The Bangladesh Bank has initiated a measured depreciation of the taka against the US dollar since March, marking a shift from its previous policy of defending the currency through market intervention. This move comes as global energy prices surge following the ongoing conflict in Iran, creating mounting pressures on import payments, foreign exchange reserves, and domestic inflation.
Central bank officials are navigating a delicate balancing act: preserving price stability while maintaining sufficient foreign exchange reserves. A rapid depletion of reserves due to higher fuel import bills could exacerbate inflation and disrupt the overall economy. By permitting a gradual decline in the taka’s value, the Bangladesh Bank aims to shield reserves and mitigate the inflationary impact of escalating import costs.
Rationale for Depreciation
Although currency depreciation typically stokes inflation, the central bank has opted for this path after careful consideration of the Real Effective Exchange Rate (REER), which suggests that the taka remains overvalued relative to major trading partners. Depreciation is also expected to bolster exports and remittance inflows, which could otherwise decline due to the regional economic uncertainty caused by the Middle East conflict.
Ezazul Islam, Director General of the Bangladesh Institute of Bank Management, highlighted that gradual depreciation is necessary to absorb external shocks and protect reserves, particularly in light of expansionary fiscal measures planned in the upcoming national budget and post-election credit demand.
A senior Bangladesh Bank executive noted that the pace of depreciation remains slower than in India, a major trading partner. Undervaluation of the Indian rupee renders Indian imports cheaper, potentially increasing import pressure on domestic industries. A managed depreciation of the taka will improve competitiveness for exporters, enhance profitability, and benefit import-competing domestic industries.
Current Exchange Rate Dynamics
The taka began declining on 8 March, rising to nearly Tk123 per US dollar after months of stability at Tk122.30. The REER, based on 17 trading partner currencies and adjusted for inflation, stood at Tk126 on 29 March, indicating room for a further Tk3.24 depreciation to maintain competitiveness.
The central bank maintains a daily internal exchange rate band, recommended by the IMF, which sets an upper limit of Tk130 and a lower limit of Tk125. The current exchange rate remains below the lower band, granting the bank flexibility to allow a controlled depreciation up to 5.6% without selling reserves.
| Metric | Value | Notes |
|---|---|---|
| Current interbank rate | Tk122.75/USD | As of 30 March |
| REER | Tk126 | Indicates overvaluation |
| Exchange rate band | Tk125 – Tk130 | Internal monitoring, not publicly disclosed |
| Foreign exchange reserves | $29.29 billion | Down from $29.59 billion two weeks earlier |
| Potential depreciation | Up to 5.6% | Before reaching upper band |
Risks and Forecasts
An internal study by the Bangladesh Bank projects that a combined oil price and currency shock could erode reserves by $6.5 billion by 2026. Inflation may rise by 0.5–2 percentage points above the current baseline of around 10.5% if global fuel prices remain elevated. The report recommends partial fuel price adjustments, a gradual depreciation of the taka, and a contractionary monetary stance to manage inflationary pressure.
To further ease balance of payments stress, Bangladesh Bank is exploring emergency IMF support for fuel imports, separate from the ongoing $4.7 billion loan programme, with potential disbursement of $1.5 billion by June. Discussions are also underway for a $2 billion credit line to strengthen reserves.
Market Guidance and IMF Concerns
While depreciation is allowed, the process remains partly guided by central bank instructions, with commercial banks reportedly advised to trade dollars within specified ranges. The IMF has raised concerns over this practice, advocating for market-determined exchange rates rather than pre-set guidance, to ensure transparency and efficiency in the currency market.
By allowing a managed, gradual depreciation, Bangladesh Bank aims to safeguard reserves, protect the domestic economy, and provide exporters and remittance channels with a competitive edge during a period of global uncertainty.