In a historic move, Bangladesh’s central bank has decided to allow its currency, the taka, to float freely for the first time. The decision comes in response to demands from the International Monetary Fund (IMF) and aims to unlock additional funds from a $4.7 billion loan program. While Bangladesh is not heavily indebted, the country joins a growing list of nations, including Pakistan, Egypt, and Lebanon, that have opted to loosen control over their local currencies to secure financing from the Washington-based lender.
The new market-driven exchange rate regime is expected to bring greater transparency and efficiency to foreign exchange transactions, benefiting businesses, individuals, and the overall economy. Despite concerns of depreciation, the central bank does not anticipate a significant decline in the value of the taka, which has already experienced a slight 5% decrease this year.
Following the announcement, the taka experienced a decline of up to 0.9% against the dollar. However, the broader index of the Dhaka Stock Exchange recorded a notable increase of up to 0.3%, the largest gain since June 7. This positive movement reflects the potential for a looser currency regime to bolster Bangladesh’s reserves by making its exports more attractive.
Since gaining independence in 1971, Bangladesh has relied on fixed exchange rates to manage volatility and ensure affordable imports. With the adoption of a unified exchange rate regime between the taka and the dollar (or any other foreign currency), the country aims to bridge the gap between formal and informal markets. From July 1, the central bank will cease selling foreign exchange at a discounted rate, and by the third quarter of 2023, all international transactions will be based on the new exchange rate structure.
Bangladesh’s central bank has already sold approximately $13 billion in the current fiscal year, ending on June 30, due to increased demand for foreign currency. The government received the first installment of $476 million from the IMF loans in February, with the second tranche expected in November. Prime Minister Sheikh Hasina has expressed confidence in her country’s ability to repay the loan, emphasizing that the IMF provides assistance to nations capable of meeting their financial obligations.
In a recent development, Moody’s Investors Service downgraded Bangladesh’s ratings to B1 from Ba3, citing weakened economic conditions and heightened external vulnerability and liquidity risks. The central bank, however, has downplayed the impact, noting that the country has not issued sovereign bonds, which would be directly affected by the downgrade. Addressing concerns about inflation, Bangladesh aims to achieve a growth target of 7.5% in the upcoming fiscal year, starting July 1, and seeks to graduate from being a least developed country. To manage inflation, the central bank plans to implement a tight monetary policy for the first half of the new fiscal year, adjusting interest rates accordingly.
Free and Floating Currency:
Definition: A free and floating currency refers to a currency whose exchange rate is determined by market forces, such as supply and demand, without any interference from the central bank or government.
Managed Currency:
Controlled Currency:
Reduced Currency Volatility: By pegging the currency to a more stable foreign currency, a controlled currency system aims to reduce exchange rate volatility and provide a stable environment for trade and investment.
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