Smooth start for floating rate

It is encouraging for the economy that the first week following Bangladesh's transition to a market-driven floating currency rate went by without major instability. The taka traded at 122-123 against the dollar in the banking sector, a rate much in line with pre-transition levels. This indicates that the currency was not severely misaligned and that the timing of the transition was reasonable. Unlike the volatile experiences of other emerging economies where official and market rates diverged sharply when they transitioned, Bangladesh appears to have avoided significant initial disruption. While the move to embrace the floating regime may have been partly influenced by the need to meet IMF conditions for loan disbursements, the smooth adjustment confirms the practicality of the decision.

A floating currency rate, while offering flexibility, is not without its share of challenges and remains susceptible to market manipulation. Bangladesh Bank Governor Dr. Ahsan H. Mansur's recent warning against dollar hoarding at a roundtable discussion identifies this critical vulnerability, as deliberate withholding of foreign currency by aggregators could artificially inflate prices and disrupt market equilibrium. Such practices threaten to erode confidence in the new system as well. The Governor has also appealed to expatriate workers to refrain from delaying remittances in anticipation of further depreciation. Remittances serve as a lifeline for the economy and their steady flow is essential to maintaining exchange rate stability. For the floating system to work, all stakeholders including banks, financial institutions and individuals must resist short-term opportunism in favour of long-term macroeconomic stability.

Although the exchange rate is now officially governed by market forces, its sustainability is compromised by the country's inadequate foreign currency reserves. The current reserves of around $25 billion, though slightly improved from previous lows, are still insufficient to inspire durable market confidence. It is worth recalling that as recently as August 2021, the foreign exchange reserves stood at $48 billion, a figure that demonstrates both the capacity to accumulate reserves and the dramatic erosion that has occurred since. A realistic and strategic target should be to raise the existing reserves to $50 billion, a level that would provide over six months of import cover and serve as a buffer against external shocks such as global commodity price surges or supply chain disruptions. More importantly, it would give Bangladesh Bank the room to manage temporary volatility without having to fall back on restrictive interventions. A sizable reserve is what transforms a floating regime from an aspiration into a stable functioning system. However, building these reserves cannot happen automatically and requires deliberate policy actions. For example, this will require boosting remittances through official channels and ensuring timely repatriation of export earnings, among other measures.

Bangladesh's adoption of a floating exchange rate is undoubtedly a progressive step, a move that, from the standpoint of economic rationality, was bound to happen at some point. Given the current international conditions with declining fuel prices and falling costs of key commodities, the timing appears favourable. While the current reserve position is less than ideal, strong remittance inflows since August 2023 offer a foundation to build upon. This momentum must be maintained through consistent policy support. Moving forward, Bangladesh Bank should intervene only when absolutely necessary, such as natural disasters or large, unanticipated financial shocks. Furthermore, ensuring strong coordination between monetary and fiscal policies will be crucial to mitigating exchange rate risks. If managed prudently, this new chapter in Bangladesh's economic policy could mark a turning point toward greater economic stability and sustainable growth.