Chasing Real Effective Exchange Rate Overlooking Economic Feasibility

The recent report in an English daily, titled "Concern about Bangladesh losing export competitiveness" (October 31, 2026), raises an important issue concerning the relationship between the real effective exchange rate (REER) and Bangladesh's external trade performance. According to the report, the REER reached 106.29 in September, suggesting that the taka was overvalued by nearly 6.5 per cent against its benchmark. The implied policy discussion appears to favour further depreciation to restore export competitiveness. While the REER is a useful economic indicator, treating its movement as a prescription for exchange-rate adjustment risks overlooking the structural realities of Bangladesh's export sector. Currency depreciation is not necessarily a remedy for every competitiveness problem. In certain circumstances, it can aggravate the very difficulties it is intended to address.

The first issue concerns what REER actually measures. It captures changes in the value of a currency against a weighted basket of trading-partner currencies, adjusted for relative inflation. It is useful for assessing broad movements in relative price competitiveness. However, it does not directly measure the prices exporters receive, their profit margins, production costs, productivity or bargaining position with international buyers. Nor does it adequately capture the extent to which exporters can pass increased costs on to overseas customers. 

These distinctions are particularly important for Bangladesh's ready-made garment (RMG) industry, which dominates merchandise exports. International apparel buyers operate in a highly competitive market and possess considerable bargaining power. Bangladeshi manufacturers frequently struggle to secure prices that adequately reflect their production costs. Export prices are generally negotiated around cost calculations, with relatively thin margins. Even when production costs increase, exporters often cannot pass the entire increase on to buyers without risking the loss of orders. Their competitiveness therefore depends on much more than the nominal exchange rate.

A depreciation of the taka may initially appear to improve export competitiveness by increasing the domestic-currency equivalent of export receipts. But this advantage can be substantially eroded by higher costs of imported raw materials, energy, machinery, transportation and other production inputs. For an industry dependent on imported cotton, chemicals, dyes, accessories and capital machinery, currency depreciation is not an unqualified benefit. It can increase both production costs and working-capital requirements. The ultimate benefit depends on the proportion of export earnings exposed to foreign-currency costs and the extent to which additional domestic-currency earnings translate into improved margins.

Bangladesh's experience in late 2022 deserves particular attention. The taka experienced substantial depreciation during the period, with the adjustment continuing into FY2023. According to the IMF, the currency depreciated by approximately 15.2 per cent against the US dollar in FY2023 alone. Yet the depreciation did not generate a proportionate improvement in export performance. This experience should encourage policymakers to question the assumption that a weaker currency automatically translates into stronger exports. Global demand, input costs, production capacity, financing conditions and supply-chain constraints can be equally, if not more, important. 

The cost of depreciation on the import side also deserves greater attention. Bangladesh remains substantially dependent on imported commodities, intermediate goods and capital machinery. Consider an illustrative annual import bill of USD 45 billion, excluding imported inputs used for export production. A depreciation of Tk 2 against each US dollar would increase the taka-equivalent cost of financing the same volume of imports by approximately Tk 90 billion, assuming unchanged dollar prices and import volumes. This is a substantial additional burden on importers and, ultimately, consumers and domestic industries. 

The consequences extend beyond the direct import bill. Higher prices of imported fuel, fertiliser, food commodities, industrial raw materials and machinery can transmit into domestic inflation. Businesses face higher operating costs, consumers lose purchasing power, and investment decisions become more expensive. Inflation itself can subsequently erode the initial competitiveness gain from depreciation. In other words, an exchange-rate adjustment intended to improve external competitiveness may create another round of domestic cost increases, partially neutralizing its intended benefit. 

This is particularly relevant when Bangladesh is already struggling to contain inflation. A policy that increases imported inflation without delivering a corresponding improvement in export earnings deserves careful scrutiny. The exchange rate should not become an instrument for mechanically correcting an index while the broader economy bears the adjustment cost. 

Another important omission in assessments of export competitiveness is the role of government support. Bangladesh has maintained cash incentives for a range of export products to encourage diversification, value addition and employment generation. For FY2026-27, incentives continue for 43 specified export items, with rates ranging from 0.30 to 10 per cent. These facilities support sectors including leather, jute, agricultural products, light engineering and information technology services. An assessment that considers exchange-rate movements but overlooks such fiscal support provides an incomplete picture of the effective policy environment in which exporters operate. Equally important is the timely disbursement of incentives; an announced benefit that reaches exporters after considerable delay cannot provide the intended support to their cash flow and pricing decisions. 

The selection of comparator countries also requires greater care. India, for example, cannot automatically be treated as a direct competitor across all Bangladeshi export categories. Competitiveness is product-specific and market-specific. Bangladesh's competitors in basic garments may differ from those in high-value apparel, leather products, pharmaceuticals, agricultural goods or light engineering. Even within the RMG sector, competition varies according to product quality, order size, delivery time, compliance standards and sourcing requirements. A meaningful assessment should therefore identify actual competitors for particular products in particular destination markets rather than rely on a broad comparison of national currency movements.

None of this means that REER should be disregarded. It remains a valuable analytical tool for understanding external price developments. However, an index value above 100 does not, by itself, establish the precise extent of necessary depreciation. The benchmark is an index reference, not an automatic equilibrium exchange rate. Moreover, the movement of REER can reflect persistently higher domestic inflation, which may indicate a need to address domestic cost pressures rather than simply weaken the currency. Bangladesh Bank's REER calculations, based on a basket of 17 currencies, should consequently be interpreted alongside other indicators of export performance and external-sector conditions. 

There is also a question of how such indicators should be communicated. Publishing economic data is important for transparency, but isolated index readings can generate misleading policy expectations when their limitations are not adequately explained. Bangladesh Bank should consider accompanying REER publications with brief analytical notes clarifying their interpretation, limitations and implications. The index should inform internal policy assessment and public understanding, not become a mechanical target for exchange-rate management. It would be counterproductive to allow a single indicator to dominate a policy debate involving numerous interconnected economic variables.

Ultimately, Bangladesh's export competitiveness cannot be restored through exchange-rate adjustment alone. Reliable energy supply, efficient ports, lower logistics costs, affordable financing, improved productivity, technological upgrading, skills development and predictable policy support are equally important. Exporters need an environment in which they can produce efficiently, deliver on time and retain reasonable margins. These improvements are more sustainable than relying primarily on currency depreciation. 

The objective of exchange-rate policy should be to maintain macroeconomic stability while supporting a viable external sector, not to pursue a particular REER number irrespective of its wider consequences. A currency can be made weaker through administrative or market adjustments, but an economy does not automatically become more competitive as a result.

The real challenge is not merely to make the taka cheaper; it is to make Bangladesh's products more competitive without making the country's economy more expensive.

Mehdi Rahman 
writes on foreign trade and 
monetary policies.