Staff Reporter :
Bangladesh witnessed its most significant currency devaluation in history, with the Bangladesh Bank raising the dollar price to Tk117 from Tk110 through the implementation of the crawling peg exchange rate mechanism.
In a move aimed at stabilizing currency fluctuations, the central bank announced a new mid-rate of Tk117 for buying and selling dollars, marking a substantial shift in exchange rate policy.
Over the past two years, the taka has depreciated by 36 percent against the dollar, with the exchange rate climbing from Tk86.45 to Tk117.
This drastic depreciation has been attributed to several factors by experts.
According to analysts, the central bank’s decision to devalue the local currency at an accelerated pace serves two primary purposes.
Firstly, it aims to alleviate pressure on dollar reserves by moderating demand through higher exchange rates.
Secondly, the move is part of efforts to establish a unified and transparent exchange rate system.
The introduction of the crawling peg exchange rate system is a notable departure from the conventional fixed exchange rate model. Under this system, the currency is allowed to fluctuate within a predetermined band of rates, combining elements of both fixed and floating exchange rate regimes to enhance flexibility and stability.
The new system allows the exchange rate for limited fluctuations within a predefined range. It falls between the floating and fixed exchange rates.
“Under this system, a crawling peg mid rate (CPMR) has been set at Tk 117.00 per US dollar with immediate effect,” it noted.
The circular further said the scheduled banks can purchase and sell US dollars freely around the CPMR with their customers and in interbank deals.
While announcing the monetary policy for the second half of the current fiscal in January, the central bank disclosed its intention for introduction of the crawling peg method to determine the currency exchange rate.
On 5 May, Bangladesh Bank Governor Abdur Rouf Talukder said the central bank will adopt a market-based interest rate and apply a crawling peg system to fix the foreign exchange rate.
He said the central bank is working with prominent economists and bankers to prepare a contractionary monetary policy measure to curb inflation and restore macroeconomic stability.
Earlier on 2 April, the World Bank had said the crawling peg would need to be a market-clearing exchange rate mechanism that reduces the gap between the formal and informal exchange rates.
“This would help rebuild external buffers by attracting remittances through formal channels, making informal channels less attractive, and reducing the financial account deficit by expanding trade credit and other forms of external financing,” it said in its latest Bangladesh Development Update report.
Meanwhile, the International Monetary Fund has been advocating for a market-based dollar rate.
The IMF imposed several conditions against the $4.7 billion loan facility over a three-and-a-half-year period in January 2023. Bangladesh has received two instalments of the loan by fulfilling almost all the conditions except the reserve.