IMF urges Bangladesh to adopt market-driven exchange rate

The call comes as a delegation from the international lender visits the country to review the progress on a major loan deal before the release of the next tranche

The visiting International Monetary Fund (IMF) delegation has once again urged the Bangladesh government to make the foreign exchange rate fully market-oriented.

The IMF mission has begun its visit to Dhaka to review the progress of the utilisation of the third tranche of the major loan deal to Bangladesh and the fulfilment of conditions before releasing the fourth tranche.

For this purpose, the 13-member delegation led by Chris Papageorgiou, head of the Development Macroeconomics Division of the IMF Research Department, has been meeting with officials, organisations and departments at various levels of the government since Dec 4. Papageorgiou also previously came to see the progress in implementing the conditions before releasing the third tranche of the loan.

In that vein, the delegation met with Bangladesh Bank on Tuesday. During the meeting, the delegation urged the central bank to take the initiative to fully align the dollar rate against the taka according to market conditions.

The exchange rate of the dollar has been stable at Tk 120 for over three months. The dollar is being traded on the open market for Tk 122-123. As the rate has been fixed at Tk 120 in the banking channel, the IMF believes the exchange rate is not fully market oriented.

For this reason, the organisation has sought the implementation of the crawling peg system mentioned in the conditions given in the third instalment.

Addressing the meeting, Husne Ara Shikha, spokesperson and executive director of the central bank, told bdnews24.com on Wednesday, "For the past three months, the foreign exchange rate has been fixed at a single rate. The IMF has suggested that the rate be fully market-oriented, so that the dollar rate automatically rises and falls in line with market demand and supply."

At the meeting, the IMF representatives showed the central bank officials a graph of the dollar exchange rate for the past six months.

There, it could be seen that the graph line of the dollar exchange rate from September to November of this year is completely straight.

Since it has not risen or fallen, the organisation has urged the exchange rate to be freed as before. For this reason, the IMF has suggested implementing the crawling peg system, a method for periodically adjusting a country's currency value at a predetermined rate or in response to specific economic indicators.

After the implementation of the second tranche of the loan, the IMF had attached a condition to introduce the crawling peg system to overcome the foreign exchange crisis before the release of the third tranche.

During the review of the second tranche last May, the central bank officially announced the crawling peg system and started implementing it.

After this, a monetary policy announcement was made on the implementation of the crawling peg. Although the announcement was made in the previous monetary policy system, it was not implemented.

The crawling peg is a method of adjusting the value of a foreign currency against the local currency. The exchange rate of a currency is allowed to fluctuate within a certain range, which the central bank has called the crawling peg mid-rate (CPMR).

In this case, the maximum and minimum limits of the currency rate are set. As a result, it cannot increase too much at once, nor can it decrease.

When the CPMR was first announced in May, the dollar exchange rate was set at Tk 117. Then, it was raised to Tk 120 taka last September.

Since then, dollars have been exchanged in banking channels at that rate. In the past, although the exchange rate was left to the market, the financial sector regulator would verbally inform banks about the dollar rate.

In that case, the central bank would allow them to buy and sell foreign currency after adding or subtracting the Tk 0.50 from the announced rate.

As the economy recovered from the COVID-19 pandemic, the demand for dollars began to increase from mid-2021. When Russia invaded Ukraine in February the following year, the price of goods in the international market increased, and the demand for dollars increased further. Since then, the exchange rate has continued to increase due to dollar shortages and instability in the dollar market.

Bangladesh entered into a loan agreement with the IMF in January 2022 to meet its foreign exchange needs. After entering into the loan agreement, the Foreign Exchange Dealers Association (BAFEDA) and the Association of Bankers, Bangladesh (ABB), an organisation of bank executives, started fixing the dollar rate from September 2022 as part of making the exchange rate more market-oriented in line with IMF’s conditions.

Then, in the monetary policy announcement last January, the central bank said that the responsibility was given to ABB and BAFEDA as the first step to making the exchange rate more market-oriented.

The Bangladesh Bank introduced the crawling peg system on the advice of the IMF last May to further push the exchange rate’s market orientation.

According to the plan of the loan agreement, 83.3 million SDRs (Special Drawing Rights, a supplementary foreign exchange reserve asset defined and maintained by the IMF) have been allocated for Bangladesh in the fourth tranche.

If Bangladesh receives the fourth tranche, it will receive a total of 352.3 million SDRs, which is 33 percent of the total loan amount.