Assignment on

How prone is Bangladesh to such crisis? (i. e. Asian Currency Crisis)

Submitted to:
Dr. M. Masud Rahman, Professor, Department of Finance, University of Dhaka

Submitted by:
Md. Imran Hossain ID# 13-011 MBA 13th Batch Department of Finance, University of Dhaka

Date of Submission: May 14, 2012

Bangladesh, one of the poorest countries in the world, is burdened with many socio-economic problems. Furthermore, it is also exposed, to some extent, to the possibility of occurring a crisis like the Asian Currency Crisis (1997-1998) that was mainly started from Thailand. Bangladesh is prone to such crisis because the reasons behind that crisis are also prevailing in our country. The main reason of that crisis was the successful maintenance of fixed exchange rate ($1= 25 Baht) by Thailand since mid 1980s. This success was exaggerated by illusionary effect. It was a matter of only 15 years & all forgot about the number and believed that Thailand was an exceptional country and it would be able to maintain it forever and that was the big enough mistake. Though Bangladesh follows floating exchange rate since 2003, but it is actually dirty or managed floating. The exchange rate is indirectly controlled by Bangladesh Bank (BB) and so it can be said that, to some extent, managed floating is one type of fixed exchange rate system. Again, interest rate differential in Bangladesh is higher compared to USA (Lending interest rate in BD is 13.63% & 3.25% in USA). So, theoretically, US investors should invest in BD. But in reality, it does not happen to that extent due to high inflation rate differential in BD (10.92% in BD & 2.7% in USA), depreciation of TK, structural rigidity, political & economic instability etc. Nevertheless, if US risky investors invest here to get high interest & tax advantage, these funds would be possibly channelized through the Banks of BD to those sectors that demand large amount of loans. These funds will mainly go to the unproductive sectors. As Asian Currency Crisis was related to the Real Estate sector of Thailand, if we focus on the real estate sector of BD then we can see many similarities. BD real estate sector is now a booming sector and growing faster. Indeed it is a slow income generating sector but the cost of property sector is higher. As demand for real estate is increasing, demand for loan from banks to this sector is also increasing. There are numerous number of developer companies in this sector and most of them are not creditworthy, but the banks will provide loans indiscriminately to almost all and due to adverse selection & moral hazard problems, bad loan will be going to start. The borrowers will not be able to repay the interest as well as the principal to the banks and consequently, banks of BD would default and become bankrupt. The foreign investors would anticipate the depreciation of TK and that would be enough for the collapse. They would like to draw back their money from BD and demand for dollar would increase and TK will depreciate. BB will try to minimize the crisis by spending foreign currency reserve but how long it will continue? It will be ineffective in the long run. This will deepen the crisis even more. If this happens, our economy is not so strong that we will be able to recover the crisis. So the central bank as well as the govt. should be more careful about these scenarios so that this crisis will not happen in future.