Depreciation Without Advantage: Bangladesh’s Export Paradox

 

For decades, currency depreciation has been prescribed almost reflexively as a remedy for export weakness. The logic appears straightforward: a weaker currency makes exports cheaper and imports costlier, thereby improving trade competitiveness. Yet Bangladesh’s current experience with an apparently overvalued taka, rising real effective exchange rate (REER), and declining export receipts exposes a more uncomfortable truth. In an import-dependent, buyer-driven export economy like Bangladesh, depreciation does not always benefit exporters. In some cases, it may benefit foreign buyers far more than domestic producers.

Recent data from Bangladesh Bank show that the real effective exchange rate of the taka climbed to 106.37 in November, remaining elevated above the benchmark level of 100 that policymakers generally regard as equilibrium. A REER above 100 indicates that the domestic currency is strong in real terms relative to trading partners, making exports less competitive and imports cheaper. Economists warn that such overvaluation risks eroding export competitiveness precisely when export earnings are already contracting.

On paper, the diagnosis seems clear. Inflation in Bangladesh has remained stubbornly higher than in peer economies, while private-sector credit growth has slowed and import demand has remained weak. These factors have pushed the REER upward despite a nominal depreciation of the taka in recent years. Based on recent readings, Bangladesh Bank data suggest that the equilibrium dollar rate should be around Tk130, while the market rate remains closer to Tk123-implying a significant overvaluation in real terms.

From a textbook perspective, the solution appears equally clear: allow further depreciation, restore competitiveness, and revive exports. But Bangladesh is not a textbook economy. It is a net importer with a highly concentrated export basket dominated by readymade garments, which account for around 85 percent of total exports. This structural reality fundamentally alters how exchange-rate movements are transmitted through the economy.

Bangladesh’s exports are not produced in isolation from global supply chains. They are assembled from imported inputs-fabric, yarn, accessories, chemicals, machinery-most of which are priced and paid for in foreign currency. Export earnings are also received in foreign currency. In theory, when the taka depreciates, the value-added portion of exports should increase in local-currency terms, improving profitability. This is the standard argument. But in practice, the outcome is far more complicated.

Export orders in the garment sector are executed at pre-negotiated prices. Buyers and suppliers agree on a contract price well in advance, often months before shipment. That price is typically determined on a cost-plus basis, where production costs are calculated and a margin-commonly referred to as cutting, making, and trimming (CMT) charges-is added. Government incentives, such as cash subsidies or duty drawbacks, are often factored into this pricing structure as well.

When the taka depreciates sharply, as it did in late 2022, the immediate assumption is that exporters gain because foreign-currency earnings translate into more taka. But this view ignores bargaining power. Bangladesh’s garment exports operate in a buyer-driven global market. Large international brands and retailers exert significant control over pricing. They are acutely aware of currency movements in supplier countries and adjust negotiations accordingly.

Business insiders argue that depreciation often leads not to higher margins for exporters, but to pressure from buyers to reduce mark-ups. Buyers expect suppliers to pass on the benefits of currency depreciation in the form of lower prices or thinner margins. In effect, depreciation becomes a bargaining chip for buyers, not a windfall for producers. The theoretical gain in local-currency value is absorbed through renegotiated contracts, reduced CMT charges, or delayed price revisions.

This reality helps explain why Bangladesh did not experience a sustained export boom following the sharp depreciation of the taka in 2022. While nominal export values fluctuated, profitability at the factory level remained under strain. Rising costs-energy, logistics, compliance, wages-combined with imported inflation eroded whatever gains depreciation might have offered. For many exporters, margins remained squeezed despite a weaker currency.

At the same time, depreciation increases the local-currency cost of imported inputs. Since exports are heavily import-dependent, this cost escalation offsets the benefits of higher taka receipts. The more import-intensive the export sector, the weaker the net gain from depreciation. In extreme cases, depreciation can even worsen cost pressures without improving competitiveness.

This creates a paradox. Bangladesh is warned that an overvalued taka undermines exports, yet depreciation does not reliably strengthen exporters either. The missing piece lies in understanding real exchange rates versus nominal exchange rates, and structure versus theory.

The REER captures relative prices adjusted for inflation across trading partners. Bangladesh’s high inflation-driven by food prices, supply constraints, and structural inefficiencies-has raised the REER even as the nominal taka weakened. This means that exporters face rising domestic costs faster than those of competitors. In such a scenario, nominal depreciation merely compensates for inflation differentials rather than delivering genuine competitiveness gains.

In other words, depreciation is being used to chase inflation, not to create advantage. As long as inflation remains high, the real exchange rate stays misaligned, and exporters see little relief. This is why central banks globally aim to keep REER close to equilibrium rather than pursuing aggressive depreciation. Bangladesh Bank’s cautious approach reflects this reality. Officials have indicated reluctance to engineer sharp depreciation, opting instead for strategies to cool the index, including reducing dollar purchases and rebasing the REER calculation to make it more realistic. The concern is clear: a large jump in depreciation could destabilize the economy without delivering proportional export benefits.

The deeper issue is that Bangladesh’s export competitiveness problem cannot be solved by exchange-rate policy alone. When exports are concentrated in a single sector, dependent on imported inputs, and embedded in buyer-driven global value chains, currency movements have limited power. Competitiveness is increasingly determined by productivity, efficiency, compliance, logistics, energy reliability, and diversification.

Moreover, reliance on depreciation as a policy tool carries risks. It fuels inflation, raises the cost of living, increases the domestic burden of foreign debt, and undermines financial stability. For a net importer, persistent depreciation acts like a tax on consumers and businesses alike. Any export gain must be weighed against these economy-wide costs.

The experience of recent years suggests that depreciation without structural reform merely redistributes value-often from domestic producers to foreign buyers-rather than creating new value. Exporters become price-takers in a global market that quickly internalizes currency changes. Without stronger bargaining power, branding, or product differentiation, suppliers have little ability to retain depreciation gains.

This does not mean exchange rates are irrelevant. A severely overvalued currency can indeed hurt exports. But the solution lies in maintaining a balanced real exchange rate, not in pursuing depreciation as a cure-all. Stability, predictability, and alignment with fundamentals matter more than headline rates.

For Bangladesh, improving export competitiveness requires tackling inflation at its root, reducing logistics and energy costs, upgrading skills and technology, and diversifying the export base beyond garments. Moving up the value chain-into higher-value apparel, textiles, and non-RMG sectors-would give exporters greater pricing power and reduce vulnerability to buyer pressure.

The current debate around REER and overvaluation should therefore be reframed. The question is not simply whether the taka is too strong or too weak, but whether the economy is structured to benefit from currency movements at all. Without addressing structural constraints, exchange-rate adjustments risk becoming symbolic gestures rather than effective policy tools.

Bangladesh’s experience challenges a long-held assumption in development economics: that depreciation automatically boosts exports. In a world of fragmented supply chains and asymmetric bargaining power, the relationship is far less mechanical. For Bangladesh’s exporters, especially in garments, the real battle is not the exchange rate, but who captures the value created.

Until that balance shifts, depreciation may continue to help buyers more than sellers-and competitiveness will remain elusive, regardless of where the taka trades.


Mehdi Rahman works in the
development sector. He also
writes on foreign trade and
monetary issues.