Overvalued taka likely to cut export, remittance earnings

Local-currency taka again gets overvalued against the US dollar, as per July ratings, after remaining undervalued in two consecutive months, stoking concerns about Bangladesh's trade competitiveness on the volatile global market.

The real effective exchange rate (REER), a key indicator for gauging foreign-exchange-market equilibrium, stood at 101.14 in July 2025. It was 98.61 in June and 99.27 in May, according to Bangladesh Bank data released Tuesday.

Based on REER, the BDT was overvalued by Tk 1.71 against the dollar in the month under review. The exchange rate should have been 121.13 but it traded at Tk 122.84 during the period.

In economics, a REER reading above 100 suggests that a local currency is overvalued against a basket of major trading partners' currencies, including the greenback. A rate below the 100 benchmark suggests the local currency is undervalued.

An overvalued currency typically erodes export competitiveness and slows remittance inflows though it makes imports cheaper.

The REER, based on a fiscal year 2016 baseline, incorporates 18 currencies representing Bangladesh's top trading partners' economies that together contribute to around 85 per cent of the country's external trade.

A senior central banker attributes the recent REER increase to several interlinked factors: a weakening US dollar and higher domestic inflation in July.

"Our inflation rate was higher in July than in June while our trading partners saw easing inflationary pressures," he says to explain the change in the equilibrium.

The Bangladesh Bank official, however, mentions central bank's bid to keep the index close to 100 to minimize impacts on the economy.

Central-bank officials point out that REER was too high during the Sheikh Hasina government. During the tenure of previous BB governor Abdur Rouf Talukder, the taka was often overvalued, with the REER hovering around 107-108--meaning the local currency was overvalued by Tk 7-8 against the dollar that time.

Economists voice warning that the overvalued BDT may hurt both growing export and remittance inflows, which are vital for the economy.

Dr Mohammad Akhter Hossain, chief economist of Bangladesh Bank, told the FE that the central bank is closely monitoring the development. "Export and remittances are very much important for us. So we are trying to keep exchange stable through different mechanisms."

He notes that there are many factors for the fluctuation but Bangladesh Bank wants to keep it stable.

Another economist argues that as Bangladesh is a largely import-dependent economy, and its strategy should be for maintaining a balanced REER.

"The domestic inflation differential with Bangladesh's peer economies is high and this is a key reason behind the higher REER in July," says Dr M. Masrur Reaz, chairman and CEO of Policy Exchange Bangladesh.

He says the demand for import has increased, leading to rising demand for dollars in the market. Globally, he notes, the dollar remained weak, which has ultimately supported appreciation of the BDT.

jasimharoon@yahoo.com