GDP, Inflation and a Small Exporter
A small garment exporter earns 80% of revenue in US dollars and pays most costs in taka. Over the past year the central bank reports: GDP growth slowed from 6.5% to 4.8%, CPI inflation rose from 6% to 9.5%, and the taka depreciated from Tk 105 to Tk 118 per USD. The firm's dollar revenue was flat at USD 2 million, while taka costs rose 12%. The finance director argues the depreciation is 'pure good news - every dollar now buys more taka'. The economist on the board warns that inflation and slowing growth may offset the gain. The firm's input costs are largely imported.
1. Quantify the net effect of the exchange-rate and cost movements on the firm's taka gross position, and evaluate the finance director's claim.
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Revenue in taka:
- Before: USD 2,000,000 × 105 = Tk 210,000,000
- After: USD 2,000,000 × 118 = Tk 236,000,000
- Gain from depreciation = +Tk 26,000,000 (+12.4%).
Costs (taka): rose 12%. If base costs were, say, Tk 170,000,000, they become Tk 190,400,000 - an increase of Tk 20,400,000.
Net effect: +26.0m revenue − 20.4m cost = +Tk 5.6m, a modest gain, not the windfall implied.
The finance director is only partly right. Depreciation does raise taka receipts per dollar, but:
- Costs are largely imported, so a weaker taka raises input prices - the depreciation is partly self-cancelling.
- Domestic inflation of 9.5% compounds the cost push.
- If competitors in other currencies also depreciate, the price competitiveness gain may not materialise - dollar revenue stayed flat, suggesting volume/price did not improve.
2. Using the data, explain the likely macroeconomic linkage between the depreciation, inflation and slowing GDP, and its implication for the firm.
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Linkage:
- A weaker taka raises the taka price of imported inputs → imported/cost-push inflation, consistent with CPI rising from 6% to 9.5%.
- Higher inflation erodes real incomes and raises borrowing costs → consumption and investment fall → GDP growth slows from 6.5% to 4.8%.
- Slower growth may further weaken the currency, creating a depreciation–inflation feedback loop.
Implication for the firm: the export gain is real but fragile. Because dollar revenue was flat, the firm is not winning share - it is merely converting the same dollars at a better rate while its imported costs climb. Slowing global/domestic growth threatens future order volumes.
Recommended stance: hedge FX exposure, seek local substitutes for imported inputs to break the inflation link, and avoid pricing decisions that assume the depreciation gain is permanent.