High inflation – Low reserve – Weak currency risk spiral of economic downturns in Bangladesh

Bangladesh’s currency, the Taka or BDT, continues losing value, most rapidly since May 2022, when it was traded at 90.09 for one EUR on the 13th May 2022 and 122.05 on the July 14th 2023, a loss over 35% of it’s value. Similar trends recorded against almost all global major currencies.

The inter-bank selling rate for each US dollar stood at BDT 109.50 last Thursday, the 31st August up from BDT 95 exactly a year ago. For each Euro, it was BDT 119.66, up from BDT 95.15 in the previous year.

Till July of this year, BDT lost 28.25% of it’s value against the Swiss franc year-on-year basis followed by the euro 25.54%, pound sterling 24.4%, US dollar 15.83%, Australian dollar 13.82%, Indian rupee 11.86%, Japanese yen 11.59% and renminbi 8.89%.

Around 90 percent of foreign trade of Bangladesh is conducted through the US dollar while the remaining 10 percent through other foreign currencies although the use of other foreign currencies, most notably in Chinese renminbi and Indian rupee, continues to rise.

The BDT has weakened against almost all the foreign currencies mainly due to low supply and high demand, said Mohammad Ali, managing director and CEO of Pubali Bank, to The Daily Star newspaper.

“Our import payment is higher than the export earnings, which created the shortage of foreign currencies,” he said, adding, “we have to find new export markets to increase the foreign currency earnings.”

As the foreign currency shortage persists, businesses in Bangladesh are increasingly finding it difficult to open Letters of Credit (LCs) since banks can’t supply the adequate foreign currency to settle the imports bills.

This means many companies can’t secure the raw materials required to keep their factories up and running, which has forced them to cut industrial production creating downwards spiral of economic downturns.

“It is very concerning that our local currency has weakened sharply due to skyrocketing inflation and interest rate in lending being low,” said Dr. Ahsan H Mansur, former IMF Economist and Executive Director of the Policy Research Institute of Bangladesh.

The BDT will not be able to become stronger against the foreign currencies if inflation does not reduce, said the economist. Inflation in Bangladesh stood at 9.69% in July and an 11-year high in May at 9.94% , accordingly the Bangladesh Bureau of Statistics (BBS).

Demand for other foreign currencies, particularly for the Chinese renminbi and Indian rupee is continuing to rise while the US dollar still remains the dominating foreign trade currency at least for now, said a senior official of the Bangladesh Bank (BB), central bank of Bangladesh.

In September of last year the BB permitted to maintain accounts in Chinese yuan or renminbi with their corresponding lenders or branches abroad so as to help local businesses settle transactions for foreign trade using the currency. The government published a gazette notification in March 2014 declaring the Chinese yuan or renminbi as a convertible currency.

In July of this year, Bangladesh and India rolled out a cross-border trade settlement mechanism in rupee.

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