Taka Stabilizes as REER Index Hits Equilibrium, Reserves Rebuild Amid Policy Shifts3 min read

The Real Effective Exchange Rate (REER) index for Bangladesh dropped to 100 in March, indicating a return to exchange rate equilibrium and signaling an end to immediate depreciation pressure on the local currency. This marks a significant shift after a period of currency instability and declining reserves reportedly.

The stability follows a policy-driven devaluation of the taka to reflect market realities and easing inflation. These adjustments have also helped slow the depletion of foreign currency reserves, which are now gradually recovering.

Bangladesh Bank’s latest figures show that gross foreign reserves increased by over $1 billion – from $19.96 billion in January to $21.1 billion by April 15 – bringing the reserve level above the IMF’s three-month import coverage standard. The current reserve level can now support more than four months of imports.

This progress was acknowledged by the International Monetary Fund (IMF) during a review mission that concluded on April 17. The IMF commended the government’s efforts, highlighting that while reserve accumulation hasn’t yet resumed, stability has been restored, ending a two-year downtrend.

Several factors have contributed to this turnaround. The collapse of the previous administration on August 5 last year led to more robust enforcement against illicit financial activities, such as hundi and money laundering. These efforts have coincided with a significant increase in remittance inflows, which, together with export earnings, have now exceeded import expenditures.

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From July to February of FY25, the surplus from remittances and exports over imports reached $4.7 billion, a sharp contrast to the modest $748 million surplus during the same period in FY24. This excess foreign currency helped ease pressure on the dollar, allowing Bangladesh Bank to relax restrictions on Letters of Credit (LCs), which has in turn driven a rise in imports.

Several struggling banks, previously required to maintain a 100% LC margin, have now been exempted, thanks to improved dollar availability. As a result, monthly imports have consistently exceeded $6 billion since December 2024.

In February alone, LC openings and settlements increased by 20% year-on-year, supported by robust export growth of 10% and a 23.6% jump in remittances. March saw monthly remittance inflows exceed $3.2 billion for the first time, maintaining a level above $2 billion since August last year – after a previous dip below $1.5 billion due to high unofficial transaction volumes and corruption during the earlier regime.

Despite rising imports, the central bank significantly reduced dollar sales from its reserves, providing only $715.38 million between July and February of FY25 down sharply from $7.57 billion during the same period a year earlier. Banks themselves now hold a surplus of over $4.5 billion in foreign currency, reflecting improved dollar liquidity.

REER Index at 100 Marks Equilibrium

The REER index, which captures export competitiveness based on both exchange rates and inflation relative to major trading partners, fell to 100 in March from 104 in November. A reading of 100 signals a stable, equilibrium-based exchange rate, suggesting that the current rate of Tk122 per dollar accurately reflects market fundamentals.

Declining inflation has also improved Bangladesh’s competitiveness. Overall inflation fell to 9.32% in February from 9.94% in January, while food inflation dropped to 9.24%, breaking a 10-month streak of double-digit rates.

Balance of Payments Deficit Narrows

The improved foreign exchange position has narrowed external deficits. The current account deficit shrank to $552 million during July-January FY25 from $4.28 billion a year earlier. Likewise, the overall balance of payments deficit dropped to $1.1 billion from $4.68 billion.

Tight Monetary Policy Prevents Capital Flight

After taking office, Bangladesh Bank Governor Ahsan H Mansur swiftly raised the policy rate from 8.5% to 10%, making borrowing costlier and curbing demand. Simultaneously, the dollar rate was adjusted from Tk118 to Tk122, discouraging excessive imports. These moves, coupled with a halt to money creation via devolvement, helped strengthen the taka and contain capital flight.

A senior central bank official noted that such capital outflows were previously driven by an overly loose monetary policy. His research indicated that external balance deterioration began as early as 2017, with the 2020 lending rate cap and continued liquidity injection contributing to import surges and dollar pressure.

Together, the tighter policy framework and structural reforms have restored macroeconomic stability, halted reserve depletion, and placed the external sector on a firmer footing.

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