Bangladesh Bank has redrawn one of the most closely-watched indicators of the country's external competitiveness, updating its real effective exchange rate (REER) index to better reflect today's economic realities.
For the first time, the central bank has factored remittance inflows into the calculation, an acknowledgement of how deeply overseas earnings now shape the foreign exchange market.
The rebasing of the index to fiscal year 2023-24, from 2015-16, also captures shifts in trade patterns, inflation differentials and bilateral exchange rates over the past decade.
Officials say the changes are intended to give policymakers, businesses and analysts a clearer signal on whether the taka is fairly valued, and how competitive Bangladesh really is in global markets.
The central bank believes the revision will make assessments of currency valuation and export competitiveness more realistic and policy-relevant.
"Previously, some important components were missing or underweighted," said a senior Bangladesh Bank official, speaking on condition of anonymity.
"We have now incorporated the appropriate weights in the basket so that the valuation becomes more realistic and practical."
Bangladesh Bank regularly updates key foreign exchange indicators, including the REER and the nominal effective exchange rate (NEER), which are widely used to assess export competitiveness and currency valuation. Officials familiar with the development told the Financial Express that the inclusion of remittances better reflects the structure of the REER, as this large supply-side source of foreign currency is critical to stabilising the forex market.
The revision also captures shifts in Bangladesh's trade geography over time. China is now the country's largest trading partner and carries the highest weight in the new REER basket, replacing India, which previously held that position.
The updated index removes one Middle Eastern country from the basket as its trade share has fallen below 1.0 per cent. The revised basket now includes 17 currencies, collectively accounting for more than 85 per cent of Bangladesh's total trade.
The central bank plans to apply the new base year and methodology to the REER and related indicators starting with the December 2025 calculations, the official said.
Bangladesh Bank selected fiscal year 2023-24 as the base year as it was considered more representative of current economic conditions, with significantly lower data distortions, making recent figures comparatively more reliable.
Neighbouring countries also periodically update their base years. The State Bank of Pakistan currently uses 2015-16 as its REER base year, while India also applies the same base year (2015-16 = 100).
A REER reading above 100 generally indicates that the local currency is overvalued, implying a loss of competitiveness, while a reading below 100 suggests undervaluation and improved competitiveness. Bangladesh's REER stood at above 106 in November last, according to central bank data, indicating that the taka remained overvalued.
jasimharoon@yahoo.com