Policy Rate Perks And Taxing Export

Policy rate has many solutions to offer, Tax export to fill govt coffer.

Latest inflation data reveals that inflation rose to 8.55% from 8.48% in July. Constant increase in rice prices,caused food inflation to rise to 9.56% in June , and rise in nonfood inflation from 9.37% to 9.38% maybe the reason for this hike. Rice price in particular increased by Tk 8/ kilo, prompting govt to allow private importers to import rice.

Meanwhile, keeping the policy rate at double digit is still being criticized though it brought down inflation from 11% to current level. The govt is apolitical and it has courage to do this thing before election. Otherwise, popular govt may have difficulties maintaining this kind of contractionary policy amid pressure from various groups. Before election, investors are reluctant to go for new investment and poor private sector credit growth tells all of it. So the timing is good and central bank is doing the right thing though many thought it was wrong.

As I highlighted before, keeping the policy rate high thwarted would-be launderers from taking loans and keeps Taka's value stable. Lowering the policy rate may make central bank's intervention in the foreign exchange market ineffective. With the high policy rate, depreciation pressure on Taka is low, so central bank's intervention in forex market will lead Taka keep a desired value. With low policy rate, depreciation pressure on Taka will be higher as the NPL keeps growing, so forex market intervention may not yield the desired result and wild fall of Taka maybe observed, worsening the passthrough effects of inflation and farther raising the cost of goods and services. Another thing I mentioned in one of my earlier posts is that higher policy rate is helping many ailing private and public institutions and it helps provident fund to grow,addressing the inflation. Otherwise, govt would have to intervene and provide cash to them through printing money or using the bloc grants. The balance sheets of many institutions say ,as the news reports revealed, they made profit through investment in treasury bonds. Again market mechanism addressing the prevailing maladies, when investment prospect and law & order situation is doomed at grassroot level. Recently, I encountered a news report on a public sugar mill[,located in Jhenidah,] bogged down with unsold sugar worth of TK 360 million as market price is lower than the govt set price. The mill is waiting with the sugar stock amid undue payments for the workers. If the provident fund's money is invested into treasury bonds, then by this time workers would take loan from provident fund and may not face financial hardship. They might sell the sugar in favorable time and clear the loans. Govt intervention would not need at all. Moreover, situation like workers [descending] on streets could be avoided.

The 20% tariff is not something to remain complacent. Back in February, no one would imagine such a situation might pop up. But it happened and seriously jolted the macroeconomic situation. We have to accept that WTO is dead and we live in post WTO world. We exactly do not know what will happen in the next two quarters. So there is no reason for being content with the 20% tariff. Rather, we should chalk out contingency plan how to avoid situation like this again.

It is indeed interesting that other countries are imposing [tax] on our exports and remittances while we are charging nothing. I argued several times if we would tax remittances and export(*see "Tax On Remittance: Good Or Bad?", published here on May 20,2025), govt coffer might fill with ample money to provide more private sector credit. 1% tax on remittances and export will bring Tk 4/5 billion revenue , discarding the need for imposing minimum tax on all the TIN holders. Revenue will be used to intervene in the forex market to depreciate Taka in a bid to give incentives and provide private sector credit to banks. There should be two way traffic of receiving incentives and giving tax.

It is indeed a good move to keep the policy rate same as it screens out would-be launderers, improves balance sheet of companies amid stagnant business, keeps the depreciation pressure low, checks cost of production and [reduces] need for govt intervention. 20% tariff does not herald a new dawn rather exposes challenges in a post WTO world where black swan events will be more frequent. We should start imposing tax on remittances and exports to cover the incentives. Preparing and bracing ourselves against the black swan event will prevent the need for Middle Eastern intervention for saving the day.

[*Update: this piece is updated on August 12,2025. The update includes reference to tax on remittance argument.]

MPS And The New Tariff

Challenges are there amid low tariff, MPS targets depend on but and if.

Bangladesh Bank formally published the Monetary Policy Statement (MPS) for the second half of 2025. Inflation declined to [8.48%] in June,yet it has not touched the desired level of 7% ,below which policy rate may witness a drop. MPS aims to achieve 5.5% GDP growth rate in FY 2026. Key developments in the first half of this year set some positive indications on that direction. Free floating of exchange rate did not witness sharp fall of Taka rather Taka appreciated and the central bank had to intervene to depreciate Taka in order to give exporters and remitters incentives. Forex reserves start to grow and stopped the continuous decline.

However, private sector credit growth was low compared to what it had been projected. Only 6.4% growth achieved against the target of 9.8%. For this reason, the target is set to be 7.2%. Election uncertainties, poor law & order condition and drop in deposit growth might have contributed to the poor private sector credit growth.

Broad money growth also witnessed decline. Its impact may be seen in the next 2 months. As demand for major commodities will be lower, anticipated in the MPS, in the international market and dollar may be further weakened impact of import-induced inflation may be lower. So deflationary pressure may prevail provided that govt's grain procurement is satisfactory and no deterioration or fresh eruption of regional conflicts in multiple regions.

MPS highlighted govt's formation of three task forces to reform the banks,stricter policies to classify loan, review of risk guidelines, introduction of new laws to get rid of troubled banks and managing the Non Performing Loans (NPL). But the NPL turned worst and keeps growing. So it is highly unlikely that NPL situation will improve dramatically when domestic private sector investment is stagnant and govt is heading towards election preparations.

Lowering of US tariff to 20% from 35% came as a relief to the cash strapped economy. But there is little room for complacency. China faces 30% tariff, India 25%, Vietnam 20%,Indonesia 32% and Pakistan 19% tariff. Most of these countries have huge investment in backward linkage industry. Their value addition to readymade garments,particular in woven, is relatively higher than Bangladesh. But Bangladesh has the largest number of US and EU compliant green factories and Bangladeshi workers are more productive than workers of those countries. But both China and Vietnam have sustained policies to weaken their currencies. India has to depreciate its currency by 5% to be on per with the other competitors. So this tariff rate is only delusional, it is the macroeconomic policy, productivity, investment in value addition that will be the deciding factors in capturing the US market share. Though for the moment depreciation pressure on Taka is low, keeping a close tab on how Yuan, Rupee and Dong behave against USD in the next 2/3 months will chart the course for our exchange rate policy.

Despite favorable context in the international commodities market and export market, there are challenges in achieving the 5.5% GDP growth rate. Govt itself apprehends domestic turbulence ahead of election. In addition, low private sector credit growth shows no sign of optimism. If govt bars the undocumented money into real estate and allows it to banks,then law and order situation may dramatically improve and liquidity situation in the banks may improve as well.

Non Trade Issues Halt Trade Talks

Trade talks halted on non trade issues, Nonstatic threat comes from out of the blues.

Bangladesh and the US trade talks enters stalemate over non-trade issues. A nondisclosure agreement bars the two parties disclosing nitty-gritty of the ongoing deal(80% agreed). The press highlighted the disagreement areas on following US sanctions on other countries, restrictions on WTO's MFN clause, less import from China etc.

Earlier when the Chinese trade minister visited Bangladesh a press report claimed that China wanted similar concessions in trade if the US would get some in Bangladesh. If it is indeed true ,then it would put Bangladesh into serious trouble.

There is no doubt that we have to increase our import from the US and to retain the valuable market. But the issues brought up, if the press report is indeed true, mean the end of WTO or redrafting its core rules or inventing another WTO-like organization that will incorporate the new trade realities in this changing world.

Threat is a changing phenomenon. We do not know the exact source from where it may emanate. And threat has many aspects apart from territorial encroachment. So identifying one as foe or friend is really difficult in this world. While addressing the security issues,we have to keep in mind the shifting nature of threat in this complex world. So our security challenges may not be the same as our trading partners.

But we have to keep good relations and retain the markets in the West. As I have said earlier, losing the West favor may lead us to losing the favor of others. Even if this trade talks hits the dead end, we should not retaliate. We should maintain zero tariffs to US goods. So that in future it will give us favorable ground for talks.

As I have said repeatedly, a large part of this tariff impact can be offset through depreciation of currency, which will be difficult in future due to US policy of weakening USD. In recent week, Taka appreciated because of constant flow of USD.Just in a month USD lost 1.7% of its value. As major economies across the world lower their dependence on US treasury bond and USD, there are abundant supply of USD. The central bank did the right thing by buying USD and keeping Taka weak. Otherwise, the Bangladesh Bank has to give incentives to exporters and remitters. 2.5% incentives to remitters cost the govt Tk 70 billion per annum. This is avoided through market mechanism while checking the inflation. I highlighted the thing in the past.

In brief, since threat is an evolving phenomenon in this complex world, it is difficult to give binding commitment on security issues. At the same time, we have to keep good relations with the West. In troubling times, they and their institutions come forward for rescue. Look at the sub Saharan countries,which rely on both the West and China on investment and aid, now look up for help of western institutions amid acute macroeconomic crisis as Chinese investment is drying up. Macroeconomic policy mix and adjustment is the key to face any adverse consequences of tariff.

Key To Face 35% Tariff Challenge

Bangladesh faces higher tariff in the US market, Negotiations is on to reach a deal perfect.

Bangladesh has been given a revised tariff of 35% in the US market. 2% reduction is nothing compared to what its competitors face now: Vietnam 20% and Indonesia 32%. Luckily, Bangladesh still has room for negotiations till August 1. If both parties agree on terms and conditions ,this tariff may be farther lowered. Protecting this $8 billion market is crucial for Bangladesh. Otherwise, any shrink to market share will cast shadow over the current account balance.

Now it is not clear whether the total tariff to the US market is 35% or 50%. But I think the total tariff is 35%. Previously Bangladesh paid around 15% taxes to the US on exports.(But I think Bangladesh even paid more than that in earlier years). And Bangladesh maybe the only country in the South and Southeast Asia that pays a higher tax than other countries. Given the total tariff is 35%, it means Bangladesh has to depreciate its currency by 20% to retain its prevailing market.

There are many other ways to lower the production cost apart from depreciation. Introducing new technology is costly and requires investment and time. Another way is to provide extended credit (say for 5/7 years) to invest in new technology or to cope up the challenges emanating from the new tariff rate. However, depreciation is itself an incentive to the exporter.

Now the question is can Bangladesh afford a 20% depreciation? The latest BBS inflation data put a question mark on its credibility. Food prices and cost of living index did not register such a decline that translated into a 8.78% inflation rate. It maybe a deliberate move to lower the policy rate to get credit from banks that are still suffering from piling up of huge credit. If oil price is low and overall macroeconomic management such as tighter fiscal policy is maintained, then 20% or 15% depreciation may not pose serious inflationary risk.

A policy mix like extended credit , cheap electricity, introduction of new technology and depreciation could be the key. It will help us to chart the course to get rid of difficult situation if 35% tariff indeed stays forever.

Bangladesh still faces lots of hurdle in Chinese market with over $28 billion trade deficit. There is hardly any chance that the country will become an $8 billion export market in the next 4/5 years. The Chinese ambassador said to open China's market for Bangladeshi workers. But its labor market is not so open for allies like Cambodia, Vietnam , Laos,Myanmar ,Pakistan and other African countries. Why will it be an exception for Bangladesh? China could easily buy Bangladeshi knit items where Bangladesh has huge value addition. So far it shows less interest in it.

Pakistan itself is suffering from huge macroeconomic crisis. Chinese banks owe huge money to Pakistan. I watched a news report on NDTV two years ago that shows protesting Chinese workers protest over due pay in front of a bank that put itself into trouble after lending Pakistan money following govt's instruction. So it is the Chinese interest that led to the picture session of this Sino-Pak-Bangladesh formation which has very little materialistic reason to take off. Apart from Bangladesh, both the economies are command and control economy where govt decisions hardly reflect market reality. Interestingly, with both the countries Bangladesh sustains huge trade deficits. Is it the case that Bangladesh will suffer economic hardship where the two will continue to enjoy trade surplus? Economic reality should dictate over any political or strategic consideration.

There is another pitch from Chinese investors for more Chinese investments in the infrastructure sector. Pakistan has yet to reap the benefits from Gwadar investment and sustains macroeconomic crisis. We should remember it before accepting fresh Chinese investment in infrastructure project.

Retaining the US market and maintaining good relations with the West should be priority focus area of our international relations. If the West leaves us, China ,Russia and others will not be that cooperative with us.

On the flip side of this higher 35% tariff , there is something good too! It will thwart any move from other countries and vested quarter that will try to reexport items using made-in-Bangladesh tag.

There maybe some unease for one year but it will be okay if we go for 20% depreciation amid 35% tariff. We endure the pain of pass through effect from 40% depreciation for two years. Our sufferings may be prolonged for one more year. But we have to do it for the sake of the economy if the last round of talks yield no improvement.

Perks For Early Trade Deal

Perks is must for early trade deal, Seasonal woes a partner should not feel.

Bangladesh and the USA is on the verge of finalizing a bilateral trade agreement. Both sides are scheduled to hold talks on Jul 3 and 4 to decide the nitty-gritty of the agreement. Bangladesh decided to import wheat from the USA this year,costing the govt $25 more per tonne than the international market price. It is in line with govt's attempt to downsize more than $6 billion trade surplus in favor of Bangladesh.

Govt earlier removed VAT/duties from LNG,soybean, animal feed--- which mostly come from the USA--- in the next budget. This will increase the pace of importing US goods. Scrap metal,cotton,plane engines are other major importing items for Bangladesh. Bangladesh also decided to import more US passenger aircraft and engines. Cotton is also likely to see boost in import.

There is widespread speculation that the Trump administration may pause the process of reciprocal tariff for another 1 year.

There should be perks for countries for concluding talks earlier. Otherwise, Bangladesh should wait and see what other countries offer on the table if the pause is indeed [prolonged].

I think both countries should also include special treatment of factors of production (i.e. capital, labor). The US citizens (black/white) can take up jobs in specialized sectors like financial market, port management, power management, tertiary education, automobile manufacturing etc. And Bangladeshi workers can work and set up business in the USA. Similarly, Bangladeshi businesses need foreign credit. Only few businesses have access to MIGA,IFC and other multilateral funding arrangements. If the US financial institutions like Citibank and other investment banks ,state funds provide special credit to Bangladeshi private sectors aiming to boost manufacturing in both the countries, it will augment the scope of foreign financing for Bangladeshi private sector. At the same time, setting up DEA office and congress office here will keep at bay any vested quarter who may take advantage of this kind of trade and investment privileges as happened in Mexico.

Recently, crude oil price crossing $70/barrel caused lots of concerns at home. Luckily, it came down to $65/barrel. High oil prices (above $70/ barrel) have pros and cons for Bangladesh economy. High oil prices deteriorated current account balance , yet below $70/barrel prices did not always result in [current account] surplus in the past, as I explained in one of my pieces back in 2019. (See "Oil Price & Current Account Balance" ,published here on March 22,2020)

Oil prices above a threshold level ($70/barrel) allows the Saudi government to expand its social security programs, which in turn permit Saudi households to recruit foreign domestic help,agricultural workers. Consequently, this policy helps to recruit more Bangladeshi workers and [bring] more remittances at home to pop up the current account balance. Apart from that it brings new investment money for the Middle East to resume planned infrastructure projects ,resulting in recruiting more foreign workers. High energy subsidies due to high oil prices whether outweigh the extra remittances should be the cause of concerns.

Luckily govt adjusts fuel prices every month and the market price largely reflects [the original] fuel prices, reducing govt's subsidy burden greatly.

Oil price drop is a good news for the govt as it does not have to increase the energy subsidies.

If we somehow add special energy deal,investment in biofuel production in Bangladesh or biofuel import from the USA in trade negotiation, it will reduce greatly our energy woes from seasonal shock.

In brief, early bilateral trade deal should have perks. Bilateral trade agreement should also focus on setting up dedicated DEA office in Dhaka, quality testing centers, US public representatives' office, strengthening international humanitarian offices through setting up forensic lab so that evil quarters do not take advantage of it or exploit the loopholes. At the same time, such deal should address the investment and energy woes of Bangladesh.

Fear About Taka's Free Floating

Unease about motive speculative Causes the confusion and disbelief.

The short relief of tariff debate between the USA and the China reached with a reduction in tariff for 90 days. During this time, the USA will charge 30% tariff on Chinese goods [whereas] the China will levy 10% tariff on American goods. This relief will give both the countries ample time to chalkout a contingency plan. It is indeed a good news for Bangladesh since the decision has strengthened the USD against major currencies, steering a depreciation pressure on Taka. Bangladesh has mid July to ink a deal with the USA about reciprocal tariff. It has another 90 days to depreciate its currency when it has the just cause for depreciation. In the international exchange market Taka has already depreciated to 121.50/USD from 121.42/USD in past one week. Official exchange rate has not changed though.

There has been great reluctance from the side of govt to go for market based exchange rate. The fear is that speculators and international exchange houses may further depreciate Taka. Earlier Dubai and Jedda based exchange houses had been found in such malpractices. Govt even asked for another $1 billion from the IMF to implement the fully market based exchange rate instead of the prevailing crawling peg system. The market does not signal that Taka will be same as the Sri Lankan or Pakistani Rupee. Rather it says Taka is 121.50/USD. Back in December, we saw major volatility in the exchange rate of Taka due to settlement of international bills and speculators' activity at home ahead of policy rate hike in Monetary Policy Statement. Speculation concerns mostly arise from home and major trading partner countries. Speculation motives at home greatly reduced after the correct alignment between policy rate and inflation rate. For the next 90 days, it will be further reduced as US dollar will remain strong against other currencies. Property purchase in the UAE and money laundering fuelled the speculation motive in the UAE and Saudi Arabia. Bangladesh is no great trading nation whose currency will be great value to others. Speculation from abroad is also minuscule at this time as there is no reason for [speculation]. Moreover, international market rate does not say so. What would one do with stockpiling so much of Taka? Ultimately, Bangladesh Bank is the sole institution that in the end [has to] deal with it. At the end of the day[,] it is indeed a loss making project. I do not think it is a wise move not to let Taka align with the market completely. We do not have enough opportunity to depreciate Taka in the future. Because the USA wants a world where the US dollar will remain weak,leading to appreciation of other currencies. Command and control economies like China and Vietnam can depreciate their currencies through state intervention. We cannot do so easily. But I support Bangladesh's position of seeking extra $1 billion from the IMF to cushion any adverse effects from free floating of Taka.

This depreciation pressure comes at a moment when tariff debate will lower global demand,showing a downward pressure on prices of fuel. Inflationary pressure will be largely offset by this lower demand for major commodities. Moreover, such depreciation will augment revenue collection that the government is desperately seeking. 10% depreciation will make exchange rate Taka 134.2/USD ,5% will make it Taka 128.1/USD and 2% will end up in Taka 124.44/USD. Next week we may see a strong US dollar and it will be the right time to depreciate the Taka further.

$25 billion remittances in 10 months reflect earlier depreciation of Taka. Moreover, it helped bringing back export earnings in time. Since Taka is not a major trading currency, speculative tendencies should not cause a lot of concerns for not letting Taka free float. Speculative motive at home and in the countries with Bangladeshi diaspora is negligible since the market conditions dictate so. Why should government be so worry about introducing market based exchange rate?

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.

Reshaping Global Trading System: What Lies Ahead

Trade restructuring starts with tariff debate, Leading to multiple systems as global trade's fate.

The Trump administration imposed 37% reciprocal tariffs on Bangladeshi exports to the USA. The imposed tariffs are much higher than its rivals to the US market. The disruptive action is not a deliberate but well planned move to reorder the global trading system. In 2024, the USA incurred a budget deficit of $1.83 trillion. In addition, the US gross debt to GDP reached 120%. And that is not all. The Tax Cuts and Jobs Act 2017 allows US citizens to enjoy reduced income tax rates till 2026. The Act also reduced corporate tax rate to 21.2%. Economist Stephen Miran, who is also the current chair of the Council of Economic Advisors, argues in his "A User's Guide To Restructuring The Global Trading System" ( a policy paper published by Hudson Bay Capital in November 2024) to continue tax rebate beyond 2026 the US economy requires $5 trillion every year. Deficits plus the extra money to sustain the policies means the money has to come from somewhere else. And the solution is to tariff the other countries. This,he thinks,is one of the tools to reshape the global trading order.

We can clearly see here the US runs huge budget deficits, yet USD remains overvalued decades after decades. Because the US dollar is beings used as reserve currency/asset in many other countries. Any devaluation of the US currency would result in loss of reserve asset in other countries.

But to make America great again, to bring back the manufacturing plants from other parts of the world to the USA and to make American goods more competitive ,you need to do something. At the heart of US - China trade dispute during Trump's first presidency is the undervalued Yuan. Appreciation of the Yuan will take away the competitive advantage of many manufacturing items and help relocating their plants in other parts of the world including the USA. Over the years, this perception of undervalued currency extended to currencies of other countries. Added to that the idea of America is forced to overvalue its currency to maintain ongoing order. So Miran came up with some tools in his paper,which he would like to describe as an essay to comprehend their consequences, to fix the issue and thereby help the Trump administration achieving "Make America Great Again". The other tool is the currency, which will be touched a little later.

The tariff drives up the domestic price of the tariffed good,a general perception. Miran argues it will not happen if the tariffed /exporting country depreciates its currency to the full magnitude of the tariff. That means if Bangladesh depreciates its currency by 37% then prices of its exportable items will not rise in the US market. Tariff is not inflationary in this case. And forex reserve will continue to grow for Bangladesh. Bangladesh Bank with its foreign currency will buy treasury assets. And individuals holding foreign currency will buy foreign goods. Think of China that has a closed capital market. The Chinese govt restricts investment abroad. So holders of foreign currency are forced to invest in less productive and risky domestic assets like real estate that accumulated huge bad debt. Miran argues continuing currency devaluation under capital controls will not sustain amid high tariffs. So there will be great capital flight from China. And it will force the Chinese central bank to raise interest rate , leading to appreciation of Chinese currency. The plus side of tariff war is that the US govt will get revenue without incurring the inflation. However, the US may lose revenue if the partner country does not depreciate the currency and an ensuing inflation may be expected.

The currency tool has two approaches: the multilateral approach and the unilateral approach. In the multilateral approach, the US sits with major trading partners and convince them to appreciate/strengthen their currencies and to depreciate/weaken the USD. This starts to happen when they start to sell USD from their forex reserve. The US starts to buy those dollars and issues new treasury security with duration of 100 years. In addition, the US sells those bonds to friendly countries who need security assistance in troubled waters and territories. By the way, the century bonds will replace the short and medium term bonds,easing the burden of the Fed to make huge interest payments and improving the budget deficits. Here the US projects the global security assistance as public good. And buying the century bond ,you are actually paying for that public good. In addition, holders of the century bond will enjoy favorable tariffs in the US market while the hostile partner will face a different kind of tariff. This multilateral currency approach has a precedent. In 1985, the US,France,UK,Germany and Japan met at the Plaza hotel and agreed to devalue the USD.

The unilateral approach reveals the leverages the US has to reshape the global trading system.It emerges when multilateral approach fails(many countries do not give consent to devalue dollar). One of the leverages is the International Emergency Economic Powers Act 1977 that allows the US president to halt and limit transfers of credit, payments or securities internationally. The US could hold part of the interest payments on treasury security in a bid to make USD unattractive for using it as reserve currency. This will lead countries to lower the size of their USD holdings, creating a depreciation pressure on USD.

Another leverage is the reserve accumulation,which means the US will buy other currencies in a bid to increase the demand of other currencies provided that the Fed prints and supplies the much needed USD.

So far the USA employed the tariff tool. The currency tool has not yet been applied yet. Stephen Miran's work is the guiding principle of Trump's fiscal policy. There is some kind of thinking behind this latest policy action.

Here are my observations:

1. The tariff tool tends to worsen the inflationary pressure in the partner country. The pass through effect(37%) of depreciation may become unmanageable. I hope the US and Bangladesh starts negotiating tariff terms soon and bring about a solution.
2. What about the European countries? They have a common currency. Yet they face different tariffs. How do they depreciate the Euro? Will the members agree and allow the European central bank to depreciate the Euro?
3. The formula used to calculate the tariffs does not take into account tariffs paid by the member countries. The formula ,which is criticized right and left ,is:

   Change in tariffs= (US exports to partner - US imports from partner) ÷ (Price elasticities of import demand × Import price elasticities with respect to tariffs × US imports from partner)

   According to Pew research center, Bangladesh paid 15.2% tariffs on its exports to the US in 2024, much higher than what the other countries in the South and South-East Asia paid(see "Bangladeshi Exporters Pay Highest Tariff In US Market", Textile Today,April 23,2018). It has been doing so more than a decade. This means Bangladesh pays more money to US govt than its rivals in exports. Yet this acknowledgment is not reflected in reciprocal tariffs. If the trade deficit is adjusted for the revenue paid by the partner country, the reciprocal tariffs become much lower. In 2024, Bangladesh exported $8 billion to the USA and imported $2 billion worth of goods and paid $1.216 billion as tariffs(15.2% of $8 billion export). Taking into account the tariffs already paid, the adjusted trade deficit becomes $4.784 billion and and the resulting reciprocal tariff is around 29%.
4. The reciprocal tariff formula used, it appears,tries to capture overvaluation/undervaluation of a partner currency through the trade surplus/ deficit. If partner country's currency is undervalued ,the trade deficit will be larger,so will be the reciprocal tariff. So a political consideration is being played out in this formulation of tariff. It is all about to redesign the trade rules,keeping certain countries out of the global trading system.
5. If currency tools come into effect, then Bangladesh may incur loss in forex reserve. To mitigate the loss, Bangladesh should immediately convert part of its forex reserve into gold. Say USD depreciates by 20% ,then we should buy gold with the 20% of forex reserve.
6. Following the Plaza Accord, the Yen appreciated and the Japan went into recession. If the Euro zone and the Japan go into recession again, our export will dip and we will face serious macroeconomic instability.
7. Threat perceptions and security concerns are different for different countries. Territorial encroachment appears to be bigger threat. In that light,former foe may become ally to defend my territory. This is particularly true for Europe. China has vast frontiers with the Russia. In case of any aggression to Europe, it can mobilize troops along the Russian border and defuse tensions between Russia and Europe. In that light the Chinese security assistance is more plausible for the Europe than the one provided by the USA. Intertwining trade and security concerns does not address the issue.
8. If trade and security concerns are intertwined, there will be many new trading systems, not just one. These regional blocs then draft rules to do trade among the blocs,abolishing the WTO or reinventing its roles in the world of multiple providers of global security.

Stephen Miran's work lays out the blueprint for the new trading system and subsequent action of Trump tells that the recent move is a political one. Trump administration wants renegotiation of trading terms among the partner countries. He wants to weaken the dollar, keep the tax rate low for the Americans, relocation of manufacturing plants of high-end products like semiconductor, automobiles in the USA , so that the US narrow down the trade deficits and remain a formidable power. I hope this tariff war will not last long, because impoverished world is not the result we want to see here. Bangladesh should brace itself for a world with multiple trading systems. For the moment, Bangladesh should also prepare itself for worst case scenario: the reciprocal tariffs stay for indefinite period. Many try to argue that our rivals will take advantage from the heightened tariffs. Harmonized system code for our export items will get us find our true rivals.Cambodia, Vietnam ,China and Pakistan appear to be our rivals in exports. Even if India manages some advantages from the ensuing tariffs,Bangladesh can offset the advantage by depreciating its currency. A 10% depreciation of Taka( difference between the tariffs faced by Bangladesh and India in the US) will bring the trade favor on our side. Our economy can sustain the effect of 10% depreciation of Taka at this moment or near future. One thing emerges clear as the sun is that Taka has to be depreciated in future.