Relation between Foreign Currency Borrowings and Foreign Exchange Rate Volatility: Evidence from Bangladesh Economy

Huq Muhammad Tashfiq

Ichihashi Masaru

IDEC DP2 Series

Borrowing foreign currency from sources abroad has been a relatively new concept in the private sector of Bangladesh. The major advantage of external commercial borrowing is the lower borrowing cost in the international financial markets compared with the prevailing domestic market. On the other hand, the government of Bangladesh has recently borrowed a large amount of foreign currency to finance large projects. We empirically analyze different aspects of the effect of foreign currency borrowing on exchange rate volatility in the Bangladesh economy using quarterly time series data. Since Bangladesh is an import-based country, exchange rate volatility can exert a great pressure on living standards by increasing the price of imported consumer products. Our analysis using VECM found that both government and private borrowing of foreign currency are cointegrated in the long run with the volatility of the exchange rate, but only the coefficients of government foreign currency borrowing are significant in the short run. However, in the OLS results, both government foreign debt and private foreign debt had a significant effect on exchange rate volatility. Our results suggest that measures to control government debt would be more effective in moderating foreign currency volatility than measures affecting private borrowing.

Foreign Exchange rate

foreign currency debt

VECM

eng

広島大学大学院国際協力研究科