Local currency near-competitive with dollar in foreign trade

A price correction in March brings the Bangladesh currency to a more competitive level in foreign trade, after having stayed significantly overvalued against the US dollar in January and February.

The real effective exchange rate (REER) index dropped to 101.90 in March 2025, implying that the taka is now overvalued just by Tk 2.30 against the greenback in currency exchange.

In its latest report the central bank says the decline in the REER index reflects a marginal improvement in the competitiveness of the taka in international trade, driven by favourable price differentials between Bangladesh and its trading partners.

The Bangladesh Bank regularly reports to the government on the nominal, nominal-effective and real-effective exchange rates of the taka against a basket of 18 currencies. This basket covers more than 85 per cent of the country's trade.

In economic terms, a REER value of 100 signifies balanced trade- competitiveness. A value above 100 means the currency is overvalued, which can hurt exports by making them more expensive in global markets.

Officials at the central bank told the FE that a slight easing in domestic inflation helped reduce the REER. "We're working to bring the REER closer to 100," says one official familiar with the developments on the foreign-exchange front.

Inflation fell to 9.35 per cent in March on a point-to-point basis, while the taka depreciated 3.28 per cent during July-March period compared to the same period a year earlier.

The exchange rate of the taka against the US dollar depreciated by 3.28 per cent during July-March FY25, compared to a 1.49-percent depreciation in the same period of FY24.

Bangladesh's inflation remains higher than that of its major trading partners, which continues to contribute to the currency's overvaluation. The 12-month average inflation was 10.26 per cent as of March.

During the tenure of the previous central-bank governor, Abdur Rouf Talukder, the taka was overvalued as much as by Tk 6.0 to Tk 7.0.

Dr Zahid Hussain, an independent economist, says Bangladesh's persistently high inflation compared to its trading partners is a key reason for the taka overvaluation against the US dollar.

"Although inflation has slightly eased, there's concern it may rise again due to increases in the prices of essential items like soybean oil and some varieties of rice," he notes.

Bangladesh's two largest trading partners, China and India, are experiencing relatively much lower inflation.

China is currently facing deflationary pressure and its inflation stood at 0.7 per cent in March, while India's inflation stood at 3.34 per cent. Together, these two countries account for over 40 per cent of Bangladesh's total imports.

Inflation was also lower in other key trading areas - 3.6 per cent in India and 2.2 per cent in the Eurozone in March.

Dr M. Masrur Reaz, chairman and CEO of Policy Exchange Bangladesh, has highlighted that an overvalued currency erodes trade- competitiveness, particularly affecting export performance.

He notes that Bangladesh's exports have been increasing and might increase in the coming months, too, as trade war between the USA and China might give dividend in favour of Bangladesh.

Exports increased by over 3.0 per cent in February, fetching $3.673 billion, according to Export Promotion Bureau (EPB).

However, as an import-dependent economy, Bangladesh also relies heavily on foreign goods for both consumption and production. To modernise its exchange rate and monetary policy, the Bangladesh Bank introduced a series of reforms on December 31, 2024 following the regime change.

It now publishes a daily reference rate based on the weighted average of freely quoted exchange rates from market transactions which on 17 April 2025 (Operation till 05:00 PM) was recorded at 121.8949.

In May 2024, the central bank implemented a Crawling Peg Exchange Rate System for spot dollar transactions, introducing a Crawling Peg Mid Rate (CPMR) of Tk 117.00 per USD.

jasimharoon@yahoo.com