Bangladesh taka may be hit by broad money influx

The country's central bank fears that large-scale influx of broad money may force taka's devaluation ahead of parliamentary polls.

Bangladesh Bank, the country's central bank, fears that large-scale influx of broad money (M2) may force taka's devaluation ahead of parliamentary elections due early next year.

HT Image

That it is related to the political processes already under way is confirmed by Bangladesh Economic Association (BEA) general secretary Prof Abul Barkat, who says that prior to the elections, around taka 30 billion ($1 = taka 60) would be "whitened".

Even as the country's central bank wants to intervene, its officials say the International Monetary Fund (IMF) does not favour obstructing the current trend in the forex market.

According to sources, the lending agency is rigid in this regard. "It (IMF) sticks to the point that the Bangladesh Bank (BB) must maintain the international banking standard," said a senior official of BB on condition of anonymity, The Bangladesh Observer reported.

The official said the BB management has neither the option to intervene in the money market nor can it defy the importance of internationalising its banking system.

BB sources nevertheless confirmed that without intervention in the money market, the growth in the flow of M2 could not be checked.

However, due to the existing economic policy (the open market economic policy), the central bank cannot oversee or intervene in the fluctuation of dollar-taka exchange rate.

On the other hand, economists have warned that any interference in the money market to tackle abnormal exchange rate behaviour could only be a short-term option, which may cause higher fiscal deficit and hamper export earnings in future.

"There needs a discussion among the central bank, donors and the financial sector reform committee to take an effective measure to check further fall in the rate of taka, without violating the open market economic system," said Ruhul Ameen, a BEA member.

BB Governor Salehuddin Ahmed recently expressed his concern over the unusual fluctuation in dollar-taka exchange rates.

He indicated that to check inflationary pressure and keep the local currency stable, the necessity of intervention in the money market should be considered urgently.

According to BB's latest "Economic Trends" bulletin, a 12.22 per cent increase took place in the broad money expansion during July-April period of fiscal year 2006. During the same period of the previous fiscal (FY05), the M2 expansion was 9.31 per cent.

The increase in the inflation rate was registered at 7.08 per cent in April 2006 as against 6.48 per cent in 2005.