Businesses lose out as the real effective exchange rate (REER) index rose to 102.97 in October from 100.40 in September that signals a decline in the competitiveness of Bangladesh's currency in international trade, sources say.
According to the latest measure for October 2024, prepared by Bangladesh Bank, the central bank, this increase reflects the rising price levels in Bangladesh compared to its 15-currency-trade-basket partners.
Sources in business and banking circles sound alarm that this development could adversely impact the country's export performance.
Officials at the central bank told The Financial Express that the taka-dollar exchange rate, currently hovering around 120, would need to be adjusted upward.
They argue that a more favourable level of REER would be around 100, which could better support exports and remittances.
The point-to-point inflation heated up to 10.87 per cent in October-a high not seen in many years-that spurred REER volatility.
In financial literature, REER is a critical measure for determining the equilibrium value of a currency. A REER below 100 indicates that exports are becoming more competitive and imports more expensive. Conversely, a REER above 100 suggests the reverse swing.
Bangladesh's key trading partners include China, the European Union and India, among others. The REER calculation incorporates the currencies and inflation rates of the country's top 15 trading partners.
"Our aim is to maintain the REER at 100. Otherwise, there will be pressure to depreciate the taka against the dollar," a senior central-bank official told the FE.
Economists warn that the current REER level is eroding 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 of Bangladesh, underscoring the need for stability on the foreign-exchange market.
"We enjoyed a favourable position over the past few months, but now the situation is becoming volatile."
As such, he cautions, export receipts may decline.
Dr Masrur attributes the REER rise primarily to higher inflation in Bangladesh compared to its trading-partner countries.
He points to growing demand for the dollar, driven by relaxed import policies, as a contributing factor.
Dr Zahid Hussain, former lead economist at the World Bank's Dhaka office, emphasized the importance of a stable REER.
"Stability in the REER is essential to bolster exports and remittances," he said.
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