ACE Money Transfer - Blog

Send money to Bangladesh through ACE Money Transfer

The Advantages and Disadvantages of Currency Pegging Policies on Money Transfers to Bangladesh

25 Jul 2023


Although millions of Bangladeshi migrants live in foreign countries to earn a living and send money to Bangladesh to offer financial support to their families back home, certain government policies impact the flow of inward remittances.

But for remittances to take effect from any government policy, they have to operate through legal channels. Because all illegal means of transferring remittances operate outside of a government’s purview.


There are several such policies that directly or indirectly affect the flow of inward remittances to any country. And if you look closely, you will realise that most developing countries are the recipients of remittances sent to them by their respective diaspora populations. 


Currency pegging is one such policy that bears a direct impact on the flow of remittances.

According to a report by the Arab News, sourcing its data from Bangladesh’s Bureau of Manpower Employment and Training, over 13 million Bangladeshi migrants are living in different countries.


The same report continued to state that the government of Bangladesh is planning to send 1 million more people abroad to expand its migrant base and add to the quantum of inward remittances.


These Bangladeshi migrants have sent back $21.5 billion in inward remittances in 2022, according to a World Bank report.

As mentioned earlier, one of the policies that affect remittances is the currency pegging policy.


Do you know what is a currency pegging policy and how it impacts the flow of remittances to Bangladesh?


Well, read on to find answers to these important questions.
 

What is Currency Pegging?

Currency pegging is a monetary policy through which a government maintains a fixed exchange rate for the currency of another country.

It leads to a stable exchange rate policy between the two countries and their respective currencies.

For example, if the government of Bangladesh pegs its currency to the US Dollar, it will fluctuate with the dollar whose chances are slim given that the US Dollar is the world’s most stable currency.

Therefore, Bangladeshi migrants, in such a scenario, will get a stable currency exchange rate in each money transfer to Bangladesh, should they choose to send money in US Dollars.


With or without currency pegging, it is also essential for you to understand How Currency Exchange Rates Are Calculated.


Let’s see the important components of currency pegging.
 

Essential Components of Currency Pegging

For the process of currency pegging, the following components are essential.

Domestic Currency

It is the legally accepted monetary instrument that is needed for exchange in one’s own country. It is also the primary currency around which is centred every business, trade and commerce, and sale and purchase within a specific country.

Foreign Currency

It is a legally accepted monetary instrument that is needed for exchange outside of one’s country. Foreign currency is needed for trade and commerce with another country.

Fixed Exchange Rates

It is where currency pegging comes in. The central government or a financial regulatory authority fixes the currency exchange rate against another currency of the country it wants to do business with. It supplements the business and offers a stable currency exchange rate which is not influenced by fluctuations triggered by international factors.

Let’s look at some of the limitations of currency pegging.

A Few Limitations of Currency Pegging

While currency pegging policy serves many purposes which are discussed below, it also has the following limitations.

  • When the currency peg is intact, the central bank maintains foreign reserves at a certain level which helps buy and sell the reserves at a fixed rate.
  • Currency peg becomes invalid if the domestic currency runs out of the foreign reserves it is supposed to maintain.
  • This can lead to currency devaluation where the exchange rate floats freely.

Some Important Considerations about Currency Pegging

Before knowing the advantages and disadvantages of currency pegging, it is important to know some other important considerations so that you know how it benefits your online money transfer to Bangladesh. These are:

  • Currency pegging came to the fore after Bretton Woods.
  • Developing countries try to come at par with developed countries in terms of economic development through currency pegging.
  • Currency pegging countries ensure that they purchase a currency at a lower rate than the higher rate at which they sell it.
  • It boosts imports and exports.
  • Most countries peg their respective against the US Dollar.
  • Mostly, currencies are pegged on gold.

Advantages of Currency Pegging

Some of the advantages of currency pegging are listed below.

Increased Commerce

Business in the country increases and commerce boosts. Because a currency peg ends speculation, which paves the way for investors to come and make investments in the country.

Protection Against Currency Fluctuations

A currency peg provides stability against currency fluctuations and it attracts long-term investments in the country that does currency pegging. It adds to the overall economic health of a country.

Stable Monetary Policy and Less Volatility

A currency peg offers stabilization in a country’s monetary policy and reduces volatility that is the result of fluctuations in the exchange rates of different currencies due to several global factors.

Steady Flow of Remittances

Since a currency peg offers a fixed exchange rate, it adds to the steady flow of inward remittances. But for that to happen, expatriates must work in and send money from countries to which their native country’s currency is pegged.

Disadvantages of Currency Pegging

Some of the disadvantages of currency pegging are listed below.

Increased Interference in Domestic Affairs

Consider currency pegging as a favour from the other country. And in response to that favour, the other country will keep interfering in a country’s domestic affairs.

Strong Support and Consistent Monitoring

A country needs strong government support for currency pegging because it is a long and complicated process. Additionally, monetary authorities have to consistently monitor the entire process.

These are a couple of disadvantages of a currency peg as the positives of currency pegging outweigh the negatives.

Wrapping Up the Discussion

If you send money to Bangladesh online with ACE Money Transfer, you can get live and market-competitive exchange rates for several currencies, because the country you are working in may not necessarily be currency pegged by Bangladesh’s government. Right? Furthermore, you will get speed, safety, a wide service network and much more for a low fee from one window.


Frequently Asked Questions (FAQs)


What is currency pegging?

Currency pegging is when one country ties its currency’s exchange rates against another country’s currency. Most developing countries peg their respective currencies against the US Dollar as it is the world’s most stable and strong currency.


What purpose does currency pegging serve?

A currency peg offers a steady, stable and fixed exchange rate which is not affected by the fluctuations that are triggered by many global factors like wars, natural calamities, and pandemics.


Does the currency peg benefit inward remittances to Bangladesh?

Yes. A currency peg does benefit the flow of inward remittances to Bangladesh provided money is sent from such a country whose currency Bangladesh has pegged its currency against.


Is currency pegging a good idea?

Yes, currency pegging is a good monetary policy. Because it ends speculation and volatility and encourages investors to invest in the business and also enables locals to import more goods and services from foreign countries.


Why should a country choose to peg its currency?

There are several reasons for pegging a currency but the prime ones include providing economic stability, fostering bilateral trade and commerce, and mitigating the effects of entering new economic markets.


Resources

  • Bangladeshi diaspora

(Bangladesh sets target to send 1 million workers abroad in 2022 | Arab News)

  • Inward remittances

(Personal remittances, received (current US$) - Bangladesh | Data (worldbank.org)


News

PREVNEXT
Tips For Maintaining A Healthy Work-Life Balance As A Pakistani Expat Worker
A Journey Through Desi Delights: A Recap of the ACE-Sponsored Copenhagen Mela 2024
  • Categories
  • Country