapore 1970 to 1996,” Journal of Asian Economics 12, 47–63
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Source by Hasnat Chowdhury
