Exchange Rate Crisis and Its Impact on Bangladesh Economy

Abstract

It is widely accepted that the exchange rate as a crucial factor in shaping both short- and long-term macroeconomic goals, such as growth and development of a nation. Exchange rate volatility and its impact on the economy of Bangladesh has always been an area of concern, particularly for past few years. Particularly, Bangladesh has been severely impacted by the foreign exchange reserves (FER) crisis, facing significant economic challenges since the COVID-19 pandemic, further exacerbated by the Russia-Ukraine war. Between August 2022 and January 2023, the country's foreign reserves declined from $39 billion to $32 billion, while the Bangladeshi Taka depreciated by 27%, falling from BDT 84 to BDT 107 per U.S. dollar. Given the growing concerns surrounding debt and dollar crises, this study explored the underlying causes of these recent financial disruptions and explored policy recommendations. Bangladesh Bank has taken a range of initiatives to ease the conditions. Particularly, apart from the currency exchange rate volatility mitigation policies, the overall monetary policy has been adopted to mitigate the crisis of the financial sector, but to what extent it would be curbing the inflationary pressure that the country is exposed to is still a question. Hence, to restore external resilience, near-term corrective policy actions would require reducing the reliance on the exchange rate as primary nominal anchor for monetary policy, further tightening the monetary policy stance, and maintaining fiscal discipline.