Will Taka Remain Stable?

War leads to further rise in inflation, Policy rate cut may cause depreciation.

Last week exchange rate of Taka reached 123.30 against US dollar. Now the rate settled at Tk 122.75 per USD. The ongoing war in the Middle East cast a shadow over remittance inflow and supply of energy through the [Strait] of Hormuz. Moreover, govt changed Bangladesh Bank governor abruptly and the new governor hinted to lower the policy rate while inflation rate increased further and hovering around 9.13% in February. In January ,it was 8.58%. In this backdrop, serious question raised over continuity of regulatory discipline.

Throughout the fasting month of Ramzan ,key kitchen items registered higher prices. A new war in the Middle East risks worsening the inflation by causing supply problems [for] energy and spiking the fuel price. Despite govt assurance of no fuel crisis at home, the long queue of motorbikes and cars in front of petrol pumps is a testament to panic prevailing at the ground. Central banks of major economies already shelve their plans to lower policy rate while ours one walks on a different direction. Furthermore, abrupt dismissal of governor sent a wrong signal abroad about commitment to reforms. It may delay improvement of our credit ratings, causing troubles to get foreign credit for private sector.

Taking a look at major macroeconomic indicators tells that time is indeed not right for a policy rate slash. During July-January period of 2025-26, export declined to $26.09 billion from $26.36 billion in 2024-25. Trade deficit increased to $13.79 billion in 2025-26(July-January) from $11.74 billion in 2024-25(July-January). Current account deficit declined to $381 million in 2025-26(July-January) million from $1.31 billion in in 2024-25(July-January),riding on growth of remittance. Remittance rose to $19.43 billion in 2025-26(July-January) from $15.96 billion in 2025-26(July-January)(See https://www.bb.org.bd/en/index.php/econdata/bop). Despite improvement in current account deficit, situation is not right for discarding the tight momentary policy. [Particularly] when the war may derail the growth of remittance. At one hand trade deficit is growing ,on the other rising import and uncertainty over remittance put overall macroeconomic situation at a precarious position. In this situation, lowering the policy rate will increase the depreciation pressure on Taka against other currencies. Any wild fall of Taka worsens inflationary situation through pass-through effect of the new exchange rate.

Moreover, further worsening of war will spike fuel prices and deteriorate inflation in advanced economies, where most of our exportable items go. This will cut the purchasing power of their nationals and lower overall consumption. Declining trend of export will further cause depreciation pressure on Taka. When exchange rate and inflation rate will both rise ,real effective exchange rate will fall further given denominator part of the formula remains same(look at the formula).

REER at period t= (Exchange rate index of a country x Inflation rate of the country)x 100÷(Average of trading partners' exchange rate index x weight x Average of inflation rates in partner countries)

Exchange Rate Index at t= (Exchange rate of a county's currency at t)÷(Exchange rate of a county's currency at base period)

So far US dollar appreciated against other currencies following the start of the war. Since we do trade with other partners in USD ,a stronger USD translates into depreciation of real exchange rate of Taka given other things remain same. However, inflation is likely to rise amid escalating war . When average of inflation rates in partner countries is higher than exchange rate of Taka and inflation at home,then Taka will appreciate in real term (see the formula).

Stability of Taka depends on many things. But so far the development indicates Taka is likely to depreciate further if the war turns out to be a protracted one. We coped with 40% depreciation of Taka all these years. Similar or more depreciation will be unbearable for us. So cautious monetary policy ,which implies a tighter one, will be good for us. Does the central bank have courage and commitment to do so?

Macroeconomy Amid Trade War

Clashes of the titans in trade May prolong the struggling state.

Bangladesh Bureau of Statistics (BBS) divulged that inflation again increased to 9.87% in May. It is highly likely to see another round of hike in policy rate in the next monetary policy statement. A 1% increase will make the policy rate 9.5%,narrowing the gap between current inflation rate and policy rate. Fitch ratings downgrade of Bangladesh's credit rating will make foreign credit harder for the public and private sector. Bangladesh Finance Minister is optimistic about getting the third instalment of IMF credit package. IMF in its last board meeting in May cleared credit package for Ecuador.

Things turn out to be difficult for the government. Revenue shortfall,dependence on domestic borrowing from banks,lack of foreign credit and FDI will cause further depreciation of taka against US dollar. Central bank's stated policy of containing the inflation rate to 7.5% may be prolonged and face serious hurdle in the wake of trade war between China and USA.

So far US federal fund rate is being stuck at 5.33%. Federal Reserve System has no intention to lower it as it sees inflation will take time to ease. Moreover, lowering the interest rate will raise the US treasury bond price,facilitating the process of ditching US treasury assets by govts not happy with US policies. Meanwhile Chinese policy rate is now 3.45% and it may go down further. It will make Chinese goods even cheaper. Let's draw a rough sketch on how the macroeconomic situation will prevail in the country given different policy rates in USA and China and trade tensions between the two countries.

Fed funds rate:5.33%
Chinese policy rate: 3.45%
If the current policy rates prevail and the countries engage in tariff and trade war, then Bangladesh has to further depreciate the currency since value addition condition to US-bound goods will also get tougher. However, special treatment to US cotton made garments may give some favor. But to meet the extra cost emanating from trade restrictions, Bangladesh has to depreciate its currency further to give the exporters some kind of favor. On the other hand, Bangladesh has to continue its contractionary policy for a longer period to mitigate the inflationary pressure.

Fed funds rate: More than 5.33%
Chinese policy rate: Less than 3.45%
It will be hard to get foreign credit and assistance in US dollar. Dollar-based investment and return will be lucrative in the West and few will be reluctant to invest here where timely repatriation of profit is under scanner. Meanwhile, Chinese credit will be cheaper. Both the government and private sector will hinge on Chinese Yuan,easing the pressure on US dollar. Weakening of Yuan may increase Chinese share of EU export market, putting pressure on Bangladesh's export to EU. EU will unlikely to get tougher on China in the wake of a trade war in a bid to neutralize it against Russia. In this situation, taka has to be depreciated more than the previous scenario against the stronger US dollar and to stall the dollar flight. Amid tight monetary policy, the central bank may resort to money supplying measures,further worsening the inflation. More rise in policy rate and delay in stabilizing the macroeconomy. More reliance on Chinese credit and deepening trade ties between China and Bangladesh.

Fed funds rate: Less than 5.33%
Chinese policy rate: Less than 3.45%
It will help Bangladesh getting foreign credit in US dollar. Less pressure on forex reserve and taka. Ongoing monetary policy may go as usual and goals may be attained in the anticipated time. No large depreciation of taka is needed to make the goods more competitive. Easing of import restrictions on capital machinery may increase economic activity. Cheaper foreign goods/ingredients may ease inflationary pressure. Economic recovery will be early. This is an ideal case for Bangladesh as both the Yuan and US dollar credit will be available at an affordable rate in the wake of a trade war. Bangladesh may have to convert a significant amount of its US dollar assets into other IMF SDR currency or to procure gold if there is further unease in the relations between Bangladesh and USA.

Since access to foreign credit gets tougher for Bangladesh, Bangladesh has to prolong its austerity measures. In all three cases ,we see that Bangladesh has to continue raising policy rate and depreciating its currency. Likelihood of the occurrences of the cases would further depict a grimmer picture . Most optimistic scenario/case(the last one) for Bangladesh is less likely to happen. In a heated trade war,US will not lower the policy rate. The second one (worst for Bangladesh) will have a better chance to emerge than the first one. We have to further tighten our belt.

Dollar Crisis Becomes Acute

Plant risks to get shut down over dues, Dollar crisis hits companies of all hues.

Dollar crisis in the country has become acute. Recently, news report surfaced on the press divulged that the Chinese govt refused to sell coal to Payra Thermal Power Plant. The plant authority has not yet cleared the due payment of $293 million for earlier shipments¹. The current stock will run out in two weeks. Earlier Rampal Thermal Power Plant ran similar problems stemming from government’s strict regulation on dollar purchase. Later government intervention resumed its operations.

Adani group also placed a bill of $20 million before the Power Development Board for the electricity it generated in Jharkhand power plant.

Meanwhile, another news report says Biman Bangladesh Airlines,national flag carrier of Bangladesh,has yet to pay Taka 20 billion($186.91 million) to Bangladesh Petroleum Corporation(BPC) for the jet fuel it supplied².

Perhaps the worrying thing is the decline in export and remittance receipts. And $3 billion worth of export proceeds have not yet reached the local banks during the July-February period of current fiscal year^3.

This will indeed cause great pressure to dollar demand. In this backdrop, central bank has little option but to devalue the currency further. Value of Taka has long been artificially pegged at some rate that is not reflective of the market. In my observation two things hold back the ruling regime to let market determine the value of Taka: first, it fears market rate will increase the cost of development expenditure; second, deterioration of inflation that will raise the cost of sending money abroad.

An economist and former staff of IMF Ahsan H. Mansur argued that artificially pegged Taka presented a swollen estimate of GDP. Any adjustment will shrink that estimate. In an election year, govt is pretty much reluctant to do this as the stance will be politically costly.

Toxic political climate fuelled by anarchistic behavior also played a role in this crisis. It increases incidence of money laundering and capital flight.

In 2009,when AL assumed power , 1 US dollar fetched Tk 68.80. In 2014, Taka depreciated further to 77.72. In 2019,exchange rate became Taka 83.85/US dollar⁴. And now 1$ fetches Taka 107 officially and Taka 112 unofficially. Though such depreciation increased our competitiveness and our export earnings manifolds, illicit capital flight has also increased many times. And our budget deficit also gets widened. The fast decline in reserve(now $29 billion) also puts pressure on the exchange rate.

There are initiatives to trade in Yuan and Rupee. However the transaction will be in small amount and bigger impact of such transaction will take time.

There is no alternative to break the political stalemate and reach a reconciliation in a bid to send a positive signal to the market and investors that will ultimately restore the confidence and restrain the money flight. Look at Sri Lanka.Since there is no stalemate, Indian and Chinese investors flock there to invest. To improve drastically things at home when recession like scenario looms large in the West, there is no alternative to reconciliation and stability.

Notes And References

1. “Koila Sonkote Bondho Hotey Parry Payra Bidyut Kendro O(Coal Crisis May Shut Down Payra Power Plant)”,Mahfuz Mishu,Jamuna News,May 02,2023. For more watch https://m.youtube.com/watch?v=AjO0PeRlXIM&pp=ygVI4Kaq4Ka-4Kav4Ka84Kaw4Ka-IOCmpOCmvuCmqiDgpqzgpr_gpqbgp43gpq_gp4Hgp44g4KaV4KeH4Kao4KeN4Kam4KeN4Kaw
2. “Bimaner Bokeya DUI Hajar Koti Taka,Adaye Hard-line E Sorkar(Biman Yet To Pay Taka 20 Billion,Energy Ministry Is On Hardline)”,Orthosongbad,April 09,2023. For more read at https://tinyurl.com/bdf9v7y2
3. “More Strain on Reserves As Unrealized Export Proceeds Hit All-time High of $3 Billion “,Jebun Nesa Alo,The Business Standard, May 03,2023. For more read at https://www.tbsnews.net/economy/more-strain-reserves-unrealised-export-proceeds-hit-all-time-high-3b-625970
4. Bangladesh Economic Review 2019

La Semaine Dernière A Mes Yeux

(27 mai--- 03 juin)

Selon un reportage, le Bangladesh et l'Inde ont inauguré un nouveau service de train entre Dhaka et Jalpaigudi,une ville se situe au pied de montagne de Darjeeling.

Selon un reportage, deux policiers bangladais ont déserté et disparu au Pays-Bas. Ils y sont allés pour participer dans une formation.

Selon un reportage, la Banque centrale a arrêté fixé le taux de change de Taka contre dollar américain.

Ma Semaine Gastronomique

Date	Petit-déjeuner	Déjeuner	Dîner	Snacks,Sucrerie et Fritures
28	Eau de citron ,pain , omelette, thé sans sucre	Riz, gombo, Pama croaker poisson, Courge amère,Soupe de lentille	Riz battu au lait chaud avec datte	Muraly,Thé sans sucre,Biscuit,Riz gonflé avec Chanachur
29	Eau de citron et Psyllium Husk,pain,omelette,gourde serpent avec thé sans sucre	Riz,feuille de calebasse gourde,Anchois gangétique curry,gombo,Courge amère et Soupe de lentille	Riz gonflé, feuille de calebasse gourde,Anchois gangétique curry et Soupe de lentille	Biscuit,Graines de Jacquier,Arachide,Thé sans sucre,Jamrul/Champoo
30	Eau de citron et Psyllium Husk,Pain,Omelette,Luffa et Thé sans sucre	Riz,Épinards de buffle,Ruhi poisson	Riz gonflé,Chanqchur, Épinards de buffle	Riz gonflé, Chanachur,Patate douce,Thé sans sucre,Muraly
31	Pain,Omelette,Lait et Thé sans sucre	Riz,Haricot vert/yardlong,Ruban séché poisson avec Gourde épineuse et graines de Jacquier,Ruhi poisson et Soupe de lentilles	Patate douce	Muraly,Thé sans sucre,Riz gonflé et Chanachur
01	Pain,Haricot vert/yardlong, Thé sans sucre	Riz,Ruhi poisson,Épinards d’eau, Gourde serpent, Soupe de lentilles.	Patate douce	Muraly,Thé sans sucre,Riz battu au ait l
02	Pain,Gourde serpent,Thé sans sucre	Riz,Purée de pommes de terre,Anchois gangétique,Poisson ruban séché dans gourde épineuse, graines de Jacquier, Haricot vert	Nouilles, Riz battu au lait froid	Thé sans sucre,Biscuit
03	Pain,Haricot vert,Thé sans sucre	Khichri(un plat de riz et lentilles populaire dans jour pluevial),haricot vert, omelette, concombre et citron.	Pois de chiches,Chanachur,Riz gonflé	Thé sans sucre,Riz gonflé, pois de chiches