Bangladesh's currency gets overvalued driven by higher domestic inflation compared to its trading economies with the prospect of export and remittance losing out, economists and businesspeople say.
Export and remittance are then two wellheads of foreign-exchange supplies for the country-and this duo helped out with an upturn in earnings recently while the country grappling with depleting reserves.
The real effective exchange rate (REER) index-a key measure of currency valuation-rose to 102.97 in October and to 104 in November, up from its fair value of 100.09 in September 2024, according to Bangladesh Bank data.
This suggests a decline in the competitiveness of Bangladesh's currency-the taka-- in international trade, sources told The Financial Express (FE).
The November REER measurement, prepared by the central bank, reflects rising price levels in Bangladesh relative to its 15-currency-trade-basket partners.
Business and banking insiders, however, predict that if inflation is brought under control in the coming months, the pressure on the REER will ease.
This overvaluation of the currency could negatively impact Bangladesh's export performance.
Central bank officials indicate that the taka-dollar exchange rate, officially at BDT 120 against a greenback, may require an upward adjustment.
They note that a more flexible version of the crawling-peg system, set to be implemented on January 12, will include the publication of exchange rates twice daily allowing for free play of the market within set norms.
This adjustment is expected to bring back the REER closer to 100, a level that could better support exports and remittances, they hope about a cure.
Bangladesh Bureau of Statistics (BBS) data showed point-to-point inflation having surged to 11.38 per cent in November--its highest in many moons-- up from 10.87 per cent in October. This inflationary spike has contributed to REER volatility, people familiar with the matter told the FE.
In financial literature, REER is considered a critical metric for assessing the equilibrium value of a currency.
A REER below 100 indicates increased export competitiveness and more expensive imports, while above 100 suggests vice versa.
Bangladesh's key trading partners, including China, the European Union, and India, are integral to the REER calculation, which factors in the currencies and inflation rates of the country's top 15 trading partners.
Economists warn that the current REER level is undermining the competitiveness of Bangladeshi products in global markets.
"This is having a negative impact on export earnings," says Dr M. Masrur Reaz, Chairman of the Policy Exchange Bangladesh, emphasizing the need for stability on the foreign-exchange market.
"We enjoyed a favourable position in recent months, but the situation is now becoming volatile," he adds, cautioning that export receipts may decline further.
Dr Masrur attributes the rise in REER to higher inflation in Bangladesh compared to its trading partners and to growing dollar demand unleashed by relaxed import policies.
The economist, however, holds hope that the elevated inflation will come down as the prices of necessary goods, including kitchen items, have started falling.
Huge winter harvest of farm produce has cast a cooling impact on the recently overheated market. However, many local industrial manufactures and imported commodities remain costly for what experts say lax market management.
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