In recent months, discussions have intensified over the prospect of the Bangladeshi Taka facing renewed pressure in the foreign exchange market. Currency depreciation is often presented as a policy tool that may stimulate exports or restore external balance. However, in the context of Bangladesh’s economic structure, such an argument deserves scrutiny. While a weaker currency may appear beneficial on paper, the reality is that excessive depreciation carries high macroeconomic costs. It fuels inflation, erodes purchasing power, and destabilises economic expectations. More importantly, exporters in Bangladesh operate largely in a buyers’ market, meaning that the theoretical advantages of currency depreciation rarely translate into tangible gains for them.
Bangladesh already experienced a substantial depreciation episode during late 2022 and early 2023. The Taka lost a significant portion of its value within a short span of time. What makes this episode particularly noteworthy is that the depreciation occurred at a time when the country’s foreign exchange reserves were still above $40 billion. Such a level of reserves should normally provide adequate space for prudent market intervention and liquidity support. Yet the market experienced sharp volatility, and the value of the Taka declined far more than necessary.
In essence, foreign exchange is a form of liquidity. Just as domestic financial systems require liquidity support during times of stress, foreign exchange markets require liquidity injections when temporary shortages arise. If importers are unable to access foreign currency through normal banking channels, they turn to alternative markets. This creates speculation, drives up exchange rates, and ultimately amplifies depreciation pressures. The experience of late 2022 illustrates this dynamic clearly. Import payments remained high, global commodity prices were elevated, and remittance inflows temporarily slowed. As a result, banks experienced foreign currency shortages. Instead of receiving adequate liquidity support through the market, these shortages intensified. Importers began searching for dollars outside the banking system, and expectations of further depreciation accelerated the demand for foreign currency.
Once expectations shift in this manner, the market can enter a self-reinforcing cycle. Businesses rush to secure foreign currency before the exchange rate increases further. Exporters delay repatriation in anticipation of better rates. Remitters wait for more favourable exchange rates. Each of these behaviours reduces the immediate supply of foreign currency while increasing demand, thereby pushing the exchange rate even higher. A central bank’s role in such circumstances is not merely to observe market developments but to stabilise expectations. Timely liquidity support can prevent temporary imbalances from turning into prolonged currency instability.
It is important to understand that liquidity support in foreign exchange markets does not necessarily mean permanently depleting reserves. Rather, it often involves temporary injections designed to smooth market functioning. When reserves exceed comfortable thresholds, measured intervention can stabilize the market while maintaining overall reserve adequacy.
From a liquidity management perspective, such a buffer provided considerable room for calibrated intervention. By supplying foreign currency to the market during periods of stress, the central bank could have prevented panic-driven demand and limited the magnitude of depreciation. Instead, the market was allowed to absorb the shock largely on its own. As the Taka depreciated rapidly, inflationary pressures intensified across the economy. Bangladesh, like many developing economies, relies heavily on imported commodities, including fuel, food ingredients, capital machinery, and industrial inputs. When the currency weakens sharply, the cost of these imports rises immediately.
This imported inflation quickly spreads through the economy. Higher fuel costs increase transportation expenses. Higher raw material prices raise production costs for manufacturers. Retail prices eventually adjust upward, placing additional pressure on households. In this way, exchange rate instability becomes a direct contributor to domestic inflation.
Most Bangladeshi exporters operate in markets dominated by large international buyers. These buyers often dictate prices through long-term contracts or competitive bidding processes. As a result, exporters have limited ability to increase their margins when the domestic currency depreciates. Furthermore, exporters rely heavily on imported inputs. The readymade garments sector, for example, imports significant volumes of raw materials, fabrics, accessories, and machinery. When the Taka depreciates, the cost of these imported inputs rises. Any potential benefit from a weaker currency is therefore partially or entirely offset by higher input costs.
The current global environment adds another layer of complexity. Geopolitical tensions, including conflicts in the Middle East, have the potential to disrupt energy markets and global financial flows. When such uncertainties intensify, international liquidity can tighten. Commodity prices may rise, shipping costs may increase, and risk perceptions among investors may shift. These developments can reduce the availability of foreign currency in emerging markets. For Bangladesh, which relies on steady inflows of export earnings and remittances to finance imports, global disruptions can create temporary liquidity shortages.
In such circumstances, passive exchange rate management becomes risky. If the market is left entirely to its own dynamics during periods of external stress, temporary shortages can quickly transform into currency instability.
A more prudent approach is for the central bank to actively manage foreign exchange liquidity. This does not mean fixing the exchange rate at an unrealistic level, nor does it imply ignoring market signals. Rather, it involves carefully balancing market forces with stabilising interventions.
Liquidity support can take several forms. The central bank can supply foreign currency through spot market sales to authorised dealer banks when demand temporarily exceeds supply. It can conduct swap transactions to provide short-term dollar liquidity without permanently reducing reserves. It can also coordinate closely with commercial banks to ensure that genuine trade payments receive priority access to foreign currency.
Equally important is the communication strategy of the central bank. Markets respond not only to actual interventions but also to expectations of policy actions. Clear communication about liquidity support mechanisms can reduce speculative behaviour and reassure market participants that temporary shortages will be addressed promptly.
Foreign currency treasury management, therefore, becomes a critical responsibility for the central bank. Effective management involves continuous monitoring of market conditions, proactive liquidity planning, and timely interventions when imbalances emerge.
Bangladesh’s economic stability depends heavily on maintaining confidence in the national currency. A stable exchange rate environment supports trade, investment, and financial planning. Businesses can price their products more accurately, importers can manage costs more predictably, and households can maintain purchasing power. Conversely, rapid and unpredictable currency depreciation undermines confidence across the economy. Inflation accelerates, investment decisions become more uncertain, and financial markets experience heightened volatility.
Bangladesh possesses the institutional capacity and policy tools necessary to manage these challenges. What is required is a strategic approach that prioritises stability while maintaining flexibility. The foreign exchange market should be allowed to operate within a framework of careful oversight, supported by well-timed liquidity interventions when necessary.
The objective should be clear: safeguarding the value of the Taka while ensuring the smooth functioning of the foreign exchange market. By combining prudent liquidity management with transparent policy communication, the central bank can protect the economy from unnecessary volatility and maintain confidence in the national currency during uncertain global times.
The writer is a liaison officer at a trade company
