Exchange rate management came to the fore after the Covid-19 pandemic when Bangladesh economy started recovering, which created a huge pressure on foreign currencies to finance external trade. The Ukraine-Russia war jeopardizes the situation further by creating supply-side constraints on food and fuels, in particular. As a result, spiraling inflation with the sharp depreciation of the dollar exchange rate created extra pressure on international reserves in Bangladesh. The dollar has depreciated by more than 25% from June 2022 and the international reserves have depleted from about US$ 48 billion to US$23 billion as of now. The depletion of reserves led to the depreciation of the Taka and aggravated inflation. Though Bangladesh officially maintains floating exchange rates, its exchange rates have been highly managed and remained stable for the last decade or so (Hossain and Ahmed, 2020; Hossain, 2021). With a sharp depreciation trend in the recent past, the Bangladesh Bank (central bank) adopted various policies such as quantitative restrictions on imports, higher cash incentives for remittances, selling dollars in the market, etc. Though Bangladesh Bank declares a rate (Dollar rate) every day, the market rate was way above that rate indicating the ineffectiveness of Bangladesh Bank’s exchange rate policy. Against this backdrop, it is important to assess the exchange rate management over the last few years or so in order to identify which exchange rate system is better suited to developing countries like Bangladesh in a crisis period.

 Objectives:

The specific objectives of the study are:

1.      To analyze the behavior of the nominal exchange rate by focusing on the behavior of interest rates and international reserves;

2.      To highlight the merits and demerits of adopting multiple exchange rates and assess the market pressure by estimating an exchange rate market pressure index;

3.      To assess the behavior of the REER and the misalignments through the movements of the REER;

4.      To examine the implications of exchange rate management on monetary policy, international reserves and debt management policy

5.      In light of the empirical results, a review of exchange rate management in crisis episodes in other developing countries will be made to provide policy recommendations on Bangladesh’s case. 

Study Team:

1. Dr. Monzur Hossain (Team Leader)

2. Mr. Jayed Bin Sattar

Sponsor: Research Endowment Fund (REF) of BIDS