Taka grows in number, not in value

In 1972, Bangladesh presented its first budget with an outlay of Tk796 crore. Fast forward 50 years and the size of the budget has increased by nearly 852 times to Tk6.78 lakh crore, indicating the substantial growth of the economy and the influx of money.

One striking example of this growth is in remittances. In FY22, the country received nearly $21 billion, equivalent to Tk2.20 lakh crore or 277 times more than the country's first budget. Additionally, exports have surged to $52 billion or over Tk5.20 lakh crore, while imports were $82 billion or over Tk8 lakh crore. These figures demonstrate the magnitude of Bangladesh's economy.

Over the last 15 years, the private sector, expatriates, and government spending on mega projects and other development works have pumped more money into the economy, fueling its massive growth.

Rising consumption is an important driver of the country's economic growth. When people consume more goods and services, it creates a ripple effect throughout the economy, leading to job creation, increased production, and greater economic activity.

For many years, the highest denominated note in Bangladesh was Tk500. However, in response to the increasing demand for higher denomination notes and to make transactions more convenient, the country introduced the Tk1,000 note on 31 March 2008.

The volume of the Bangladeshi currency, Taka, has grown significantly since the issuance of its first paper note of Tk1 denomination on 4 March 1972, even though its value has not increased. Currently, there are 10 series of paper notes in denominations of Tk1, Tk2, Tk5, Tk10, Tk20, Tk50, Tk100, Tk500, and Tk1,000. But coins below Tk1 are no longer in circulation, and the Tk1 paper note has been replaced by a coin mainly used for making change as it holds little value today.

As the Bangladesh economy has grown, businesses have expanded, and people's incomes have increased, the circulation of currency has also increased. As of December 2022, the total value of currency in circulation stood at a whopping Tk2.9 trillion.

However, the value of the taka has continued to depreciate compared to the world's most powerful currency, the US dollar.

A weak taka weakens many, benefits few

After replacing the Pakistani rupee, the taka was introduced at an exchange rate of Tk7.5 per US dollar. From the 1980s to the end of the decade, the taka experienced significant depreciation, with the exchange rate dropping to Tk30 per dollar.

In the 1990s, the taka's exchange rate remained volatile due to inflation, political instability, and external factors, fluctuating between Tk41 and Tk52 per dollar. From 2010 to 2021, the taka remained relatively stable, appreciating against the dollar at times and fluctuating between Tk69 and Tk84 per dollar.

Although Bangladesh adopted a floating exchange rate system two decades ago, the central bank had been intervening in the market until the Russia-Ukraine war caused commodity and energy prices to surge, resulting in a sharp increase in import bills for Bangladesh. Banks were unable to meet import payments, and there was a surge in demand for the US dollar, causing the taka to depreciate by around 25% in just one year.

While a weak currency can have positive or negative impacts on consumers, depending on individual circumstances and the specific context of the currency's weakness, this time around, the depreciation puts a significant strain on the government, businesses, and consumers alike.

Higher prices pinch consumers

A weak taka led to higher prices for imported goods, since it took more of the local currency to buy the same amount of US dollar needed to purchase those goods. 

As Bangladesh is heavily dependent on imported products, be it food, raw materials or energy and fertilizer, consumers have to pay more for buying goods and services. This has become problematic for consumers on fixed incomes, as their purchasing power declines.

Low demand, high cost of doing business 

A weak taka impacted on the cost of doing business as it made imports more expensive. It has increased the cost of importing raw materials for manufacturing finished goods. This has led to higher prices for products, which can ultimately lead to reduced demand.

Government also feels the pinch

As the government imports fuel oils, fertilizer and some other commodities, it is now paying around 25% higher prices to buy the same amount of goods. In addition, the government's borrowing from multilateral lenders has become more expensive due to the depreciation of the taka, resulting in increased borrowing costs.

Some sectors benefit

Exporters: A weak taka has made exports more competitive as exporters are getting Tk104 per dollar, up from Tk86 a year ago. This can create new investments, create job opportunities and stimulate economic growth, which can ultimately benefit consumers.

Remitters: The depreciation of taka has increased the value of the dollars, meaning that expatriates can send more money back to their home country with the same amount of foreign currency. This has had a positive impact on the individuals and families who received the money.

Tourism: Foreigners willing to travel to Bangladesh are getting the benefit as a weak taka can make their travel more affordable. However, it makes domestic travel more expensive, as airlines and hotels may raise prices to compensate for the weaker currency.

Foreign investments: A weak currency can also create investment opportunities for foreign investors. For example, if an investor invests $100, they will be able to purchase more assets due to weakening taka.

Banks can benefit: One way banks can benefit from exchange rates is through foreign exchange trading. For example, if a bank can buy dollars at a lower rate and sell it at a higher rate, it can earn a profit from the difference in prices.

How the value of taka can be increased

The value of Bangladesh's currency can appreciate or increase through various factors.

Increasing exports: When Bangladesh exports more goods and services, it earns foreign exchange, which increases the demand for taka in the foreign exchange market and leads to an increase in its value.

Increasing foreign investments: Foreign investment brings in foreign exchange, which increases the demand for taka and, as a result, its value.

Increasing foreign remittances: As Bangladesh receives remittances from abroad, the demand for taka increases, leading to an appreciation of its value.

Higher interest rates: Higher interest rates attract foreign investors and increase the demand for taka, leading to an appreciation of its value.

Political stability: A stable political environment in Bangladesh can attract foreign investment and increase the demand for Taka, leading to an appreciation of its value.