Taka slide brings some joy to major exporters
A declining local currency generally translates into higher revenues for exporters as their products become more competitive in global markets.
From this perspective, Bangladeshi exporters, which brought in a record $52.08 billion in the just-ended fiscal year, should be pleased as the taka has fallen more than 11% against the US dollar over the past year as the central bank slackened. exchange rate control to stem the depletion of foreign exchange reserves.
But local exporters were unable to take advantage of the sharp decline in the currency due to soaring import costs for raw materials, an unprecedented rise in shipping costs and a runaway inflation, fueled by the dragging coronavirus pandemic and the Russian war in Ukraine.
And it is the greater added value and less dependence on imports that makes all the difference.
This means that sectors such as jute, ceramics, leather, leather goods, agro-industry, vegetables, fish and fruits benefit more from currency depreciation since their value added and retention are nearly 100%.
On the other hand, the retention of apparel exports, which account for about 85% of the country’s revenue in international markets, is 65%, which translates into lower benefits for the country’s biggest foreign exchange earner.
The depreciation of the taka was a long-standing request from exporters seeking to take greater advantage of a favorable exchange rate and to be more competitive in international trade.
In January this year, one dollar was trading at 86 Tk in the banking channel and it climbed to 102 Tk this week. The rate is 105 Tk in the curbside market.
But the fall came at a time when the cost of imports skyrocketed. As a result, the benefit of currency depreciation does not help exporters much since the gain is largely swallowed up by the higher cost of raw materials purchased from external sources.
Md Fazlul Hoque, managing director of Narayanganj-based Plummy Fashions Ltd, says he has not benefited much from the depreciation since he has to import raw materials at higher prices.
“As international buyers are not raising the prices of goods and the cost of production has increased, exporters have not been able to make the most of the falling taka.”
According to Hoque, the depreciation gain could reach 20% while the cost of production and the import value of raw materials have almost doubled.
In fact, the gain is almost the same as before the currency plunge began as Hoque and other exporters lagged in global supply chain competitiveness due to a stronger taka. .
Garment makers in countries like China, India and Pakistan that have their own raw materials are well positioned to profit more from their currency declines, as countries don’t need to spend billions of dollars into import bills to manufacture finished goods for export, the entrepreneur said.
Echoing Hoque, Kutubuddin Ahmed, president of Envoy Textile, says that since the company imports raw materials at higher costs, it does not benefit much from currency depreciation.
Kamruzzaman Kamal, Marketing Director of Pran-RFL, one of the largest agro-food exporters in Bangladesh, says the local value addition of agro-processed foods could be as high as 80%.
“So we are taking advantage of the depreciation of the taka.”
According to Mohammed Mahbubur Rahman Patwari, former president of the Bangladesh Jute Mills Association, exporters are getting Tk 92-93 for the dollar, up 9% from the previous Tk 85.
Exporters of jute goods can retain up to 98% of their export earnings because the environmentally friendly jute is grown locally.
“We will do better if we receive low-cost loans to invest in modern machinery to improve productivity,” Patwari said.
Mustafizur Rahman, Distinguished Fellow at the Center for Policy Dialogue, says the level of gain from currency depreciation is lower than expected as exporters have to purchase commodities at higher costs.
For example, of total apparel export revenue of $42 billion in the last fiscal year, net retention is $28 billion after excluding labor and raw material costs.
Retention is 80% in knitwear exports and 40% in woven apparel exports, Rahman said.
Mohammad Hatem, executive chairman of the Bangladesh Knitwear Manufacturers and Exporters Association, says local banks pay them between Tk 93 and 94 per US dollar when they collect their export earnings.
But when opening letters of credit to import raw materials and capital goods, banks charge Tk 103-104 per USD.
“So it’s the banks that mainly benefit from currency depreciation, not the exporters,” Hatem said.
Selim Raihan, executive director of the South Asian Network on Economic Modelling, said sectors that are not heavily dependent on imports benefit from the depreciation.
“This is an opportunity for industries other than clothing. Exports of non-clothing products could increase if the problems faced by exporters are resolved.”
For example, he said, the Savar tannery industrial zone is not properly functional, while leather and leather goods manufacturers do not receive the same treatment as garment manufacturers when it is to use the bonded warehouse while importing raw materials duty free.
The import tariff for materials used in light engineering and agro-industrial products is also not favorable.
“Exports from these sectors will increase if these issues are addressed,” added Raihan, also an economics professor at the University of Dhaka.
Amin Ullah, chairman of the Bangladesh Frozen Food Exporters Association, said it would be difficult for them to increase shipment of locally grown shrimp and fish unless the taka loses its value.
“But we don’t get higher prices since European buyers offer lower rates.”
In the past, frozen food exporters had to depend on imported cartons and machine spare parts. Now they can source the items locally.
“So our value addition is almost 100% and we keep all the export earnings,” Amin said.
He urged the government to pay particular attention to increasing exports of products containing a greater proportion of local ingredients.
Syed Md Shoaib Hasan, former vice president of the Bangladesh Agro-Processors Association, has called on the government to remove the restriction on the export of aromatic rice.
If inflation cannot be contained, currency depreciation may not bring much return, said MA Razzaque, director of research at the Policy Research Institute.
Inflation in Bangladesh soared to 7.56% in June, the highest in nine years.