REER index shows exchange rate stabilising, reserves rebuilding

Infographic: TBS

The Real Effective Exchange Rate (REER) index – the weighted average of a country's currency relative to a basket of other major currencies – decreased to 100 in March, signalling stability in exchange rate competitiveness and suggesting no further depreciation pressure on the taka.

This remarkable development follows the faster devaluation of the taka in line with market demand and a cooling of inflation. The exchange rate stability also helped to halt the erosion of foreign exchange reserves, which have begun to rebuild gradually in recent months.

The high inflow of remittances appears to be an automatic outcome of curbing hundi, money laundering, and corruption following the end of former prime minister Sheikh Hasina's autocratic regime on 5 August last year, which contributed to the turnaround in the external sector, industry insiders say.

According to Bangladesh Bank data, the gross foreign exchange reserve rose by more than $1 billion in two and a half months from $19.96 billion in January to $21.1 billion on 15 April (as per the BPM6 manual of the International Monetary Fund).

The April 2025 reserve level was sufficient to cover more than four months of imports, surpassing the international standard of three months.

The IMF mission that closed their review on 17 April also expressed satisfaction over stabilisation of the forex reserve.

Chris Papageorgiou, chief of the mission at a press conference on the closing day, said, "We see that reserves have stabilised, and we commend the authorities for that, as reserves had been on a steady decline for two years, which was concerning.

"Now, reserves are at least stable, though we haven't seen an accumulation of them. We expect that with more flexibility, accumulation will occur in the near term."

The stable reserve position also reflected in the current and financial account balances, as deficits in the external accounts narrowed significantly amid easing of the dollar crisis.

The improvement came despite high foreign debt repayments. Medium- and long-term loan payments increased by 38% in July-February of FY25, whereas borrowing was negative 22.8% during the same period, according to central bank data.

Strong inflows from remittances and exports helped rebuild reserves, with total inflows exceeding import spending. In July-February of FY25, combined remittance and export earnings were $4.7 billion higher than import expenditure, a surplus compared to $748 million in the same period of FY24.

The availability of dollars prompted Bangladesh Bank to lift restrictions on LC (Letter of Credit) causing a rise in import expenditure.

Additionally, several troubled banks previously subject to a 100% LC margin restriction were exempted following improvements in the dollar supply situation.

The country's monthly import volumes have surpassed $6 billion since December last year, aided by improved dollar availability in banks.

In February, both LC openings and settlements saw 20% year-on-year growth as export earnings remained strong. During July-January of FY25, exports grew by 10% and remittances by 23.6%, compared to a modest 3.3% rise in import expenditure, according to the central bank.

Monthly remittance inflows crossed $3.2 billion for the first time in March. The inflow of remittance remained above $2 billion since August last year, after previously dipping below $1.5 billion during the Hasina regime, despite high levels of manpower exports.

The earlier fall was attributed to hundi operations, driven by the wide gap between official and unofficial exchange rates, and capital flight through corruption in banks.

Imports rose despite Bangladesh Bank limiting dollar sales from reserves to emergency cases only – an indication that dollars are now available in the banking system.

During July-February of FY25, the central bank sold a net $715.38 million in the foreign exchange market, compared to a staggering $7.57 billion during the same period in the previous fiscal year.

Meanwhile, monthly foreign exchange holdings in banks remained in surplus, standing above $4.5 billion, central bank data shows.

REER index falls to 100

The REER index, which reflects the competitiveness of a country's export prices relative to its trading partners, decreased to 100 in March from 104 in November.

The index includes 18 currencies and incorporates both inflation and exchange rate data of major trade partners.

An index value of 100 signifies that the country's exchange rate competitiveness is stable, with no need for further depreciation of the taka. Values above 100 indicate weakening competitiveness, while values below 100 suggest improving competitiveness.

Falling inflation has enhanced Bangladesh's price competitiveness at a time when the exchange rate has remained stable at Tk122 since January.

A REER index value of 100 corresponds to a stable, equilibrium-based exchange rate of Tk122, requiring no further adjustments.

Inflation in Bangladesh continued its downward trend in February, falling to 9.32% from 9.94% in January, according to the latest data from the Bangladesh Bureau of Statistics (BBS).

Food inflation, which had remained in double digits for 10 consecutive months, eased to 9.24% in February – down 2.2 percentage points from 10.72% the previous month.

Narrowing external deficits

The improved external environment has also narrowed the country's deficit in the balance of payments. The current account recorded a deficit of $552 million in July-January of FY25, compared to $4.28 billion in the same period of the previous year.

The overall balance of payments deficit declined to $1.1 billion during the same period – a marked improvement from the $4.68 billion deficit recorded in FY24.

Contractionary policy stemmed capital flight

Soon after taking charge of Bangladesh Bank following the regime change on 5 August, Governor Ahsan H Mansur raised the policy rate to 10% within just three months – up from 8.5% – which made the taka more expensive.

He also devalued the currency by increasing the dollar rate from Tk118 to Tk122, making imports costlier. At the same time, Bangladesh Bank halted money creation through devolvement.

A senior central bank executive said the combined effect of these measures – higher interest rates, currency devaluation, and tighter monetary control – strengthened the taka and helped prevent capital outflows.

He noted that capital flight is closely linked to loose domestic monetary policy.

Sharing insights from his research on condition of anonymity, he said the country's external balance began to deteriorate as early as 2017 due to an overly accommodative monetary stance.

He added that the single-digit lending rate cap imposed in 2020 made borrowing too cheap, fuelling a surge in imports. Additionally, money creation through the devolvement process increased liquidity in the market, contributing to capital outflows and putting pressure on the dollar.