Bangladesh Bank on Wednesday devalued the local currency significantly to Tk 117 against each US dollar as it introduced the much-talked-about Crawling Peg Exchange Rate System for buying and selling dollars.
The official dollar rate, which was set by the Bangladesh Foreign Exchange Dealers Association and the Association of Bankers, Bangladesh, was Tk 110 each. Banks were trading dollars at Tk 115–116 each, while the rate was around Tk 118 in the open market.
After the declaration, the dollar price may increase significantly in the market.
The exchange rate was Tk 94.7 in July 2022 and Tk 84.8 in July 2021.
According to the circular, ‘Under this system, a Crawling Peg Mid Rate has been set at Taka 117 per US dollar with immediate effect.’
‘Scheduled banks may purchase and sell US dollars freely around the CPMR with their customers and in interbank deals,’ it said.
BB officials said that a maximum of Tk 1 can be added or deducted from the mid-price of Tk 117.
As a condition for a $4.7 billion loan to Bangladesh, the International Monetary Fund had advised setting the exchange rate of the foreign currency at a flexible rate.
The IMF wanted the Bangladesh Bank to follow a market-based approach to determining the exchange rate.
The impact of the sharp rise in the dollar rate has been felt across various sectors of the economy, with businesses facing higher import costs and challenges sourcing foreign currency.
The higher import costs are often passed on to consumers in the form of higher prices for goods and services, which economists fear can erode their purchasing power and reduce consumer spending.
Bangladesh, like many other countries, has foreign debt denominated in US dollars. As the taka depreciates, it will take more taka to repay the same amount of foreign debt in dollars.
It can lead to higher debt repayment obligations for the government and businesses, putting further strain on their finances, economists said.
The ongoing dollar crisis is attributed to various factors, including a significant gap between supply and demand for dollars in the country.
The depletion of foreign exchange reserves, poor inflows of remittances, and low export earnings are contributing to the imbalance in the foreign exchange market.
The dominance of the informal ‘hundi’ market, where unofficial currency trading occurs, also plays a role in exacerbating the crisis, according to economists.
To stabilize the foreign exchange market, the central bank has been selling dollars to commercial banks, with more than $32.8 billion sold over the past 34 months.
This included $11.67 billion allocated to banks in July-April of FY24, $13.5 billion in FY23, and $7.62 billion in FY22.
The dollar sales had the unintended consequence of reducing the foreign reserves of the BB, while also mopping up the local currency, which created another problem – a liquidity crisis in the banking sector.
As a result, foreign currency reserves, according to International Monetary Fund guidelines, dropped to $19.9 billion on May 2.
