Taka to weaken against dollar this year: report

The taka is likely to weaken against the dollar this year, impacted by a significant slowdown in remittance growth due to low oil prices and poor economic growth prospects in the Middle East, according to an analysis.

The lacklustre investment outlook in Bangladesh will also exert downside pressure on the taka, said the London-based BMI Research, a company of Fitch Group.

“However, we believe that Bangladesh Bank will maintain a tight grip on the foreign exchange market to ensure broad stability on the unit, and the threat of a one-off devaluation is relatively low as Bangladesh's external accounts are in a much stronger shape than in 2011.”

The taka remained relatively stable against the dollar for most of 2015, trading within a tight range of Tk 77-80.

The taka has been exceptionally strong in real effective terms over the past year, partly due to the windfall it has received from lower oil and commodities import costs as well as a steady inflow of remittances which supported the current account, according to the report.

“However, we expect the currency to face downside pressures over the coming quarters as remittances growth is likely to slow considerably due to an unfavourable macroeconomic backdrop in the Middle East,” BMI Research said.

In addition, the rise in domestic security threats and a poor business environment are likely to curb direct investment and portfolio inflows, further removing support for the taka, according to the report.

Bangladesh's trade deficit as a share of GDP widened considerably from 3.9 percent in fiscal 2013-14 to 5.1 percent in fiscal 2014-15, as imports surged 11.2 percent and exports grew at a much modest pace of 3.4 percent, it said.

Export growth in Bangladesh slowed considerably last fiscal year as multiple factors such as political instability, suspension of preferential trade provisions and a strong currency weighed on the sector. Over the coming year, the export sector will likely see a recovery, BMI Research believes.

In addition, the export sector also demonstrated resilience to the regional economic slowdown, registering a positive growth rate of 7 percent year-on-year between July and December 2015, while trade in the rest of the region contracted on a yearly basis.

“As such, we have revised our forecast upwards, and now expect Bangladesh's trade deficit to narrow to 4.9 percent of GDP from 5.1 percent in the previous fiscal year, versus our previous forecast of 5.2 percent.”

Despite the improvement in Bangladesh's trade account, BMI Research forecast the country's current account balance to come in at 0.5 percent, as inbound remittances growth is likely to slow significantly in 2016.

A poor economic growth outlook in the Middle East region due to geopolitical tensions in the region and muted oil prices will likely feed into reduced employment opportunities for Bangladeshi migrant workers, it said.

Remittances from the Middle East account for a substantial 58.9 percent of total remittances and are a key source of income for the South Asian economy.

“Accordingly, we have downgraded Bangladesh's remittance growth forecast to just 1 percent in fiscal 2015-16, down from the previous 8 percent.”

The rise in security threats over recent months and a poor business environment will pose downside risks to the Bangladeshi economy and its external sector as these factors could curb investment and weigh on the tourism sector.