Bangladesh Bank governor Ahsan H Mansur on Wednesday said that the exchange rate of the US dollar would now be determined by market forces, shifting from the country鈥檚 long-standing managed rate regime.
Speaking virtually from Dubai of the United Arab Emirates at a press conference on the day, Mansur said that the rate was expected to remain close to its current level and would not rise significantly after the shift, given the prevailing macroeconomic indicators.
On Wednesday, all banks were instructed to trade dollars at market-based rates.
The Bangladesh Bank on the day issued a circular repealing its January 2 directive on trading spread limits, while keeping in place the December 31 circular on transaction reporting.
Under the system, banks must report all foreign exchange transactions exceeding $1,00,000 twice a day.
As part of its transparency efforts, the central bank has also been publishing a daily benchmark rate since January 12, calculated as a weighted average of market-based transactions.
Mansur鈥檚 announcement came following extended negotiations with the International Monetary Fund, which had stalled the release of loan tranches over the central bank鈥檚 reluctance to fully liberalise the exchange rate.
After the Bangladesh decided to adopt a market-based regime, the Washington-based multilateral lender on Tuesday approved the disbursement of the pending instalments under its $4.7 billion loan programme for Bangladesh.
鈥楾his is the right time to go for a market-based rate,鈥� Mansur said, pointing to steady remittance inflows, a relatively stable foreign reserve position, and an improving balance of payments.
He added that the country expected to receive $3.5 billion from a number of foreign lenders, including the IMF by June, which would further boost its foreign exchange reserves.
The Bangladeshi taka weakened in recent years against the US dollar due to a dollar shortage and pressure on banks to settle import payments. The exchange rate steadily depreciated from Tk 84.81 in June 2021 to Tk 93.45 in June 2022 and Tk 106 in June 2023.
The rate has remained stable for the past three months. On Wednesday, the rate was Tk 122 a dollar.
To prevent abrupt fluctuations, Mansur said that the shift does not mean banks could trade dollars at any rates. 鈥榃e expect that the rate would hover around the current level,鈥� he said.
To support the transition and ensure short-term stability, the Bangladesh Bank decided to create a $500 million intervention fund that would allow the central bank to step into the market, if needed.
Economist Selim Raihan, executive director of the South Asian Network on Economic Modeling, welcomed the move, calling the earlier policy of controlling the exchange rate wrong.
He said the shift came at a time when the foreign exchange market was relatively calm, with the reserves and the exchange rate stable and inflation on a downward path.
Raihan stressed the need for close surveillance of the market to prevent manipulation.
He said that the dollar rate was unlikely to see significant upward pressure under current conditions, but if any rise triggered inflationary effects, the government should consider adjusting taxes and duties on import-reliant goods to limit the consumer impact.
He also underscored the importance of policy coordination among government agencies to manage any challenges that might emerge due to the shift.
M Masrur Reaz, chairman and chief executive officer of the Policy Exchange Bangladesh, observed that the reform was unavoidable for improving macroeconomic management.
According to him, a flexible exchange rate regime is essential for restoring discipline and credibility in the external sector.
However, he warned that the Bangladesh Bank must closely track supply-demand dynamics in the foreign exchange market to prevent any excessive depreciation of the taka.
He also stressed that the central bank must be ready to intervene in the market in case of severe volatility.
Masrur emphasised the need for guarding against market manipulation or other activities that could distort pricing and damage confidence.
Syed Mahbubur Rahman, managing director and CEO of Mutual Trust Bank, noted that banks now have the flexibility to negotiate dollar rates directly, which he said would make the market more efficient.
He added that strong export performance and robust remittance inflows had helped stabilise the exchange rate, and he foresaw no significant fluctuations in the near term.
However, he urged banks to exercise restraint and responsibility in managing their foreign exchange transactions to maintain discipline on the market.
Zahid Hussain, former lead economist at the World Bank鈥檚 Dhaka office, said that this was the right time to adopt such a move, citing strong remittance and export earnings, a stable reserve and currency market, and declining inflation and dollar rates globally.
He stressed the need for vigilant monitoring by the central bank to prevent any malpractices on the foreign exchange market.
With banks now requiring to report dollar transactions daily, he noted, the Bangladesh Bank would be better positioned to intervene promptly and prevent any sharp rise in the dollar rate.
