Taka sees biggest fall against dollar

Bangladesh has faced its steepest currency devaluation in history, with the taka plummeting by Tk2.85 in a single day as the Bangladesh Bank started to sell the US dollar at an interbank rate of Tk108.85 from its foreign exchange reserves.

The central bank's move is aimed at implementing a unified and market-driven exchange rate regime, putting an end to multiple exchange rate mechanisms to alleviate pressure on the country's forex reserves and fulfilling one of the IMF's conditions to qualify for a $4.7 billion loan package approved in January.

However, the interbank rate is still managed as the Bangladesh Foreign Exchange Dealers Association (Bafeda) set the rate as per verbal instructions from the central bank.

Meanwhile, Bafeda in a circular on Monday raised the dollar rate for import settlement to Tk109.

Banks were directed to buy or sell dollars from the interbank market at a maximum rate of Tk109 during a meeting on 26 June, said Bafeda officials.

This instruction now extends to import settlements, as some banks are selling dollars for import payments at rates higher than Tk109.

According to Bafeda's latest decision, banks can buy remittance dollars at Tk108.50 and export proceeds at Tk107.50.

On Monday, the Bangladesh Bank sold $72 million at the interbank rate from its reserves to banks for foreign payments, thus raising the rate from Tk106.

Abu Farah Md Nasser, deputy governor of the central bank, said the dollars were sold from the reserves at the interbank rate to alleviate pressure on the foreign exchange reserves.

Over the past year, the country experienced a currency devaluation of Tk15.4, equivalent to 16%, from Tk93.45.

In the new monetary policy for the current fiscal year, the central bank announced its adoption of a unified and market-driven single exchange rate regime. This approach allows the exchange rate between the taka and the US dollar, or any other foreign currency, to be determined by market forces.

The policy statement aims to promote stability in the foreign exchange market, with the Bangladesh Bank no longer quoting specific rates for buying or selling foreign exchanges.

As part of its $4.7 billion dollar loan package, the International Monetary Fund (IMF) suggested that Bangladesh Bank implement a unified exchange rate to alleviate pressure on the reserve.

Zahid Hussain, a former lead economist of the World Bank's Dhaka office, told The Business Standard that the central bank has fulfilled the IMF's conditions by selling dollars at the interbank rate. This action aligns with the IMF's concept of unification, meeting their requirements, he added.

However, the economist noted that a market-based exchange rate has yet to be established.

He noted that the interbank market is currently not a functional market.

"Now this market is doing 1-2 million transactions per day. But, when there was no multiple exchange rate, the market was active, I saw 600 million transactions there in a single day. Hence, the interbank rate cannot be called the market rate," he said.

Zahid Hussain further explained that the interbank rate lacks a market-based approach due to the cap on the dollar buying rate from remittances and export proceeds.

He explained that banks can only make a maximum profit of Tk1 from the buying price of the dollar, resulting in a cap on dollar purchases that also applies to the interbank rate.

The central bank's recent step is considered a small move toward achieving a market-based exchange rate, he observed.

Zahid Hussain highlighted that the central bank will no longer incur losses when selling dollars due to the interbank rate.

"Until now, the central bank faced losses of Tk2-3 per dollar, as dollars were sold at a lower price than the interbank rate. But, this change will result in increased revenue for the government, derived from the central bank's profits," he noted.

In September last year, the Bangladesh Bank instructed Bafeda to set different rates for export, import, and remittance to control the rapid increase in dollar prices.

The multiple exchange rates were introduced as the dollar rate jumped to Tk115, causing chaos in the forex market. This approach proved to be effective in cooling down the dollar rate, but it led to a rapid depletion of the forex reserves as government organisations started purchasing dollars from the Bangladesh Bank at a lower rate.

The rate for selling dollars from the reserves was significantly lower than other market rates, prompting the Bangladesh Bank to initiate a faster devaluation to reduce the gap between the reserve selling rate and the market rate.

Following the implementation of multiple exchange rates, the country's foreign exchange reserves decreased to $29.87 billion in May 2023, down from $36.4 billion in September 2022. However, the reserves slightly increased to $31.15 billion in June after receiving budget support funds from international organisations.

In May, Moody's Investors Service downgraded Bangladesh's rating for the first time, citing heightened external vulnerability and liquidity risks amid a deterioration in foreign exchange reserves.

The multiple exchange rate regime was also taken into consideration in the country's downgrade, according to Moody's report.

Amid this situation, the Bangladesh Bank has now taken steps towards a market-driven exchange rate regime, resulting in the highest devaluation of the taka in a single day. This move comes at a time when high inflation has significantly impacted people's lives.

Prior to the introduction of multiple exchange rates, there was only one exchange rate that served as a reference rate. Later, the rate used by the Bangladesh Bank for selling dollars from reserves became the new reference rate.