In the first six months of FY23, the Bangladeshi currency was devalued by 11.3 per cent against the USD – the highest among the neighbouring countries – as the central bank introduced a floating exchange rate in September last year amid the prevailing foreign exchange crisis.
This was revealed in the Monetary Policy Statement (MPS) for the second half of FY23, which was recently unveiled by the Bangladesh Bank.
According to the MPS, in the first half of FY23, the Indian rupee lost 4.6 per cent of its value against the USD while it was 4.1 per cent for the Indonesian Rupiah and 2.9 per cent for the Chinese Yuan. However, the Malaysian Ringgit did not depreciate against the greenback.
Regarding Taka’s devaluation, the central bank said in the MPS, “Bangladesh Taka depreciated sharply during the first half of FY23 reflecting excess demand for foreign exchange along with an appreciation of the USD in the global market.”
Former lead economist at the World Bank’s Dhaka office Zahid Hussain told The Business Post this had happened due to the sudden fall in Taka’s value in September 2022 when the central bank introduced the floating exchange rate.
“But even before the USD crisis, the central bank was supplying dollars from reserves to retain the value of the Taka. The countries mentioned in the MPS did not do that. Instead, they have been slowly devaluing their currencies against the dollar for the last two years. That is why their devaluation is less visible compared to that of the Taka,” he explained.
The dollar crisis started in March last year. Then the Bangladesh Bank in September tasked the Bangladesh Foreign Exchange Dealers’ Association with determining the exchange rate as part of implementing the floating exchange rate.
As a result, on September 12, Taka was devalued by 11.73 per cent against the USD. Now the American currency is selling at Tk 107, which was Tk 95 before the floating rate was introduced.
The central bank pumped $7.8 billion into the money market during the first six months of FY23 to meet the excess demand for the greenback, according to the MPS, which also said the central bank would return to a unified rate.
“It is expected that the exchange rate will move toward a unified rate (within a 2 per cent variation) within this fiscal year and a flexible exchange rate system for all international transactions bringing stability to the BDT-USD exchange rate,” the MPS noted.
How BB is saving USD
To mitigate the pressure of devaluation and take the current account deficits to a comfortable level, the Bangladesh Bank has extended necessary policy measures. As a result, import payments declined by 2.2 per cent during July-December in FY23 compared to the same period of the previous financial year.
Besides, to increase reserves, the central bank is easing the process of sending remittances and distributing cash incentives against that, waiving money transfer fees charged by local banks for remitters, and also allowing the mobile financial services to receive and distribute remittances.
As a result of these policy measures along with record-high overseas employment in 2022, the inward remittance growth is expected to improve soon. However, Zahid thinks the multiple exchange rate caused remittance to decline despite huge manpower exports.
“If the Bangladesh Bank can get back to the unified exchange rate, we hope remittance will increase,” he added.
The central bank forecast that the country’s overall balance will reach negative $5.07 billion at the end of the current financial year, which was negative $5.38 billion in FY22.
Analysts say the Bangladesh Bank will continue the USD support from forex reserves if exports and remittances do not reach the expected levels. Otherwise, the exchange rate should be fixed at such a level that no support will be required from the reserves.
Reserves decreased by more than $12 billion in the last one year. It stood at $32.47 billion on January 18, down from $45.2 billion year-on-year.
However, according to the International Monetary Fund, the usable reserve amount is $24.47 billion now as $8 billion will have to be deducted.