REER Hints Strong Taka

A strong Taka is signalled by REER, Depreciation may bring forex sheer.

A news report divulged that Bangladeshi Taka's Real Effective Exchange Rate(REER) has strengthened/appreciated to 100 in March 2025. In January, it was 103 point somthing. REER is the weighted average of a country's currency in relation to a basket of major trading partners' currencies taking into account inflation prevailing [in] the country and trading partner countries. Taka's REER appreciation means we need less Taka to get 1 Trading Partner Currency (average of major trading partner currencies) from the market. That means value of Taka against major trading partner currencies strengthened/increased/ appreciated, not decreased!

If this is true ,then why there is no reflection of it on the official website of the Bangladesh Bank(BB)?BB website still [pegs] 1 USD at Tk 122. Meanwhile, googling USD-Taka exchange rate will show you that major foreign exchange houses offer Tk 121 point something for 1 USD. But earlier BB governor had claimed that exchange rate is evaluated daily. There is a mismatch. Following the imposition of reciprocal tariff,USD depreciated/weakened against major currencies. That is why 1 USD fetching Tk 121 point something not Tk 122!

Appreciation of Taka's REER is also a cause of concern. It indicates reduced competitiveness of Bangladeshi products in international market. In addition, import also becomes cheaper. Though depreciation pressure is low,BB can create an atmosphere for it. And it is pretty much in line with its ongoing objective.

IMF noted that forex reserve has stabilized but there is no sign that reserve is gradually growing month by month. BB can change the status quo by buying USD from the local market. It will increase the [demand] for USD at home and depreciate the local currency. Market conditions can easily deal with 10% depreciation. We do not know what will happen 3 months later when the pause on tariff will be lifted. So this is the high time for BB to intervene in the forex market to depreciate Taka against USD. Bangladesh Bank's own study acknowledges that real export declines in the wake of appreciation of REER.

Now, depreciation intervention is advantageous from the point of view of BB. It has to swell the forex reserve to get the next installments of the IMF credit package. Vietnam Dong, Rupee, Yuan all the currencies depreciated following the reciprocal tariff. Bangladeshi currency has not done it yet. It has to be appreciated first,as the REER tells, then it requires serious depreciation to make Bangladeshi goods more competitive. For that, BB's intervention is a must.

Depreciation Is The Key

A correction fully translates tariff's rise in import prices, To fight risks,depreciation sounds best among the choices.

As the world is still coping with the uncertainties associated with reciprocal tariffs,Mr Trump made it clear that he has no intention to "pause the tariff". Meanwhile, Bangladesh decided to sent a letter to the USA to postpone the decision for 90 days. Govt is planning to bring down the tariff on several US goods so that import from the USA could rise. Govt is even mulling to import LNG from the USA.

What is worrying is that several US buyers are withholding their purchase orders for indefinite period. Chief disaccord turns out to be who will bear the extra price emanating from the tariff. Big brands remain silent here ,but others press the exporters here to bear fully the brunt of it.

Now latest development hints that researchers from American Enterprise Institute questioned the formula used for reciprocal tariff. Let us look at the formula again:

Change in tariffs= (US exports to partner - US imports from partner) ÷ (Elasticity of import demand with respect to import prices × Elasticity of import prices with respect to tariffs × US imports from partner)

The first two terms in the denominator are set to be -4 and 0.25 respectively. But the researchers pointed out that the Trump administration erroneously used elasticity of retail prices with respect to tariffs instead of elasticity of import prices with respect to tariffs(which is set to be 0.945 or 1). Elasticity of import demand with respect to import prices shows how much import demand changes in response to a 1% increase in import prices. Similarly, elasticity of import prices with respect to tariffs shows how much import prices change in response to a 1% increase in tariffs. Product of the two terms tells how much the import demand changes for 1 % increase in tariffs.

The researchers claim the original author (Alberto Cavallo) made it clear that tariffs are passed fully to import prices and elasticity of import prices with respect to tariffs is used in the calculation of the actual formula, not the retail prices (see"Trump's Formula 'Based On An Error' - Conservative Think Tank", Jason Lemon,Newsweek, April 5,2025). If this argument is true then a 1% increase in tariff leads to a decrease in [import] demand by 4%. Inflation is also much higher than the earlier estimation.

The corrected reciprocal formula [may] significantly lower Bangladesh's tariffs to 9% (0.185 divided by 2), much lower than the earlier 37%.

Stephen Miran in his paper, discussed in the previous piece, argues that if the tariffed country fully depreciates its currency then price of the tariffed good will not rise in the USA. However, if the tariffed country does not cooperate, price of the imported good rises. So the corrected formula shows imported good's price increases fully in response to an increase in tariff, depicting the noncooperation scenario. Under the corrected formula, Bangladesh's tariff becomes even lower (7%) when trade deficits take into account tariffs already paid to the USA on exports.

So, in brief, Bangladesh faces tariffs in the range of 9% to 37%.

The USA shows no sign of relaxing it and Bangladesh is a marginalized country, hinges on exports and remittances heavily. Unilaterally, Bangladesh can depreciate Taka and retain the competitiveness , mitigating the risks posed by reciprocal tariffs. In the previous piece, I argued that Bangladesh can easily depreciate Taka 10% by now and near future without any trouble. We witness crude oil prices already dropped by 7% in the international market. The uncertainty is still there,indicating oil prices may plunge even further. So passthrough effect of 10% depreciation will be offset by fall in oil prices.

In the case of worst case scenario( tariffs stay for indefinite period), we have to depreciate the currency by 37%. So exchange rate of USD against Taka will be varied between Tk 134.20(10%) and Tk 167 (37%).

Compared to China, Vietnam and Cambodia, Bangladesh's tariffs are lower. China cannot sustain 104% depreciation of Yuan. Capital flight will be enormous. So Bangladesh does not need to compete with China to depreciate its currency by that insane amount.

Depreciation will work as incentives for the exporters and consumers will not feel the heat amid falling oil and commodity prices globally. The SMEs may incur loss from rising cost of imported goods. But Bangladesh Bank already installed a mechanism of extended credit facility for the SMEs to mitigate the loss from interest rate rise. Its coverage can be extended for mitigating risks from exchange rate variation. So more SMEs which do not know how to cope with risks from interest rate rise and exchange rate variation could be brought under its coverage. Giving them credit for 3/4 years will allow them to sustain their businesses in the face of potential risks from volatility.

Taka depreciation works to address many of the challenges emanating from this tariff debate. Meanwhile, Chinese central bank lowered the reserve requirements for the banks in a bid to increase liquidity in the market. On the other hand, the Federal Reserve is scheduled to lower the policy rate by May. This means foreign credit will be cheap in the coming months. As China is keen to depreciate the Yuan and gives its firms and institutions more money to invest ,some will end up abroad for sure.

As Taka depreciation sounds more plausible than any other measure, we should go for it. We have a valid reason for doing so. Foreign buyers want it,international commodity prices set the right context and incentives for exporters amid monetary contraction policy call for depreciation of Taka.

In brief things surfaced here from above discussion are: a claim says original formula reflects complete increase in import prices resulting from an increase in tariff. This correction [may] further lower reciprocal tariffs for Bangladesh and it is manageable for the govt [if the correction is taken into consideration]. Depreciation of Taka appears to be the plausible solution for the moment given the prevailing context.

Could There Be A Recovery?

Tax cut and high govt spending
Will do little in situation improving.

Taka depreciated to TK 102 against US dollar last week. The record depreciation took everyone off guard. As government is pursuing a managed floating exchange rate, it pegged the rate at TK 87.50. Now at the exchange rate market US dollar is sold at TK 95. Net difference, TK 8,remains same as before. There will be some appreciation when Bangladesh will receive $250 million budgetary support from ADB.

Meanwhile, balance of payments causes lots of worries. There is widening deficit in current account balance. It stands at $14 billion right now.

Remittances keep falling. Though export earnings have increased and show signs of achieving this years target, growth forecast about key export markets throw a wrench into similar growth expectations in the future.International Monetary Fund revised down its growth forecast for 2023 to 3.6%¹.Bloomberg Market recently conducted a survey where a little less than half of the investors apprehended a recession in US economy for 2023. Deutch Bank echoed similar concern. According to a news report, UK inflation reached 9% and 25% of the British find it difficult to get 3-meal per day^2&3.

If we take a look at the country wise export,then we will notice USA,UK,Germany and France constitute our key export destinations. We remember that in 2008-09 Housing Bubble led to recession in the USA. The following year, Bangladesh’s export to USA,Germany,France and Belgium declined ⁵.But Bangladesh got back on track in the subsequent years.Reasons will be explained few para later.

With the rising price level and uncertainty, demand for Bangladeshi goods will be lower in these countries. Though import will be costlier, import of raw-materials and other essential items like oil,foodgrains may lead us to another current account deficit next year.

However, it is not clear what impact the inflation will make on oil revenue even if there is an output contraction in the developed economies. If there is indeed an oil revenue boom in the Middle East,key source of Bangladeshi remittances, then growth in remittances may end up in a current account surplus. However, inflation may cast a shadow over remittances coming from USA and UK. In 2009-10,year after the beginning of the financial crisis,remittances from USA declined to $1.4 billion. Another bout of geopolitical tension will hurt the remittances flow surely.

It is highly likely that government will increase spending as election will be held by the end of 2023. It has to make happy thr grassroot workforce. In addition,govt mulls corporate tax cut from 22% to 21% in the next budget⁴. Such fiscal policy may increase the output but will do little in the end. Why?

• First,such tax cut will do little in bringing new investment. Existing groups close to ruling party will take full benefits of such tax cut
.
• Second, investment spending in a corruption-stricken country hardly translates into new job creation or an increase in output. Rather,in the name of investment spending we may witness opening up of LCs to import capital machinery,raw-materials etc ,making alley of laundering money abroad
.
• Third,for the foreign investors there are already various kinds of tax incentives, so tax cut will do little to bring new FDI
.
• Fourth, in a country where tax-GDP ratio is still below two-digits such fiscal expansion is not a wise move especially when government is taking assistance from others as budgetary support
.
• Fifth, such fiscal expansion will raise the interest rate and Taka will appreciate, making our goods less competitive in the future. Look at the level of depreciation in Pakistan and Cambodia
.
• Sixth, when exchange rate is pegged at some value, now it is at TK 87.50, such fiscal expansion may contract our output more than it is under a free floating exchange rate.

It is indeed interesting to see how the government manages the challenges of inflation and current account deficit in an election year when populist government generally spends more and is shy to reduce interest rate.

I am optimistic about the current account balance. Because our export items to the West are mostly lower-end items. Consumers will purchase trousers, sweat shirt,T-shirts,undergarments, sweaters no matter what their income is.Their demand is inelastic.Despite the long bad spell in the US and Europe,Bangladeshi export took a little hit and did remarkably well. I anticipate the same thing this time. Moreover, we have to make liability into opportunity. As from the next year,we have to start paying an annual obligation of $565 for Rooppur nuclear power plant⁶[*]. However, if we could manage to convince Russia, we could pay it partly as RMG items/ship and partly as agricultural items. Moreover, we have to urge Russia to export wheat and oil to Bangladesh as part of its moral obligation for starting a war.In such case, burden to our US dollar stock will be significantly reduced.

Another thing the government should do is to let Taka lose its value. Now at the open market, exchange rate for a US dollar is TK 95. Government rate should reflect it. If the Taka depreciates further (to TK 120 or somewhere there), then our exportable item will be more competitive and output contraction will not be severe in the wake of a growth cut.

Like the populist regime,government embarked upon taking expansionary fiscal policy ahead of election year. No course correction is in sight. But further depreciation and reduction in interest rate would be more welcoming.

Notes And References:

1. “IMF Cuts Global Growth Outlook, Here Are The Warning Signs”, Reshma Kapadia,Barrons,April 19,2022. For more read at https://www.google.com/amp/s/www.barrons.com/amp/articles/imf-global-growth-outlook-warning-signs-51650326199
2. “Investors Predict US Recession 2023-Here Are The Facts”,Felix Richter,Statista,April 12,2022.For more read at https://www.weforum.org/agenda/2022/04/recession-investor-bank-pandemic-united-states/
3. “Teen Bela Khabar Pacchey Na 25% British;Mullosphitete Navishash(25% British Do Not Get 3-meal A Day; Awful Inflation)”,Jamuna Television, April 19,2022. For more watch https://m.youtube.com/watch?v=dNkAqd3C-4w
4. “Corporate Kor Abar Komchhey”,Daily Prothom Alo(p-12),May 21,2022.
5. Bangladesh Economic Review 2019,2020.
6. "Rooppur Ki Shethosti?(Is Rooppur A White Elephant?)", Bangladesh Military News,Facebook,May 13,2022. For more read at https://bit.ly/3LBCVOULBCVOU

[*Note:This piece has been updated at 21:15 PM BST on May 22,2022.The update includes link to annual repayment of Rooppur Nuclear Power Plant.]