Is a strong taka helping us?

Should Bangladesh deliberately weaken the taka to make exports more competitive? No. Policymakers should not defend an exchange rate that no longer reflects economic realities. The objective should be a market-responsive taka that supports stability without aggravating inflation or undermining confidence.

The argument for depreciation appears straightforward. A weaker taka raises the local-currency value of dollars earned by exporters and can make Bangladeshi goods cheaper for overseas buyers. Export competitiveness depends on production costs, productivity, quality and delivery reliability, not simply on the number of taka received for a dollar.

Consider a garment exporter earning $100. At Tk 85 per dollar, the receipt is Tk 8,500; at Tk 120, it becomes Tk 12,000. But profit does not rise by the same proportion. Imported cotton, yarn, chemicals, fuel and machinery also cost more in taka. Overseas buyers may negotiate lower dollar prices, capturing part of the exchange-rate benefit. The net gain depends on local value addition, imported input costs, wages and bargaining power.

Bangladesh’s experience since 2022 underlines the point. The taka depreciated amid pressure on foreign exchange reserves. Yet depreciation alone could not guarantee export growth. Global demand, freight and energy prices, access to imported inputs and buyers’ pricing decisions influenced performance. A cheaper currency can provide breathing space, but it cannot replace productivity or reliable logistics.

Nor does the dollar rate tell the story. Bangladesh trades with China, India, the European Union, Japan and the United Kingdom. The nominal effective exchange rate (NEER) measures the taka against a weighted basket of trading-partner currencies. The real effective exchange rate (REER) adjusts this measure for relative prices and inflation, offering a better indication of price competitiveness.

If Bangladesh’s prices and production costs rise faster than those of competitors, depreciation’s advantage can erode. Conversely, nominal appreciation need not damage competitiveness as much if domestic costs rise more slowly. Maintaining an artificially strong currency carries risks. When the exchange rate is held below a sustainable level despite market pressure, foreign currency can become scarce, import payments may be disrupted and reserves come under strain.

But allowing the taka to weaken without restraint would be costly. Bangladesh relies on imported fuel, food commodities, raw materials and capital goods. Depreciation can raise domestic prices, erode household purchasing power and increase manufacturers’ costs. It can also make repayments more expensive for businesses with foreign-currency liabilities. With inflation elevated, policymakers cannot treat depreciation as a painless export subsidy.

The Bangladesh Bank’s move to a crawling-peg arrangement in May 2024, followed by greater freedom for banks to negotiate foreign-exchange rates, marked a shift towards a more market-responsive system. The priority should be consistent implementation, transparent price discovery and adequate liquidity, not defending an arbitrary rate.

Exchange-rate policy must work alongside credible monetary and fiscal policies. A weaker taka cannot correct poor export diversification, high logistics costs, energy disruptions or low productivity. Better ports, predictable access to imported inputs, stronger skills and reliable infrastructure can improve competitiveness without imposing the full burden on consumers. The question is not whether the taka should lose value against the dollar. It is whether the exchange rate can adjust to changing conditions without disorderly volatility. Authorities should address market dysfunction while allowing prices to reflect underlying conditions, rather than resisting every depreciation or appreciation.

Bangladesh needs neither a deliberately weak taka nor an artificially strong one. It needs a responsive currency, supported by sound macroeconomic management and structural reform. Export strength will depend less on how many taka buy a dollar than on how efficiently Bangladesh produces, delivers and competes.

The writer is an economic analyst