Policy persistence and dollar crisis: A dire outlook for 2024

There is a need for a change in the government's policy regarding the local currency – the taka – and its exchange rate with the dollar. Or else, the ongoing instability in the dollar market will persist into the new year unless decisive actions are taken.

A market-based determination of the dollar rate is necessary in 2024. The current trend is causing hardships for small business owners who are compelled to spend more, sometimes up to Tk126-128 per dollar. 

In contrast, influential traders, including those associated with banks, are benefiting from lower dollar prices. For example, a Chattogram-based business group is purchasing dollars at a reduced rate established by Bangladesh Foreign Exchange Dealers Association (BAFEDA). 

This phenomenon calls for a market-driven exchange rate to address such disparities and prevent volatility. According to central bank laws, BAFEDA lacks the authority to set the dollar price. Such actions contribute to market instability and there should be a reevaluation of the central bank's role in this regard.

Representational image. Photo: Reuters

To mitigate the looming dollar crisis, I recommend halting the sale of dollars from reserves and determining the dollar rate based on demand and supply. Failure to implement these measures could exacerbate the situation in 2024.

But solely relying on market forces will not resolve the existing issues. The government needs to leave all interest rates, including lending rates, to market dynamics and reduce the money supply to curb dollar demand. Coordinated decision-making, including increasing interest rates and decreasing money supply, is crucial to avoiding a significant rise in the dollar exchange rate.

Restructuring foreign loans in the upcoming year will alleviate payment pressures. 

In terms of economic stability, it is important to increase exports and remittances. A stable exchange rate is vital for boosting remittances and attracting foreign direct investment. The government should focus on macroeconomic stability, control inflation, and initiate financial sector reforms, while also ensuring compliance with IMF-prescribed reserve limits.

TBS Staff Correspondent interviewed the author.