Path of the Bangladesh Taka 1972-1993

Path of the Bangladesh Taka 1972-1993

Subroto Roy 1993

Note: This was part of a 1993 study I did as a consultant at the IMF in Washington in a project on exchange-rates and exports of “South Asian” countries.  The IMF is not responsible for its content.

“Bangladesh, being the former East Pakistan, shared the same currency and trade-policy history as the rest of Pakistan until the Bangladesh taka was created on January 1 1972.  Pakistan rupees in circulation remained legal tender until replaced by the taka 1:1 beginning March 4 1972.

The taka was set at par with the Indian rupee, and fixed to sterling at Tk 18.9677, or Tk 7.2797 to the United States dollar.   The path followed by the taka was determined partly by the initial value chosen for the new currency in 1972.  Given the devastation experienced by the Bangladesh economy from natural disaster, civil war and war in 1969-1971, the initial value chosen for the taka on par with the Indian rupee was in all likelihood unrealistic, even more so to the extent the Indian rupee was itself nominally overvalued at the time.

Since that time, the principal fact about official exchange-rate policy in Bangladesh has had to do with overseas workers’ remittances far exceeding any single sector of merchandise exports as a support for the balance of payments.  A multiple exchange-rate system prevailed with a secondary market as an incentive for overseas workers to remit through official channels instead of at parallel or “hundi” market-rates, the spread between the parallel and official channels being exceptionally high for Bangladesh compared to India and Pakistan.  IMF technical studies laid the groundwork for abolishment of the multiple exchange-rate practice and the unification of exchange-rates, which was accomplished on March 31 1992.

The path of the official taka is informative as a measure of nominal overvaluation.  Since August 1979, the official taka has been pegged within margins to a currency-weighted basket.  The taka was adjusted as many as 20 times between October 1980 and January 1982, the official rate being reduced to Tk. 38.4 to sterling or Tk.20.4 per United States dollar.  In January 1983, the weights were changed and in March 1985 changed again.  On this basis, the nominal effective exchange rate depreciated by 29 percent and the real effective exchange rate by 21 percent between August 1979 and December 1982.  From February 1985, exchange-rate policy has with IMF support tried to keep in mind an upper limit on the real effective exchange, the nominal rate declining in one year by 20 percent and the real rate by 22 percent.  From the end of 1985 through November 1988, there was further depreciation of 4 percent.  In absence of further nominal depreciation, combined with further deterioration of the domestic price-level, the real exchange rate appreciated by 7 percent between November 1988 and April 1989,  followed by further appreciation of over 9 percent during May-June 1989.  A revised index confirmed the loss of competitiveness, indicating at least 12 percent real appreciation by end June 1989 relative to 1988.  From November 1988 to February 1990, the taka remained at Tk 32.27 per United States dollar with the official secondary market 2 percent higher.  In 1990 the rates were depreciated six times by a total of 11 percent, corresponding to 8 percent real depreciation.  The official taka was at Tk.36.49 per United States dollar as of July 7 1991.  Recent Bangladesh exchange-rate policy has seemed to be guided by such considerations, and has not been responsive to regional developments such as changes in the Indian rupee.”

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Path of the Sri Lankan Rupee 1948-1993

Path of the Sri Lankan Rupee 1948-1993

Subroto Roy, 1993

Note: This was part of a 1993 study I did as a consultant at the IMF in Washington in a project on exchange-rates and exports of “South Asian” countries.  The IMF is not responsible for its content.

“The Ceylon rupee traded 1:1 with the Indian rupee at the time of Independence and devalued with sterling and the Indian rupee in September 1949 to Rs.4.76 per United States dollar.  It was pegged to sterling throughout the Bretton Woods period at that value.  Sri Lanka did not respond to the Indian devaluation of 1966 but when sterling devalued in November 1967 from $2.80 to $2.40, the Ceylon rupee was devalued by 20 percent to Rs.5.95 per United States dollar.  In May 1968, a dual exchange-rate system was introduced with the official rate of Rs. 5.95 applying to official capital transactions, traditional exports of tea, rubber and copra, and imports of foods, drugs and fertilizers.  Other importers and non-traditional exports faced an exchange-rate of Rs. 8.57 per United States dollar, devalued to Rs. 9.23 in June 1969.
Following the end of the Bretton Woods mechanism in August 1971, the Ceylon rupee appreciated because of its peg to sterling.  As with India and Pakistan, the link to sterling was soon broken, and in November 1971 the Ceylon rupee was pegged to the dollar, thereby depreciating with the dollar.  The peg was at the same official rate of Rs. 5.95 as previously.  As with India and Pakistan, it is possible that long-term damage was done to Sri Lanka’s competitiveness relative to other developing countries in the Bretton Woods period by overvalued nominal exchange-rates associated with inward looking trade policies.
When sterling floated in June 1972, Sri Lanka delinked from the dollar and pegged at Rs. 15.60 to sterling, until May 1976 when the rupee was delinked again from sterling and pegged to an undisclosed basket of currencies.  In a major reform in November 1977, the multiple exchange-rates were unified and the Sri Lankan rupee was devalued by more than 46 percent to Rs. 16 per United States dollar, which was maintained until the first half of 1980.  The rupee depreciated further to Rs. 18.01 per United States dollar by the end of 1980, and to Rs.18.35 by May 1981.  Relative to a weighted average of the currencies of Sri Lanka’s major trading partners (including India and Pakistan) the rupee depreciated by 14 percent from November 1977 through July 1980 and a further 10 percent by December 1980.  But due to higher Sri Lankan price-level changes, this may have been associated with appreciation of the real exchange-rate.
From August 1983, a formal system was adopted attempting to target the real-exchange rate, by which the rupee would be adjusted periodically depending on domestic price-levels relative to Sri Lanka’s six main trading partners (Britain, the United States, India, Japan, Germany and France).  In practice, the Sri Lankan authorities took other factors into account, “most notably exchange-rate movements of the currencies of neighboring as well as competitor  countries”.   The first half of the 1980s were marked by real exchange-rate appreciation by as much as 30 percent, especially against the currencies of Sri Lanka’s neighbours and competitors including India and Pakistan.  In 1985, the rupee depreciated by more than 9 percent in nominal terms and more than 15 percent in real terms, including against India and Pakistan, but this decline did not fully offset the loss of competitiveness in 1981-1984.
Since 1986, the real effective exchange-rate has fluctuated substantially.  Between 1986 and mid-1989 it depreciated by over 10 percent, when a large nominal depreciation in September 1989 contributed to further depreciation of the real rate.  Subsequently, the real rate appreciated by about 17 percent between late-1989 and early-1991, following which further nominal depreciation contributed to gradual real depreciation through mid-1992.
Technical studies at the IMF laid the groundwork for a floating market-determined exchange-rate for Sri Lanka based on a daily interbank market.    Sri Lanka introduced such a system in August 1990, whereby the authorities were to set daily buying and selling rates as intervention points and permit the spot exchange rate to be determined within them.  This system began to work effectively with an adequate difference between the intervention points in March 1992.  The Sri Lankan rupee, at Rs. 44.6 per     United States dollar in December 1991 and Rs. 46 in December 1992, was at Rs. 47.5 in April 1993.  The Indian exchange-rate reforms of 1992-1993 have been observed closely by Sri Lankan authorities, and in late March 1993, Sri Lanka removed all remaining barriers to current account convertibility.””

Path of the Pakistan Rupee 1947-1993

Path of the Pakistan Rupee 1947-1993
Subroto Roy, 1993

Note: This was part of a 1993 study I did as a consultant at the IMF in Washington in a project on exchange-rates and exports of “South Asian” countries.  The IMF is not responsible for its content.

“The Pakistan rupee traded 1:1 with the Indian rupee at the time of Independence.  As noted, Pakistan chose not to devalue with sterling and the Indian rupee in 1949, which led to the end of the common market which existed with India.  Almost six years later, on July 31 1955,  Pakistan with IMF approval devalued to Rs.4.76 to the United States dollar, again establishing the same par-value as India.

Pakistan did not respond to the 1966 Indian devaluation although the Pakistan economy had suffered similar shocks, especially the 1965 war with India and natural disasters and civil conflict in East Pakistan.  On July 22 1970, a fluctuating tourist rate was introduced, effecting a partial devaluation.  Demonetization of bank-notes in June 1971 and the civil conflict leading up to the December 1971 Bangladesh war led to considerable capital flight via the well-developed parallel market where the Pakistan rupee reportedly touched Rs. 25 to the United States dollar.
Following the breakdown of the Bretton Woods mechanism as of August 1971, the official Pakistan rupee began to appreciate because of its peg to sterling.  In September, Pakistan like India changed its peg from sterling to the dollar, thereby depreciating with the dollar.  But Pakistan stayed at the same rate that had been established since 1955 of Rs.4.76 per United States dollar.  As with India, it is possible that in the period 1949-1979 long-term damage was done to Pakistan’s competitiveness relative to other developing countries by highly overvalued nominal exchange-rates associated with an inward-oriented trade regime.
In May 1972,  Pakistan implemented a major exchange reform, unifying existing multiple exchange-rates and declaring a new par value of Rs.10 to the United States dollar, which implied a 130 percent nominal devaluation and 62 percent real devaluation.  After a small appreciation in 1974, the rupee was maintained at Rs. 9.9 to the United States dollar for the next nine years.  However, the real exchange rate appreciated by an estimated 20 percent in the first half of the 1970s, and then depreciated by about 8 percent in the second half of the 1970s.  Domestic inflation relative to foreign inflation caused further loss of competitiveness as the real rate appreciated by nearly 10 percent in 1981-1982.  Although the authorities were aware of a loss of competitiveness, they were unwilling to devalue the nominal rate for almost a decade.

Faced with a severe balance of payments situation, Pakistan in January 1982 finally abandoned the fixed peg with the United States dollar and pegged to an undisclosed currency basket with the dollar retained as the intervention currency.  The rupee was depreciated by nearly 20 percent in 1982-1983 and a further 11 percent in 1983-84, with real exchange-rate depreciations of 11 percent and 4.6 percent respectively.  A substantial improvement was recorded in the current account especially on workers’ remittances (accounting for almost the same as the entire merchandise exports of Pakistan) which rose by 30 percent over the 1981-82 level.  The nominal depreciation slowed in 1984-85, with slight real rate appreciation.  This became reflected in the current account with workers’ remittances showing a remarkable elasticity and falling by almost $300 million.  In 1985-86, the nominal exchange-rate was allowed to depreciate at a more accelerated pace.

The influence on Pakistan’s exchange-rate policies of India may be separated into different factors.  Pakistan’s initial decision in 1949 not to follow the devaluation of sterling and the Indian rupee was seen by contemporary observers as a statement of national sovereignty by the new country.  However, the detrimental consequences of this led six years later to Pakistani devaluation to the same par-value as India at Rs.4.76 per United States dollar.  Pakistan did not respond to India’s 1966 devaluation to Rs.7.50 to the United States dollar, and the Pakistani devaluation of 1972 to Rs.10 to the United States dollar was a change of policy specifically in the new circumstances following the 1971 war with India over Bangladesh.   The 1972 devaluation was in all likelihood long overdue, since, as already noted, both Pakistan and India may have sustained long-term damage during the Bretton Woods period from overvalued nominal exchange-rates in face of numerous economic shocks, especially natural disasters and wars with one another.

In relation to their mutual hostilities, overvalued nominal exchange-rates in India and Pakistan have been of course conducive to each country’s defence sector imports, although at the cost of mutual loss of competitiveness for export and other hard-currency earning sectors of in the world economy.

Pakistan did not nominally depreciate any further in the 1970s despite real exchange-rate appreciation.  The delinking from the United States dollar and the start of active depreciation did not begin until January 1982.  Whether this was coincidence or a response to the fact that India actively began to depreciate at the end of 1981 is hard to tell.  In any case, the Pakistan rupee and Indian rupee both depreciated almost in tandem during most of the 1980s  The extent of similarity was tested when the Indian rupee moved in the range of -1 to 1 percent, 1-2 percent on either side, and more than 2 percent on either side.  The greater the change in the Indian rupee’s bilateral exchange-rate with respect to the United States dollar, the larger the extent of similarity in movement between the Pakistan rupee and the Indian rupee.  In the Indian case, the large likely influence of the United States dollar has been noted, with the Indian currency depreciating less fast when the dollar was appreciating with respect to other major currencies than when the dollar was depreciating with respect to other major currencies in the 1980s.  The Pakistan rupee seemed to be maintained in the 1980s at a significantly competitive rate with respect to the Indian rupee — e.g. at 1.32 per Indian in 1986, 1.34 in 1987, 1.30 in 1988, 1.27 in 1989 and 1.24 in 1990.   This indicates a distinct change from the 1949 situation when resisting devaluation was seen as a statement of national sovereignty.
The large Indian devaluations of 1991 left the Pakistan rupee at 1.06 per Indian, and in 1992 at 0.97.  The major changes which have taken place in the Indian exchange-rate regime in 1992 and 1993 have been followed closely by the Pakistan authorities and public.”

Path of the Indian Rupee 1947-1993

Prefatory Note: This was part of a 1993 study I did as a Consultant at the International Monetary Fund in Washington in a project on exchange-rates and exports of “South Asian” countries for Hubert Neiss.   The IMF is not responsible for its content.  It was included in “India in World Trade & Payments”, first published in The Statesman, Feb 11-12 2007.    See also

1)  Monetary Integrity and the Rupee

2) My article “India’s Money” in *Cayman Financial Review*

3) My 3 Dec IIC Delhi talk “Towards Making the Indian Rupee a Hard Currency of the World Economy: An analysis from British times until the present day” & its coverage in Asian Age/Deccan Herald, GDI Impuls Zurich, Lok Sabha TV & Sunday Guardian

4) Did Jagdish Bhagwati “originate”, “pioneer”, “intellectually father” India’s 1991 economic reform?  Did Manmohan Singh? Or did I, through my encounter with Rajiv Gandhi, just as Siddhartha Shankar Ray told Manmohan & his aides in Sep 1993 in Washington?  Judge the evidence for yourself.  And why has Amartya Sen misdescribed his work? India’s right path forward today remains what I said in my 3 Dec 2012 Delhi lecture!

5) No magic wand, Professor Rajan? Oh but there is…

and indeed https://independentindian.com/2013/11/23/coverage-of-my-delhi-talk-on-3-dec-2012/

 

 

 

 

 

Path of the Indian Rupee 1947-1993

by Subroto Roy

Washington June 1993

“Following the initial devaluation with sterling in 1949, the Indian rupee was pegged to sterling and maintained at the same par-value for the next 16 years.  This was in spite of weakening reserve positions and numerous severe shocks to the economy including a 1963 war with China and a 1965 war with Pakistan, as well as severe droughts and food crises.

Devaluation on June 6 1966 by 57.5 percent to Rs. 7.50 per United States dollar met with enormous resistance on non-economic grounds, and indirectly contributed to the Congress Party’s losses in the elections of 1967.  This experience may have contributed to a distinct reluctance to even consider using the exchange-rate for economic policy, or to even attempt to find a realistic price for the rupee.

India did not respond to sterling’s devaluation in November 1967, leading to a bilateral appreciation.  While the Indian economy continued to suffer egregious shocks throughout the late 1960s and 1970s — including food crises, the rise in petroleum prices, refugees from the Pakistan civil war and the 1971 war creating Bangladesh, as well as domestic turmoil of various kinds such as the Railway Strike and the political Emergency and later political instability — the rupee was not adjusted downwards.   The closing of the “gold window” and breakdown of the Bretton Woods system in August 1971 led India to maintain the same bilateral exchange-rate with the United States dollar, thereby devaluing with the dollar’s depreciation and delinking from sterling, though sterling remained the intervention currency.  After the Smithsonian Agreement in December 1971, the rupee was again linked to sterling at Rs. 18.97, which implicitly meant a 5.4 percent devaluation against sterling.  When sterling floated in June 1972 the rupee’s peg was maintained, thus effectively devaluing the rupee along with sterling’s depreciation.  Three small devaluations occurred against sterling by a total of 2 percent between June 1972 and July 1975.

In September 1975, India delinked from sterling and pegged — within 2.25 percent until January 30 1980 and then within 5 percent margins — to an undisclosed basket of hard currencies which included the United States dollar, Japanese yen and Deutschmark.

Between 1981 and 1991, the Indian rupee was actively managed downwards by the authorities, remarkably with no political resistance unlike the 1966 episode in a world of fixed rates.  Discrete downward changes occurred by 6.4 percent at the end of 1981, 4.3 percent at the end of 1982, and 4.5 percent at the end of 1983.  These changes in the first half of the 1980s are relatively small compared to the depreciation of other major currencies against the United States dollar in that period.  From September 1985 to July 1991, the rupee followed a more rapid downward course, depreciating by some 40 percent in nominal terms, during which time the United States dollar also depreciated against the other major currencies.  What this may suggest is that the dollar weighed relatively heavily in the basket with which the rupee seemed to be pegged.

In July 1991, the incoming government was able to initiate significant economic reforms with surprising ease, especially the abolishment of  import quotas and removal of export subsidies.  On July 1 1991, the rupee was devalued by 9 percent and then on July 3 by a further 11 percent in the context of a determined effort to change the course of Indian economic policy-making towards one required by an outward-orientation.

The first budget of the Narasimha Rao Government on March 1 1992 partially floated the rupee in a context of removal of import licensing and export subsidies, and a general domestic and external liberalization.  Between March 1 1992 and the budget of March 1 1993, the rupee was on a dual rate which implicitly taxed exporters who had to surrender 40 percent of their foreign exchange earnings at an officially determined rate and could sell 60 percent in an open market.  On March 1 1993, the Indian rupee was begun to be made convertible for purposes of current account transactions. With these changes, a breakthrough in thinking may have been achieved, insofar as Indian economic policy-making may have been partially freed of the belief, held since the 1940s, that the exchange-rate of the rupee must necessarily be seen as an administered price and not a market-determined price.”

30 August 2013:  Here is a graph showing interest in this article at my blog… It might correlate that with the currency’s recent volatility…

pathoftheIndianrupee