Bangladesh's trade competitiveness on the global market rises as the taka, which was significantly overvalued against the US dollar in January, reasonably depreciated in February.
In the past month of February, the real value of the local currency should have been Tk 124.27, but the nominal value stood at Tk 122, making it marginally overvalued by Tk 2.27, according to Bangladesh Bank calculations.
In the previous month, January 2025, the taka was overvalued by Tk 3.67.
An overvalued currency negatively impacts the country's trade competitiveness with international partners.
The central bank calculates the real effective exchange rate (REER) index that stood at 101.86 in February, down from 103.01 in January.
When adjusted using the exchange rate, the real exchange rate should be at Tk 124.27 against one greenback.
The central bank or Bangladesh regularly updates the government on the nominal, nominal effective and real effective exchange rates of the taka against an 18-currency basket, which accounts for more than 85 per cent of the country's trade.
In economics, a REER value of 100 suggests trade competitiveness is balanced. Any value above 100 indicates an overvalued currency, making exports less competitive.
Central bankers told the FE that the inflation in the country got reduced to some extent and it was one key reason behind the fall of the REER.
"Our efforts are being made to bring the REER down to 100," said one of the BB officials.
He said Bangladesh's inflation rate is still higher than that of its trading partners, which is a major reason for the currency's overvaluation.
Earlier, during the tenure of previous central-bank governor Abdur Rouf Talukder, the taka was overvalued by Tk 6.0-7.0.
He says while overvalued currency impacts export competitiveness, the situation has improved over time.
Dr Zahid Hussain, an independent economist, says Bangladesh's inflation rate is higher compared to its trading partners. "As a result, our exports are relatively less price-competitive."
He notes inflation in Bangladesh dropped to some extent but the inflation in the country's major trading partners also edged down. "Such drop in inflation also impacts the REER."
Bangladesh's inflation rate was nearly 9.32 per cent in February 2025, down by 0.62 percentage points from January.
Inflation in China, Bangladesh's largest trade partner, fell into negative territory in February, while in India, the second-largest trade partner, was 3.6 per cent and Eurozone rate 2.4 per cent.
Chairman and CEO of Policy Exchange Bangladesh Dr M. Masrur Reaz emphasizes that an overvalued currency affects trade competitiveness, particularly in export.
He mentions that Bangladesh's exports grew 10.53 per cent during July-February of the current fiscal year. "It could have been much higher if competitiveness was fully in place."
The Bangladesh taka, against the USD, depreciated by 3.28 per cent during July-February of FY25 compared to the depreciation by 1.49 per cent during July-February of FY24, according to Bangladesh Bank statistics.
As an import-dependent country, Bangladesh relies on imports for both domestic consumption and export production. A sharp depreciation would significantly increase import costs.
However, to modernize its exchange rate and monetary policy, Bangladesh Bank introduced several reforms on December 31, 2024.
The regulator introduced a Crawling Peg Exchange Rate System for the spot purchase and sale of USD with a Crawling Peg Mid Rate (CPMR) at Tk117.00 per USD in May 2024.
Scheduled banks are instructed to purchase and sell dollars freely around the CPMR to both customers and interbank buyers since May 2024.
Along the same line of intensions for modernizing exchange-rate policy and monetary policy on 31 December 2024 BB launched a new foreign-exchange intervention strategy for publishing daily reference benchmark based on weighted average of freely quoted exchange rates in the market transactions.
In addition, BB has instructed authorised dealers to provide information on all foreign-exchange transactions at and above USD 100,000 twice a day and make the business day's exchange rate visible to the customers on digital screen as well as on their website.
Moreover, on 2nd January 2025, with the intension of streamlining foreign- exchange operations and eliminating discriminatory currency practices the regulator introduced a maximum allowable spread of one taka between buying and selling rates for foreign currencies, with a uniform spot rate irrespective of size of transactions.
jasimharoon@yahoo.com
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