Asian central banks are spending billions from reserves to defend their currencies against rising US dollar and the Bangladesh Bank was no different.
The country's central bank has spent $7.62 billion from the foreign exchange reserves in the just concluded fiscal 2021-22 to slow down the weakening Taka against the dollar while it bought $7.7 billion the previous fiscal year, according to the latest monetary policy statement announced this week for the current fiscal year.
The Federal Reserve Bank's tightening move to boost the dollar forced the Bangladesh Bank to reverse buying the greenback.
The dollar-selling spree eroded foreign exchange reserves to $41.9 billion as of 28 June this year compared to $46.4 billion at the end of June 2021.
The Bangladesh Bank intervened in the foreign exchange market throughout the last fiscal year, causing the highest depreciation of Taka against the dollar among its Asian peers.
Bangladesh experienced 9.2% currency depreciation against the dollar during the last fiscal year when Malaysian currency lost value by 5.6%, India's by 4.8%, China's 3.5%, and Indonesia's by 2%, according to the Bangladesh Bank data.
On the other hand, currencies of Cambodia and Vietnam enjoyed appreciation against the dollar during the same period.
The exchange rate of the dollar was Tk84.81 at the end of June last year which surged to Tk93.45 at the end of this June, according to the Bangladesh Bank data.
"The commodity prices in the international markets have been soaring due to the post-Covid economic recovery-induced demand surge amid supply chain disruptions since the end of 2021. The Russia-Ukraine war has aggravated the situation, pushing the global commodity prices and international transportation costs unusually high. Bangladesh is no exception, facing mounting exchange rates and inflationary pressure during the second half of FY22," said the central bank in its monetary statement.
The Bangladesh Bank in its monetary policy considered exchange rate stability as the major challenge in the new fiscal year.
Bangladesh's currency, which experienced lowest depreciation among the major trading partners in the fiscal 2020-21, started to weaken faster after the Russia-Ukraine conflict. The situation worsened as the US Federal Reserve moved to bolster the dollar with raising policy rates to check inflation.
The US central bank has signalled another big hike in July, with traders pricing a 75 basis-point increase.
The Fed move hit all Asian currencies prompting them to spend their reserve to bolster their weakening currencies against US dollar in the year 2022.
Already, regional currencies are hovering at multi-year lows: the Philippine peso slumped to its weakest since 2005, while the India rupee declined to a record low in the last week of June.
Though the taka experienced the most depreciation among other Asian countries, the real effective exchange rate index indicates that Taka is still overvalued against the basket of major trading partner's currencies.
The real effective exchange rate index was 116 in May. When the index crosses 100 that means that currency is overvalued.
The higher real effective exchange rate index is due to the wide price differentials between Bangladesh and major trading partners mainly developed and emerging market economies, said the Bangladesh Bank monetary statement.
The widening current account balance amid relatively moderate inflows of inward remittance aggravated exchange rate volatility, it said.
The current account deficit expanded to $15.3 billion in July-April of FY22 which is 3.3% of GDP when the shortage amount was less than 1% of GDP in the same period of the last year, according to Bangladesh Bank data.
Learning from the 1997 Asian financial crisis, central banks have been accumulating dollars to help defend their currencies during crisis periods.
The Bangladesh Bank has also taken measures to save foreign currency by limiting import of luxury goods.
Though the Taka was depreciated to ensure a market-aligned competitive rate, exporters will not get the benefit if inflation remains higher than competitor countries.
Inflation in Bangladesh was highest compared to its major trading partners in May.
The point-to-point inflation was 7.4% in May in Bangladesh when it was 7% in India, 2.9% in Vietnam, 2.1% in China, 3.6% in Indonesia, according to Bangladesh Bank data.