Path of the Bangladesh Taka 1972-1993

Path of the Bangladesh Taka 1972-1993

Subroto Roy 1993

Note: This was part of a 1993 study I did as a consultant at the IMF in Washington in a project on exchange-rates and exports of “South Asian” countries.  The IMF is not responsible for its content.

“Bangladesh, being the former East Pakistan, shared the same currency and trade-policy history as the rest of Pakistan until the Bangladesh taka was created on January 1 1972.  Pakistan rupees in circulation remained legal tender until replaced by the taka 1:1 beginning March 4 1972.

The taka was set at par with the Indian rupee, and fixed to sterling at Tk 18.9677, or Tk 7.2797 to the United States dollar.   The path followed by the taka was determined partly by the initial value chosen for the new currency in 1972.  Given the devastation experienced by the Bangladesh economy from natural disaster, civil war and war in 1969-1971, the initial value chosen for the taka on par with the Indian rupee was in all likelihood unrealistic, even more so to the extent the Indian rupee was itself nominally overvalued at the time.

Since that time, the principal fact about official exchange-rate policy in Bangladesh has had to do with overseas workers’ remittances far exceeding any single sector of merchandise exports as a support for the balance of payments.  A multiple exchange-rate system prevailed with a secondary market as an incentive for overseas workers to remit through official channels instead of at parallel or “hundi” market-rates, the spread between the parallel and official channels being exceptionally high for Bangladesh compared to India and Pakistan.  IMF technical studies laid the groundwork for abolishment of the multiple exchange-rate practice and the unification of exchange-rates, which was accomplished on March 31 1992.

The path of the official taka is informative as a measure of nominal overvaluation.  Since August 1979, the official taka has been pegged within margins to a currency-weighted basket.  The taka was adjusted as many as 20 times between October 1980 and January 1982, the official rate being reduced to Tk. 38.4 to sterling or Tk.20.4 per United States dollar.  In January 1983, the weights were changed and in March 1985 changed again.  On this basis, the nominal effective exchange rate depreciated by 29 percent and the real effective exchange rate by 21 percent between August 1979 and December 1982.  From February 1985, exchange-rate policy has with IMF support tried to keep in mind an upper limit on the real effective exchange, the nominal rate declining in one year by 20 percent and the real rate by 22 percent.  From the end of 1985 through November 1988, there was further depreciation of 4 percent.  In absence of further nominal depreciation, combined with further deterioration of the domestic price-level, the real exchange rate appreciated by 7 percent between November 1988 and April 1989,  followed by further appreciation of over 9 percent during May-June 1989.  A revised index confirmed the loss of competitiveness, indicating at least 12 percent real appreciation by end June 1989 relative to 1988.  From November 1988 to February 1990, the taka remained at Tk 32.27 per United States dollar with the official secondary market 2 percent higher.  In 1990 the rates were depreciated six times by a total of 11 percent, corresponding to 8 percent real depreciation.  The official taka was at Tk.36.49 per United States dollar as of July 7 1991.  Recent Bangladesh exchange-rate policy has seemed to be guided by such considerations, and has not been responsive to regional developments such as changes in the Indian rupee.”