Bangladesh's export competitiveness on the global market has weakened as the taka gets stronger in exchange with peer currencies, prompting exporters to entreat the government to consider currency devaluation.
The real effective exchange rate (REER) rose to 103.93, as of July, up 1.28 points from the previous month by official count, signifying further erosion in the country's export competitiveness.
The increase in the REER suggests that the taka has become relatively stronger in real terms against a basket of trading-partner currencies after adjusting for inflation and trade weights.
A sustained rise in the index makes Bangladeshi exports relatively more expensive on the international market while making imports cheaper for the importers.
"The central bank should consider depreciating the currency as the REER has surged," a senior Bangladesh Bank official told the FE, requesting not to be named.
"The export-earning sector might face problems if the taka remains overvalued."
The central bank calculates the REER against a basket of 17 currencies, using Fiscal year 2024 as the base year with an index value of 100.
The calculation takes into account trade patterns, including exports and imports, as well as remittance inflows.
An REER reading above 100 does not, by itself, mean that the taka must be depreciated by a particular amount. Rather, it indicates that the currency's real exchange-rate position is stronger than its level in the base period.
The direction and size of any adjustment depend on a range of factors, including inflation differentials, productivity, capital flows and external-sector conditions.
At the end of July, the nominal exchange rate stood at Tk123.98 to the US dollar. The rise in the REER indicates that the taka's real value has strengthened relative to the base period despite the nominal depreciation of the currency, the Bangladesh Bank said in its latest report.
The taka depreciated by about 0.35 per cent against the greenback between June and July, compared with a depreciation of more than 1.0 per cent in the Indian rupee over the same period, according to Bangladesh Bank data.
The divergence could put additional pressure on Bangladesh's exporters, particularly if competing economies experience faster currency depreciation while Bangladesh's real exchange rate remains elevated.
The REER is widely used in international economics as a gauge of a currency's external value and a country's trade competitiveness because it combines nominal exchange rates with relative price levels and trade weights.
A decline in the REER, all else being equal, would improve the price competitiveness of Bangladeshi exports, while a further rise could make it harder for exporters to compete on the international market.
For Bangladesh, where export earnings are heavily concentrated in the ready-made garment sector or RMG, maintaining a competitive exchange
rate is particularly important as exporters face competition from other low-cost manufacturing economies.
