Rupee depreciation and apparel export of Bangladesh

Bangladesh has put the ongoing economic downturn to at last one good use; it has built up a sizeable stock of international reserves. The economic slowdown has had a substantial negative impact on the country's import growth, which declined by 4.4 percent in 2012-13. However, export maintained a modest growth while remittances grew robustly. As a result a substantial surplus developed in the current account (and the overall balance) of the balance of payments. These should have appreciated the taka vis-à-vis foreign currencies quite substantially. But Bangladesh Bank prevented this from happening by engaging in large scale purchases of foreign exchange to mop up the excess supply. As a result the stock of foreign reserves increased rapidly. These had declined from $10.75 billion at the end of 2009-10 to $10.36 billion at the end of 2010-11. But within a year the reserves had shot up to $15.32 billion. It now stands at more than $16 billion. Evidently Bangladesh Bank had intervened in the foreign exchange market quite massively during the recent past, which allowed it to stabilize the external value of taka at the desired level.

Across the border the situation was quite the reverse. After several years of positive growth, India's current account turned into a small deficit of $2.5 billion in 2004-05. But since then the deficit increased by leaps and bounds to exceed $88 billion in 2012-13. However, the stock of India's foreign reserves was not greatly reduced due to considerable capital inflows; it declined from $304 billion in 2010-11 to $292 billion in 2012-13, a loss of reserves by only 4 percent. However, the foreign exchange market finally reacted to the increasingly large current account deficits. The Indian rupee started depreciating rapidly from about mid-2011, and in little over 2 years it depreciated by a whopping 40 percent. Although the currencies of many a country had depreciated during this period, few major trading countries suffered from such a large depreciation.

Since the Bangladeshi taka appreciated somewhat against the dollar during this period while the Indian rupee depreciated very substantially, the latter perforce depreciated against the taka. This implies that the prices of Indian goods would decline in the international market roughly in proportion to the rate of depreciation of the rupee. Thus Indian goods will become more price competitive than similar Bangladeshi export products in the world market.

This implication of the rupee depreciation has alarmed the business leaders in Bangladesh, especially the apparel exporters. Others, including some economists, have voiced a similar concern. They have argued that the heightened competitive advantage of the Indian apparel industry due to the depreciation would enable Indian exporters to out-compete Bangladeshi apparel exporters, and thereby capture a greater share of the international market at their expense.

The argument is apparently persuasive and the concern real. However, a little reflection will make it clear that the claim, if not untrue, is greatly exaggerated. There is really not much to be alarmed about at this stage. There is only a very small likelihood that Bangladeshi apparel export will be significantly affected on account of the rupee depreciation. There is far greater likelihood of our apparel export suffering a setback in the international market due to such internal problems as unsafe work conditions, poor wages and industrial unrest. There may be a tendency to erroneously pass off any adverse outcomes of the latter as the consequences of external factors such as rupee depreciation, and delay the necessary internal reform measures.

It remains to be seen if the rupee depreciation will be sustained or how much India will gain from the depreciation. What can be, however, confidently said is that the depreciation will have minimal adverse effect on the more competitive apparel exporters such as China, Bangladesh and Vietnam in the short to medium term given India's current production capacity. India held only 3.4 percent of the world export market in 2011, while Bangladesh held 4.9 percent and China had sway over 37.4 percent (see the table below). The world apparel export grew by a massive $61 billion in 2011. Whatever growth Indian apparel manufacturers may conceivably achieve the world market is large enough to accommodate it without causing much distress to others. Bangladesh is least likely to be affected as it is the most intensely competitive country in the world market that has consistently increased its market share over a considerable period of time. If India increases apparel export significantly it can only be at the expense of the less, and not more, globally competitive countries. Hence, it may be concluded that if Bangladesh apparel export does suffer in the near future, it will not be due to the rupee depreciation, but for other reasons.

Table: Apparel export of leading countries

Source: WTO, International Trade Statistics 2012.

One collateral benefit of the depreciation that would please the government, in particular Bangladesh Bank, is that it has had a sobering influence on the price level in Bangladesh. If Dhaka denizens are unhappy about paying Tk90-100/kg for onion, they might wish to ponder what would have been the domestic market situation if the rupee were as strong now as it were early in 2011.

The Hindustan Times reported on October 15: "Wholesale onion prices grew by 322.94% during September on the back of 244.62% in the previous month, while on country-wide basis wholesale vegetable prices grew 89.37% in September, up from 77.81% in August." If the Tk/Rs exchange rate were the same as before the rupee depreciation we might have experienced a similar rise in onion prices. But the depreciation moderated the price increase to 3-4 times. Since Bangladesh imports a large variety of food items from India including cereals, the depreciation should help contain local prices rising at the same rate as Indian prices.

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M A Taslim is a professor and chairman of the Department of Economics, University of Dhaka.