An overview of the valuation of taka throughout history, its current state, and strategies to increase its future value.
Although the value of the Bangladeshi taka has not increased, its volume has increased dramatically since 4 March 1972. This is when the country’s first paper note, 1 taka, was released. Fast forward to the present, paper notes of the taka are now available in denominations of 1, 2, 5, 10, 20, 50, 100, 500, and 1,000. The 1 taka paper note has been replaced with a 1 taka coin and lower denominations are no longer in use as it carries little value in today’s market.
As the Bangladeshi economy has evolved, money has circulated more widely, firms have expanded, and people’s salaries have climbed. As of December 2022, the entire amount of money in circulation was a staggering BDT 2.9 trillion. However, in contrast to the US dollar, which is currently the most powerful currency in the world, the value of the taka has continued to decline.
Taka Valuation Over the Years
The taka was established in place of the Pakistani rupee at a rate of BDT 7.5 to USD 1. The taka significantly declined from the 1980s to the end of the decade, with the exchange rate falling to BDT 30 per dollar. In the 1990s, as a result of inflation, political unrest, and external causes, the taka’s currency rate fluctuated between BDT 41 and BDT 52 per dollar. The taka appreciated occasionally between 2010 and 2021, ranging between BDT 69 and 84 per dollar.
The central bank had been meddling in the market even though Bangladesh switched to a floating exchange rate regime two decades prior. As a result, import costs for Bangladesh significantly increased after the Russia-Ukraine war. The taka declined by over 25% in just one year as a result of banks’ inability to pay import bills and a spike in demand for US dollars. Depending on personal circumstances and the specific context of the currency’s weakness, a weak currency can have either good or negative effects on consumers. But, this time around, the devaluation places a heavy burden on the government, businesses, and consumers alike.
The Effects of The Taka’s Devaluation
Because it takes more taka to buy goods than an equivalent amount of US dollars, prices for imported goods are rising. Consumers pay more for goods and services because Bangladesh is significantly dependent on imported items, including food, raw materials, energy, and fertiliser. Due to the loss in the purchasing power of the taka, this has become an issue for customers on fixed incomes. The weak taka increased the expense of doing business by raising the price of imports. As the law of simple economics dictates, product prices have increased due to an increase in the price of imported raw materials which may eventually cause demand to decline. The government is also being affected due to the taka’s devaluation. The government currently pays about 25% more to purchase the same number of goods since it imports fuel oils, fertilisers, and several other commodities. Moreover, the taka’s devaluation has raised the cost of borrowing for the government from multilateral lenders, which has raised borrowing costs.
Depending on personal circumstances and the specific context of the currency’s weakness, a weak currency can have either good or negative effects on consumers. But, this time around, the devaluation places a heavy burden on the government, businesses, and consumers alike.
But certain industries have experienced some gains. Exporters receive BDT 104 per US dollar, up from BDT 86 a year ago, making exports more competitive. In the long run, this can help consumers by generating new investments, opening up job possibilities, and stimulating economic growth. Remitters are also on the gaining side. Because the value of the dollar has grown due to the depreciation of the taka, expatriates can send more money home with the same quantity of foreign cash. Local receivers of remittance have benefited from this.
Reasons Behind the Devaluation
Economic factors are the main reasons behind the devaluation. For instance, if the rate of inflation is high, it can lead to a decrease in the value of its currency. This is because when there is too much money in circulation, the value of each unit of currency decreases. A trade deficit is also another probable cause. When a country imports more than it exports, it creates a trade deficit, which can put pressure on the value of its currency. Another probable cause is interest rates. If a country’s interest rates are low, foreign investors have more incentive to move their money elsewhere, leading to a decrease in demand for the currency, resulting in a decrease in its value. However, it is important to note that currency exchange rates are ultimately determined by supply and demand in the foreign exchange market, and are influenced by a wide range of factors. Therefore, the decrease in the value of the taka may be due to one or more of these factors.
To attract foreign investment, a favourable business environment needs to be fostered, trade must be encouraged, and infrastructures improved. This can be achieved by providing tax incentives, simplifying investment procedures, and improving the legal and regulatory framework.
Probable Solutions
While no solutions are surefire or foolproof, a few options can be explored to mitigate the current situation. We can increase exports by investing in the development of export industries, improving the quality of local products, and promoting goods and services in international markets. This can be achieved by providing incentives to exporters, reducing bureaucratic hurdles, and developing infrastructure such as roads, seaports, and airports. Along the same line of thought, reliance on imported goods could be reduced through higher consumption of domestic products. This can be achieved by promoting import substitution industries, such as textiles, leather, and agro-based industries. Reducing import dependency will reduce the demand for foreign currency, and thus increase the demand for the taka.
The taka’s value can also be strengthened by encouraging foreign investment. To attract foreign investment, a favourable business environment needs to be fostered, trade must be encouraged, and infrastructures improved. This can be achieved by providing tax incentives, simplifying investment procedures, and improving the legal and regulatory framework. A favourable investment climate will encourage foreign entities to invest in Bangladesh, and increase demand for the taka.
Curbing inflation can also be a probable solution. It can be achieved by implementing monetary policies such as increasing interest rates, reducing government spending, and managing the money supply. By controlling inflation, the purchasing power of the taka will increase, and it will become more attractive to investors.
Consumers pay more for goods and services because Bangladesh is significantly dependent on imported items, including food, raw materials, energy, and fertiliser. Due to the loss in the purchasing power of the taka, this has become an issue for customers on fixed incomes.
Lessons From Other Countries
In this time of global economic instability, it is worth exploring the strategies deployed by other countries to increase the value of their currency. For instance, Japan has been using a combination of monetary policy and fiscal stimulus to boost its economy and increase the value of the yen. The Bank of Japan has implemented a policy of negative interest rates and quantitative easing to stimulate economic growth and inflation, which can increase the value of the yen. The government has also implemented fiscal stimulus measures to boost economic activity and increase demand for the yen.
Switzerland has been using a policy of currency intervention to keep the value of the Swiss franc from appreciating too much. The Swiss National Bank (SNB) has been buying foreign currencies to prevent the franc from becoming too expensive, which can harm the country’s export-oriented economy. Like Japan, The SNB has also implemented negative interest rates to discourage investors from holding francs, which can reduce demand for the currency.
The United States has been using a policy of low-interest rates to stimulate economic growth and increase the value of the US dollar. The Federal Reserve has implemented a policy of near-zero interest rates and quantitative easing to encourage borrowing and spending, which can boost economic activity and increase the value of the dollar.
But of all the countries, China’s strategies to increase the value of the yuan can give us lessons to follow and implement. In the past, China had fixed the value of the yuan against the US dollar, which kept the currency undervalued and made Chinese exports more competitive in international markets. However, since 2005, China has gradually allowed the yuan to float more freely in the market, allowing the exchange rate to be determined by market forces. China has also been promoting the use of the yuan as an international currency. In 2010, China launched the Cross-Border Trade Settlement Pilot Scheme, which allowed firms to settle trade in yuan instead of US dollars. China has also established offshore yuan clearing centres in Hong Kong, London, and other cities, which have facilitated the use of the yuan in cross-border transactions.
While the case for each nation might be different, the relevant stakeholders in Bangladesh can surely look into the other countries’ scenarios to view the situation from multiple perspectives and chalk out relevant, timely and much-needed solutions to solve the current taka crisis.
