Since 2022, Taka saw a sharp 30-40% decline against the dollar.
It was majorly
due to several factors such as the Russia-Ukraine war disrupting the entire
supply chain ecosystem, Rate hikes by the United States, high import bills,
declining foreign reserves, and sudden increase in the energy price. The rising
inflation caused the depreciation of the taka. However, the previous ruling party
took numerous steps including short-term measures to prevent the decrease of
the currency but failed most of the time. After the fall of the Hasina regime, the
interim took responsibility and adopted several policies and strategies to reduce
inflation.
In January 2025, Bangladesh Bank introduced the second half of the current
fiscal year with a goal to counter the concerning inflation rate while stabilizing the
foreign exchange market to stabilize taka. Monetary policy seems bullish on
decreasing the inflation rate which may stabilize the currency. Currently, the
inflation rate stands at 10.8% and BB aims to reduce the inflation rate to 7-8% by
June 2025. Several policies have been adopted such as a policy repo rate raised
to 10%, slowed private credit growth at 7%, and continuation of the crawling peg
system. Importantly, to preserve foreign reserves, BB is not selling forex in the
market and has reduced its intervention to ease the balance of payment (BoP).
The overall deficit went down to USD 384 million, down from the deficit of USD
3.5 billion, following a significant depreciation in 2024. Slight depreciation of 1.7
percent in H1FY25, following a more substantial 8.2 percent drop in FY24.
Although this is not very significant, the taka is still somewhere stable.
Coming to the fiscal policy, is moderately expansionary, with rising public
spending and revenue mobilization efforts while maintaining a 5% budget deficit.
However, BB’s monetary policy is contractionary, emphasizing beating inflation
through higher interest rates. This situation creates policy divergence. Fiscal
policy supports growth yet uncontrolled spending can fuel inflation and put more
pressure on taka. On the other hand, monetary policy aims to stabilize the
currency by curbing the inflation rate. This could partially offset the Bangladesh
bank’s tightening measures to work. If fiscal policy is implemented properly,
revenue reforms can increase the forex reserve as well. In an optimistic case, the
Taka may encounter a slight depreciation of 1.5%-2%, but if inflation remains
under control and revenue reforms are effective, it could stabilize the taka by
mid-2025. However, this is conditional and depends on other external factors as
well.
In recent times, Bangladesh’s trade deficit has improved, mainly due to
well-planned import restrictions and sustainable economic growth. Between July
and December 2024, the trade deficit narrowed down to $9.76 billion, compared
to the trade deficit of $10.88 billion in the previous fiscal year. While the deficit
still exists, there is a positive shift in the current account deficit which recorded
$33 million in the first half of 2024-25, a significant turnaround from the 3.47
budget deficit in 2023-24. Thanks to the increased imports and Higher remittance
inflow. This will surely give a momentary relief to the foreign exchange.
Record-breaking remittance is also helping the reserve immensely.
Subsequently, Bangladesh received numerous aid and likely to receive more help
from different countries and international organizations to strengthen its foreign
reserve. But all of these help are short term and come at a cost, additionally
increasing the public debt which has to be managed efficiently as well to maintain
the volatility of taka. Around 52% of total debts come from external sources such
as IMF, JICA, ADB, and countries such as the US, China, Russia, and India.
External debts come with debt servicing costs and sometimes with interest rate.
It can easily deplete the foreign reserve of the country since repaying external
debt often requires foreign currency. If the government keeps borrowing from
external sources, it may need to increase the supply of foreign bonds which will
make the borrowing more expensive. The most optimal solution right now is
borrowing from the domestic market. But even here we are not out of challenges.
First of all, liquidity constraint in the banking sector is a major hurdle.
Government is planning to collect 1.61 trillion taka from domestic sources,
accounting for 17% of its expenditure. This risk potentially leaves room for
“crowding out” where the government borrows excessively, leaving less capital
for private businesses. Domestic savings certificates are still not very popular in
our country due to low capitalization. The debt market is underdeveloped making
it harder to borrow money domestically.
In addition to this, Foreign direct investment(FDI) is also an important aspect to
consider. In 2023-24, net FDI inflow declined by 8.8% to $1.47 billion. FDI has a
huge impact on the exchange rate and currency. When foreign investors invest
capital in Bangladesh it appreciates the value of taka. Bangladesh is struggling to
bring FDI due to several reasons which have been unsolved for a long period of
time. Unpredictable tax systems and frequent changes in policies create
uncertainty, affecting profitability and making investors more conservative to
invest.
Often the government makes tax policies without consulting with private sectors
which lead to lack of consistency. On-going political tension, lack of energy, and
workers' protest are also reasons behind why FDI has been slowed down. This
practice often makes foreign investors skeptical about Bangladesh. FDI also
strengthens countries' financial systems by creating a favourable environment for
the currency. It controls volatility and results in a better economic outlook.
Aside from these factors, Global outlook and sentiment could impact taka. The
USA, which is a major exporter for Bangladesh, currently led by Donald Trump
could create problems for Bangladesh.
America first policy could encourage the Trump administration to lift several trade
agreements that could disrupt the trade dynamics. Apart from these, we have to
assess if Bangladesh can handle the external geo-political shocks which
increase the price of oil and commodities. Because external crises can impact
the economy and currency. The policies of the interim government may seem
strong to deal with external shock but still there is a question about execution and
sustainability. In this last section we can speculate but can not provide any solid
insight due to uncertainty.
Conclusion: Bangladesh, for sure has made notable improvement in stabilizing
the taka through tight monetary policy, restriction on import, and improved trade
balance. However, inflation, external debt and political uncertainty could exercise
more pressure on the currency. The success of the adopted policies highly
depend on execution only. Looking ahead, we have to be more balanced. Tight
policies and reduction on credit policies may slow down the business
environment for a certain timeframe and some layoffs could be seen which is
likely to fuel the workers. Navigating such obstacles should be a priority.
References
Bangladesh’s net FDI inflow plummets 8.8% in FY24
Bangladesh Monetary Policy (latest one)
Fiscal policy of Bangladesh
Balance of payment
Information on borrowing of government
Budget 2025: Bangladesh seeks domestic bank borrowing to cover 17pc of the
deficit
Bangladesh Bank sees stable exchange rate amid balance of payment
improvement
