Dynamics of Exchange Rate and Forex Reserves in Bangladesh: Ways to Stabilize Foreign Exchange Rate
Year: 2024
Type: article
Abstract: The exchange rate and foreign exchange reserves stand as pivotal determinants profoundly impacting external and overall economic conditions. A sustained equilibrium in exchange rates alongside robust reserve levels is imperative for managing inflation and fostering favorable trade balances, thereby, bolstering the nation's holistic economic well-being. This study scrutinizes the dynamic interplay of exchange rates and forex reserves in Bangladesh, drawing upon meticulously curated data from Bangladesh Bank and bruegel.org. Methodologically, the investigation relies on rigorous trend and growth models to elucidate pertinent patterns. The analysis unveils a phase of exchange rate stability vis-à-vis the USD to BDT currency pair pre-2022, followed by a marked escalation in recent years attributable to localized currency devaluation. Noteworthy is the trajectory divergence observed between the Nominal Effective Exchange Rate (NEER), demonstrating a downward trend, and the Real Effective Exchange Rate (REER), exhibiting a contrasting upward trajectory surpassing NEER. Moreover, a conspicuous surge in forex reserves is evident until early 2022, succeeded by a precipitous decline to precarious levels. This downturn is ascribed to multifaceted factors encompassing the Ukraine conflict, volatility in oil prices, burgeoning foreign debt obligations of public and private entities, dwindling Foreign Direct Investment (FDI) inflows, and diminished remittances. The governmental response has entailed the adoption of short-term strategies aimed at mitigating exchange rate volatility and preserving forex reserves. While certain measures have proven efficacious, others have fallen short of desired outcomes. In pursuit of exchange rate stability, the central bank has instituted a crawling peg exchange rate regime, complemented by governmental interventions restricting imports to safeguard forex reserves. Achieving equilibrium mandates concerted governmental endeavors to invigorate remittance and FDI inflows, thus fostering a more robust economic landscape. JEL: F31, G18, O24 Article visualizations:
Authors: Md. Abdul Khaleque, M. Abu Eusuf, Rounak Jahan
Institution: University of Dhaka
Language: English
Domain: Social Sciences
Open Access status: diamond
OpenAlex ID: W4402676486