Is the time right to float the Taka?

At the end of their mission on April 17, 2025, the visiting International Monetary Fund (IMF) delegates commented that "… greater exchange rate flexibility will support price competitiveness, rebuild foreign exchange reserve buffers, and strengthen the economy's resilience against external shocks." A leading English daily ran a headline the next day with the title "It's time to go for more flexible exchange rate: IMF."

This assessment has brought renewed attention to the long-debated question of taka flexibility. In this article, we discuss whether it is really the time for Bangladesh to embrace a flexible exchange rate.

For years, emerging economies have shown a "fear of floating" - claiming to have floating exchange rates while heavily stepping in to control currency markets and avoid volatility. Bangladesh has been no exception. This fear happened because when developing countries allowed currency flexibility, they repeatedly faced harsh consequences-rising import prices, growing foreign debt burdens, fleeing investors, and public anger often pushed central banks to step into currency markets even though they had officially promised not to.

In a perfect scenario, a government should have the authority to modify or rescind its decisions. For example, if a floating currency system is causing significant difficulties for nations, the government should be able to revert to a previous monetary arrangement without any obstruction. It's important to remember that the United States (US), which once advocated for free trade and played a pivotal role in establishing the World Trade Organization (WTO), is now seeking to hinder the organisation's effectiveness. The crucial question now is whether the country has the legal capability to withdraw from or significantly modify its international commitments.

Having said this, however, a unique convergence of global and domestic factors now creates an opportune moment to finally embrace a floating taka regime.  There is also a fear factor that often pushes policy makers against floating a weak currency. Here, we argue that three critical conditions make this an ideal time for Bangladesh to overcome its fear of floating and transition to a more flexible exchange rate system.

First, oil prices have stabilised at surprisingly moderate levels despite the ongoing Russia-Ukraine conflict and persistent tensions in the Middle East. With crude prices hovering around $60-70 per barrel, Bangladesh faces a rare window of opportunity. With imported fuel meeting 90 per cent of the country's total demand, annual import costs currently exceed $10 billion. Oil payments drain our foreign exchange reserves more than any other import. When global oil prices spike unexpectedly, our reserves deplete rapidly, forcing taka devaluation. However, today's stable oil prices reduce this risk of a balance of payments crisis.

The current oil price stability isn't just temporary-it's the beginning of a fundamental shift in global energy markets. We're witnessing the arrival of "peak oil demand" as electric vehicles become more common and renewable technologies expand worldwide. This global energy transition helps protect Bangladesh from the unanticipated oil price shocks that have repeatedly harmed its economy in the past. Yes, our growing economy will need significantly more energy in the coming years, but with oil prices stable around $60-70, we can manage these increasing needs without putting pressure on our foreign reserves. A floating taka would adjust to these gradual changes naturally, instead of forcing us into those painful emergency devaluations that typically occur when reserves become critically low.

Second, the US dollar is widely considered overvalued by 20 to 30 per cent against major global currencies. Years of fiscal stimulus by the Biden administration and investors seeking safety in US assets during global uncertainty have kept the dollar artificially strong in the past several years. However, with the breakout of trade war and the fact that the second Trump administration is overtly vying for a weaker dollar, it seems likely that the dollar will remain in the weaker zone in the coming years.

This creates favourable external conditions for Bangladesh to transition to a floating regime. When the dollar is already weakening, any natural depreciation of the taka would be less dramatic than during periods of dollar strength. Recall how Southeast Asian currencies collapsed when floating during a strong dollar era in 1997? During that crisis, currencies like the Thai baht and Indonesian rupiah lost over half their value in months, triggering corporate bankruptcies and social unrest as foreign-denominated debts became un-payable overnight. Bangladesh can avoid such trauma by timing its float during this dollar weakness cycle. The psychological impact of a floating taka would be far less severe when measured against an already declining benchmark currency.

Third, domestic market signals indicate the time is right. The gap between the official exchange rate and the black market (hundi) rate has narrowed to just 3-4 taka. This point was also emphasised by Mr Papageorgiou, who led the recent IMF mission to Bangladesh. This relatively small spread suggests the taka isn't severely misaligned from its market-determined value, unlike in many other emerging countries where parallel rates diverged dramatically from official ones. Furthermore, following the massive outflow of dollars during the previous Awami League administration, it appears that the black market demand for dollars has diminished considerably, at least for now. These conditions suggest that any initial adjustment shock would be manageable - more of a gentle recalibration than a dramatic plunge.

A floating taka would serve as a powerful disciplinary force for fiscal management. When governments can no longer hide behind artificial exchange rates, poor economic decisions quickly manifest in currency movements that citizens directly feel. This creates immediate accountability. Consider Argentina's experience in 2018, when President Macri's administration faced an immediate peso depreciation after attempting to finance a large fiscal deficit through external borrowing. The currency lost nearly 50 per cent of its value in a single year, revealing the true cost of fiscal expansion that had been masked by currency controls.

A floating taka would eliminate the distortions in asset prices that currently exist due to the gap between official and market-based exchange rates. Commercial real estate, imported industrial equipment, agricultural inputs, and technology imports all have prices that don't reflect their true economic costs under the current system. When the taka floats, these prices would adjust to their actual market values, helping direct investment toward truly productive sectors rather than those artificially favoured by exchange rate manipulation. This price discovery would improve resource allocation throughout Bangladesh's economy and eliminate excess profits from businesses exploiting the gap between official and black market rates.

Critics might argue that floating exchange rates would trigger uncontrolled capital flight. This concern misunderstands the available policy options. Bangladesh can adopt a middle-ground approach - allowing the taka to float while keeping specific capital controls that prevent excessive money leaving the country but still let the exchange rate respond to real economic factors. Countries such as Brazil and South Korea have shown this approach works, using floating exchange rates while simultaneously limiting foreign currency outflows based on economic needs or conditions. This hybrid approach would give Bangladesh greater exchange rate flexibility while still providing tools to manage potential market instability.

A floating exchange rate would strengthen Bangladesh's export competitiveness by allowing the taka to find its true market value, particularly benefiting the crucial garment sector through improved pricing power in global markets. Bangladesh cannot continue relying on artificially suppressed currency values to maintain export advantages-such "beggar-thy-neighbour" policies ultimately harm long-term economic development and trading relationships. This would stop the unnecessary spending of billions in foreign reserves to defend artificial exchange rates, freeing these resources for essential national needs like schools, hospitals, and roads. This will benefit citizens who frequently remit money to Bangladesh and discourage wealthy landowners from illegally transferring assets abroad to relocate to developed countries.

What about the implications for inflation? Research from countries with similar transitions demonstrates that proper monetary policy tools, rather than the exchange rate mechanism alone, are the key determinants of price stability. By eliminating market distortions and enabling rapid adaptation to changing global conditions, a floating taka would position Bangladesh's exports more favourably while preserving vital foreign currency reserves for genuine national priorities.

For ordinary citizens worried about the cost of imported goods, a floating taka might initially cause some price increases. However, this is far better than the alternative - maintaining an artificially strong currency that eventually requires sudden, dramatic devaluation. Sudden drops in currency value cause sharp price rises, just as Bangladesh saw in 2023-2024 when the weakening taka made everything more expensive.  However, a floating rate allows small and gradual changes over time instead of one big shock that hurts poor families the most. To avoid sudden shock from floating rates, the government can provide temporary fiscal support in taka to businesses importing specified essential products.

Needless to say, preparation is essential. The Bangladesh Bank should keep building foreign exchange reserves while preparing to upgrade to a floating regime, communicate clearly about the policy shift to manage expectations, and develop technical capacity to monitor markets and intervene selectively when needed to address disorderly conditions. An artificially strong currency depletes our reserves and encourages property purchases abroad by those planning to leave Bangladesh. While emigration is legal, it shouldn't drain our national reserves.

The combination of stable oil prices, a weakening dollar trend, and reduced black market distortions creates favourable conditions rarely seen simultaneously. Even if these trends reverse, the benefits of exchange rate flexibility would outweigh the risks of maintaining artificial rates. Moving to a more flexible exchange rate now would make Bangladesh's economy stronger, encourage better government spending, and help sustainable growth. Instead of fearing a floating currency, Bangladesh should see it as a step toward economic strength and greater control over its money. The time has come to trust our economy's basics and let the taka find its true value.In this regard, a 'foreign exchange intervention fund' is relevant to support this transition

Syed Abul Basher is an economist and researcher. syed.basher@gmail.com

AK Enamul Haque is an economist and a member of the Economic Research Group.  He is also the Director General of BIDS. akehaque@gmail.com