Taka devaluation continues as Bangladesh moves closer to unified exchange rate

Bangladesh is stepping towards achieving a unified exchange rate in accordance with the guidelines set by the International Monetary Fund (IMF). 

As part of this initiative, two key participants – the Bangladesh Foreign Exchange Dealers Association, and the Association of Bankers, Bangladesh (ABB) in the foreign exchange market – increased the dollar rate for exporters on Monday to align it with the two other rates – remittances and import payments.

In a meeting yesterday, the two organisations agreed to raise the dollar rate for exporters by Tk0.50, bringing it to Tk107.50. The rate for remitters, however, remains unchanged at Tk108.50 per US dollar. The exchange rate for importers will be the average of these two rates.

Selim RF Hussain, chairman of the ABB and managing director of Brac Bank, told TBS that the central bank aims to achieve a unified exchange rate by the third quarter of this year, as per the conditions set by the IMF. To achieve that, the value of the taka has been further devalued.

The exchange rate is being adjusted based on the market rate, while exporters are also benefiting from higher returns on their proceeds.

Under the existing regulations, banks are required to sell dollars by adding a maximum of Tk1 to their average cost of purchasing the greenback.

At yesterday's meeting, a new rule was established stating that the interbank dollar rate should not exceed Tk109. If a bank's average cost of purchasing a dollar is Tk107.50, it can charge customers a maximum of Tk108.50. However, if the average cost of purchasing a dollar is Tk108.70, the bank can charge a maximum of Tk109 when selling it. 

Shahidullah Azim, vice president of the Bangladesh Garment Manufacturers and Exporters Association, expressed his approval of this measure, saying, "This is a positive step that aligns with our commitment to gradually adjust the dollar price."

However, he also mentioned that if the adjustment was based on the market price, it would be more advantageous for all exporters. The existing gap may result in smaller exporters missing out on the benefits, he noted.

Since the onset of the Russia-Ukraine war in February 2022, Bangladesh has experienced volatility in the exchange rate due to a surge in commodity prices in global markets. Within a few months, the exchange rate of the US dollar rose from Tk86 to cross the Tk100-mark, causing significant chaos and crisis in the forex market. 

At that time, the responsibility of managing the exchange rates was handed over to banks and foreign exchange dealers by the Bangladesh Bank.

On 12 September of the previous year, the Bangladesh Foreign Exchange Dealers' Association and the Association of Bankers, Bangladesh set the dollar price for remitters at Tk108 and for exporters at Tk99. 

Since then, until 16 June of this year, the associations of the bankers and foreign exchange dealers have increased the dollar price for exporters 11 times and changed the exchange rate for remittance five times.

A managing director of a private commercial bank said as banks have to purchase dollars from exporters at a higher rate, they will sell them to importers at higher prices, which may lead to an increase in the prices of imported goods.

Bangladesh introduced a floating or market-based exchange rate system in 2003, but in practice, it was rarely driven by market forces. Instead, the central bank had control over the exchange rate. When there was an excess of dollars, the Bangladesh Bank purchased them, and when there was a shortage, it sold them to the market.

The achievement of the monetary policy objectives for FY24 largely depends on various factors, including the effectiveness of the new policy initiatives, exchange rate stability, a surplus in the financial account, and a pause in the policy rate hike race among major economies.

A competitive and market-based floating, flexible and unified exchange rate regime is expected to be established for all international transactions within the third quarter of 2023. The market-determined unified exchange rate is expected to gradually close the gap between formal and informal markets and help improve external balance and international reserves, ensuring exchange rate stability.