Exchange rate and foreign trade

Exchange rate and foreign trade 

Let us assume that the export price of a shirt is Tk 700.00 (USD 10.00). At this price a foreign buyer can purchase 10 shirts with USD 100.00. With the export of USD 100.00, the exporter will get Tk 7,000.00 since the rate of exchange for each USD is Tk 70.00. Now assume that an initiative is taken to depreciate Taka and it comes to Tk 80.00 for each USD. In this case, the foreign buyer will be able to buy more than 11 shirts with the same amount of USD 100.00. The depreciation of local currency makes export price competitive to the foreign buyers as it enables them to purchase commodities in bigger amount.
  The recent financial crisis in the developed world, especially in the US and the EU, may decrease our export volume. In this situation, depreciation of Taka may help in keeping the export trend of the country at upward level. A study of data of the Reserve Bank of India shows that on September 1, 2008 the rate of exchange for each USD in India was INR 44.21 and it was INR 49.95 on October 24, 2008, marking depreciation by 13 per cent. This indicates that India has taken exchange rate adjustment measures to protect their foreign exchange earnings. The same is reported to have happened in Pakistan. Presently each USD is exchanged at more than PKR 82 which was around PKR 76 early in September, 2008.
  In respect of our country, during FY08 the difference between export (USD 13945 million) and import (USD 19486 million) is found negative of USD 5541 million. This trade deficit is supported mostly by workers’ remittances amounting to USD 604 million. The present trend of trade balance is negative due to excess import cost over export earnings. The export target for the current fiscal has been set at USD 16298 million. The import will definitely grow this year if it follows the trend of the past several years. Assumed that the export target will be achieved, the trade balance will still remain negative unless import cost becomes smaller than export earnings. But such a possibility is unlikely in view of the current trend. So, there is a need to increase the export level. But recent turmoil in the US and Europe creates risk for us and the analysts predict that export may fall. If this happens, the overall economy will be affected.
  The recent efforts in the neighbouring countries in respect of currency depreciation indicate that they are trying to maintain the level of export earnings by making their price competitive. Depreciation of Taka may bring competitive advantages for the exporters. The recipients of workers’ remittances will also be benefited as in case of the exporters. If all quarters are benefited by the depreciation of Taka, the benefits will go to the whole nation. But such is not possible since the country needs huge imports for different purposes – from daily necessities to industrial goods. The depreciation of Taka may have a negative impact on the price of daily necessities if the depreciation is made against the currencies of the countries to which we export. However, we have to do something to remain in a competitive edge in foreign trade.
  Under the prevailing floating exchange rate regime, rate is fixed on the basis of demand and supply. The central bank does not intervene in this regard. But the authorities should have some tools in their hands to bring necessary changes in the value of the local currency against foreign ones.
  If any decision is made to determine new exchange rate as a policy support, the central bank should take all aspects of our major trading partners into consideration with a view to reaching a balanced level so that commodity prices in the local market does not shoot up any further.
  Mehdi Rahman
  via e-mail