BD trade competitiveness improves with exchange rates stabilising.

Homo Sapiens · Apr 21, 2023

BD trade competitiveness improves with exchange rates stabilising

Taka's real effective exchange rate 101.51 in Feb: BB

JASIM UDDIN HAROON
Published :
Apr 21, 2023 02:00 AM
Updated :
Apr 21, 2023 02:01 AM

Bangladesh's global trade-competitiveness signals improvement as the local currency now appears to be settling near its fair value in exchange with a basket of peer currencies after recurrent depreciations, official data show.

The real effective exchange rate (REER) of the taka against a 15-currency basket of its global trading partners dropped further last February-in the process of stabilizing through recent relaxation measures.

The REER index fell from 102.29 in January to 101.51 in February 2023 as the local currency depreciated more compared to currencies of its peer trading-partner economies across the globe, according to Bangladesh Bank data.

The REER, measured by the central bank of Bangladesh against the currency basket, is said to be at its fair state when the value is 100.

This gauge can be used to assess the equilibrium value of a currency. An increase in a nation's REER is an indication that its exports are getting more expensive and its imports cheaper. The end result: its trade competitiveness is on the way down.
It is an indicator of the international competitiveness of a nation in comparison with its trade partners.

People familiar with the developments told the FE that local-currency depreciation and steep inflation persisting in Bangladesh's trading-partner nations are believed to be the key reasons.

The rate of inflation in Bangladesh's trading economies used to stay lower but this time the inflationary pressures there are higher due mainly to the war in Ukraine.

Bangladesh's top trading partners are mainly China, the EU, and India. The REER considers the currencies and inflation readings of the top 15 trading partners.

Such REER index will help enhance the competitiveness of Bangladeshi-made goods on the international market, bankers and economists believe.

Central bankers told the FE that such value of the BDT is due to the sharp depreciation of the local currency against the US dollar-apparently as Bangladesh is easing control on the exchange regime.

"The interbank exchange rate of BDT has depreciated by more than 12.0 per cent till the end of March 2023 over the end of June 2022," says one central banker.

He also attributes this depreciation to a higher current-account deficit.

In the meantime, the BB has continued with intervention in the foreign-exchange market with a total sale of nearly $11.0 billion up till March.

Economists say this effective exchange position will enhance the country's competitiveness in external trade.
"This will enhance export-competitiveness," says Dr M. Masrur Reaz, chairman of the local think-tank Policy Exchange of Bangladesh.

He notes that the country's export receipt has been on the rise and it will accelerate further if the REER becomes supportive.
He also says the current drop in the REER is a reflection of the nominal exchange rate.

Dr Zahid Hussain, a former lead economist of the World Bank, told this correspondent that the REER picture is not truly reflected as there are some control mechanisms in the country's financial market.

There is a restriction on lending and the central bank controls some rates.

And the inflation measurement raises "many questions as to whether or not it is truly calculated," the economist points out.
He questions: "If we don't have representative CPI and have a controlled forex market, how will the REER be truly assessed?"
However, the REER index used to remain much higher even a few months back.

The REER as an index was recorded at 112.4 in September 2022, 111.34 in June 2022, and 115.5 in December in 2021, according to the latest Bangladesh Bank report.
jasimharoon@yahoo.com