According to recent news reports, perhaps a sliver of relief is on the way for the price of rice. Apparently there is a bumper boro crop this year (see here. This, plus the expected arrival of imported rice, has apparently caused the price rises to cease, at least for now (see here). This is certainly welcome news.

But there are still serious grounds for worry. According to the Financial Times, rice prices rose more than 10 per cent last week as rice importing countries (including Bangladesh) tried to secure supplies from the handful of exporters still selling the grain in the international market. The price jump came as leading exporting countries including Vietnam, India, China and Egypt, banned foreign sales.

This Economist article says: Asia’s masters may need a new green revolution, if they want to avoid upheavals of a bloodier hue. Bangladesh is not mentioned, but the warning is appropriate for us too. In the long run, there is no alternative for us but to raise our own production. But long run is pretty far away. Is there anything that can be done here and now?

Last year I noted that one reason why our food prices started rising in 2003-04, couple of years earlier than the global food price inflation, was because of the depreciation of taka against the Indian rupee (see here). What I did not stress then was the magnitude of the depreciation in more recent months.

The chart below shows that taka depreciated by around 20 paisa against the rupee since the beginning of 2007.

taka-rupee.JPG

In addition to the global factors (see here) and the natural disasters, this depreciation alone could have sent our food market into a frenzy. Does anyone have any idea what caused this sharp depreciation last year?

And can it be reversed? Can Bangladesh Bank intervene in the foreign exchange market to assist an appreciation of the taka? The chart below shows that the Bank has record reserves, so it is better placed to prop up the taka today than ever before.

reserves.JPG

To be sure, taka-rupee exchange rate will not bring down rice prices to 2006 levels, let alone the ‘golden days’ of 2000. Among other things, officially India is not exporting rice, so the exchange rate shouldn’t affect rice prices at all. But if there was ever a time when the market forces and the porous Indo-Bangla border can work towards our advantage, that time is now. Extralegal rice imports aside, we do import a lot of other food items from India whose prices are also skyrocketing (see here about daal). Any taka appreciation will definitely affect the prices of these items. And more importantly, the appreciation will affect expectations about future prices (see this for a discussion on the role of expectations).

And taka appreciation could also affect exports, and possibly investment if a monetary tightening is required. But how serious could those impacts really be? I argued last year that exports boomed in the past few years because of global boom, not undervalued taka. Surely any impact of a taka appreciation on exports would be overshadowed by whatever happens in the US and other developed economies. And as for domestic investment, is financial costs of borrowing the main hindrance to business activities in today’s Bangladesh? Anecdotal evidence points to confidence issues arising from political situation as a much bigger factor.

Maybe there are other strong arguments against a taka appreciation. If so, I’d very much like to hear them. I’d also like to understand what caused the depreciation since last year.