Market-Based exchange rate: Will the dollar appreciate or depreciate?

The exchange rate has been made market-based. Bangladesh Bank governor Ahsan H Mansur has said that from now on, the price of the US dollar will be determined by the market. However, he expressed hope that the dollar rate will remain close to its current level. But will it really?

Let’s look back to 2022. At that time, the dollar was priced at Tk 86. Now, it stands at Tk 122. This means the taka has depreciated by 41.86 per cent over three years, while the dollar has appreciated by nearly 42 per cent. Many people bought and hoarded dollars during that time, and they are now owners of significant wealth.

Now, many are wondering—will the dollar price surge again? Is there any benefit in holding onto dollars? Could Bangladesh follow a path like Sri Lanka, where the dollar rate shot up by nearly 80 per cent within a week of adopting a market-based exchange rate in 2022?

The pace of the economy is currently slow. There is a severe slump in investment—neither domestic nor foreign investment is coming in.

Imports remain sluggish. Despite concerns, export earnings have shown some growth. Over the past 15 years, individuals who had accumulated vast wealth—legally or illegally—have already laundered their money and, in many cases, left the country.

Those who are newly earning illicit income have not yet begun to move their funds abroad. As a result, the demand for hundi (informal money transfers) is currently low. Likewise, the demand for dollars is also relatively low. Therefore, it is assumed that even though the exchange rate has been made market-based, the dollar price is unlikely to rise sharply for now. In this sense, Bangladesh might benefit from the side effects of a sluggish economy.

Bangladesh has made several changes to its exchange rate regime over the years, each with varied consequences. Some notable events include:
22 January 1972

On 22 January 1972, the newly formed central bank, Bangladesh Bank, its first governor AN Hamidullah had given an interview to a news agency. This had marked the central bank’s first official statement on the exchange rate. He had said, “Bangladesh would join the Sterling area. The exchange rate would be Tk 18.9677 per 1 pound. The value of the Indian and Bangladeshi currencies would be equivalent.”

Even during the Pakistan era, the intermediary currency was the British pound sterling. After independence, that link was retained. The exchange rate was set in alignment with the Indian rupee. However, the pound's rate was about 33 per cent higher than during the Pakistan period, meaning Bangladesh had effectively devalued its currency by 33 per cent right at the beginning.

At that time, the US dollar was becoming a dominant currency in the global economy. Starting 23 January 1972, the pound's exchange rate was floated against the dollar. The dollar’s rate in Bangladesh was Tk 7.27027. Pegging the Bangladeshi currency to the British pound sterling was known as a 'peg'.

The first major shift in the exchange rate took place on 17 May 1975. On that day, the taka was devalued by 58.16 per cent. As a result, the pound's official rate rose to Tk 30, up from the previous Tk 18.9677—even though in the open market the pound was worth nearly twice as much. This decision was made based on recommendations from the World Bank and the International Monetary Fund (IMF). To date, this remains the largest devaluation in Bangladesh’s history.

At that time, the government also allowed the creation of a secondary, market-based currency exchange market alongside the official rate. This led to the emergence of a kerb (black) market, where the pound traded at nearly double the official rate.

On 11 January 1983, the US dollar was chosen as the intermediary currency in place of the British pound. This was a significant decision, as by that time the pound had largely lost its importance in the global economy. During the 1980s, the majority of Bangladesh’s import-export trade was conducted in US dollars. At that time, Bangladesh was heavily reliant on foreign aid. External loans, remittances, and most foreign earnings were coming in US dollars. Internationally, the dollar had also emerged as the dominant currency or global reserve currency. As a result, Bangladesh was compelled to move away from the pound and adopt the dollar as its intermediary currency.

The first major step towards liberalising the exchange rate in Bangladesh was taken on 17 July 1993. Prior to that, the country did not have a functioning foreign exchange market. Bangladesh Bank used to allocate foreign currency directly to users based on demand. On that day, it was announced that the Bangladeshi currency would be made convertible for current account transactions. Initially, this was supposed to take effect from 1 October 1993, but due to a lack of preparation, it was implemented from 20 October instead. This marked the partial liberalisation of the country’s foreign exchange market. However, capital account transactions were still not made convertible at that time.

A circular issued by Bangladesh Bank on 19 October said, "The taka has been made convertible for current account transactions. This decision will take immediate effect. However, the convertibility of the taka on current account will not apply to expenses related to education up to the secondary level, unauthorised courses, and family expenses of Bangladeshi expatriates.

According to the decision, foreign banks, insurance companies, and other financial institutions will no longer require prior approval from Bangladesh Bank to remit their profits abroad. Bangladesh Bank is liberalising exchange rate controls in line with the government's goal of achieving sustainable and rapid economic growth through an outward-looking approach and market-based policies."

Making the taka convertible for current account transactions was essentially a condition set by the International Monetary Fund (IMF). After meeting this requirement, Bangladesh was granted Article VIII status under the IMF’s Articles of Agreement on 11 April 1994.

This status represents a major economic commitment for any member country, symbolising the adoption of open and market-oriented policies in international financial transactions. By receiving this status, Bangladesh pledged to the IMF that it would maintain full convertibility of its currency for current account transactions. It also committed not to impose restrictions or discriminatory practices on the use of foreign currency in legitimate international transactions such as trade, travel, education, profit repatriation, and remittances. As a result, obtaining loans from the IMF became easier for Bangladesh.

The next major reform in the exchange rate system came on 31 May 2003. On that day, it was announced that the determination of the dollar’s value would be handed over to the market. Until then, Bangladesh had followed an adjustable peg system, under which authorised dealers could quote exchange rates within a specific range set by Bangladesh Bank. This was not a fully market-based exchange rate but a managed floating system, where Bangladesh Bank controlled the supply of foreign currency to influence the exchange rate. At the time, the central bank was a dominant player in the foreign exchange market, making it relatively easy for it to regulate the supply of US dollars.

Amid a severe economic crisis under the previous Awami League government, Bangladesh was forced to seek a loan from the IMF. The $4.7 billion loan programme began on 30 January 2023, though negotiations had started six months earlier. During this period, Bangladesh Bank made a highly unusual decision regarding the exchange rate.

On 11 September 2022, following Bangladesh Bank’s recommendation, the Bangladesh Foreign Exchange Dealers’ Association (BAFEDA) and the Association of Bankers, Bangladesh (ABB) held a joint meeting and decided they would set the exchange rate for the dollar. Starting from 12 September 2022, all authorised dealer banks were instructed to buy and sell dollars at rates set by this mechanism.

This led to the emergence of four different exchange rates in the market—one each for imports, exports, remittances, and exchange houses. Meanwhile, the open market rate was even higher. The result was chaos in the exchange rate system, with a high degree of inconsistency and inefficiency.

The next major step was the introduction of a "crawling peg" system on 8 May 2024. Literally, a crawling peg means “the dollar rate can crawl but not jump” within a controlled range. A central rate was set around Tk 117, with transactions allowed up to a maximum of Tk 118. This system is called the "crawling peg mid-rate", meaning there’s no fixed upper or lower limit, but there is a central benchmark that must be followed. In essence, it’s a form of controlled flexibility—freedom within a framework.

The most recent and significant reform in exchange rate policy took place on 14 May 2024. On this day, the exchange rate system was made even more market-based. While still a form of crawling peg, the allowed margin for price fluctuation was widened. Under the previous rules, the exchange rate could only move 2.5 per cent from the reference rate, and the selling price for dollars could vary by up to Tk 1. This limit was expanded.

According to a circular issued by Bangladesh Bank, "From now on, authorised dealer (AD) branches of banks may determine exchange rates through mutual agreement with their clients and counterparties. Each AD branch must report its foreign exchange transactions to Bangladesh Bank twice daily. Any transaction exceeding $100,000 must be reported by 11:30am. Additionally, all foreign exchange transaction data between 11:00am and 5:00pm must be submitted to Bangladesh Bank by 5:30pm.

Bangladesh Bank will also publish a daily reference rate based on these transaction reports, available through its official website."
Furthermore, Bangladesh Bank stated that strict monitoring would be in place to prevent abnormal spikes in the dollar rate. A $500 million stabilisation fund has also been created from the reserves to meet urgent dollar demand when needed.

On 7 March 2022, Sri Lanka’s central bank decided to make the rupee market-based or adopt a floating exchange rate system. Facing a severe economic crisis, the country made this decision primarily to qualify for an IMF loan. However, the immediate impact was dramatic. Within a few weeks, the rupee's value against the US dollar plummeted from 200 to over 360—an almost 80 per cent devaluation.

As a result, both import costs and inflation soared. What followed is widely known: mass dissatisfaction, protests, and violence eventually led to the fall of the government. It's not that Sri Lanka went bankrupt solely because it floated its currency—the crisis had already begun. This move simply intensified the severity of the situation.

Since then, however, Sri Lanka has made considerable progress in stabilising its economy. In March 2023, it received a $2.9 billion loan package from the IMF. Its foreign exchange reserves have increased, and inflation has come under control.

The last major change to Bangladesh’s exchange rate system occurred on 31 May 2003, when the taka was officially declared a “floating currency.” In other words, the responsibility of setting the dollar’s exchange rate was handed over to the market. However, this new system was not fully market-based; it was a managed floating system. Prior to this, Bangladesh Bank would publicly announce devaluations or revaluations of the taka. From independence until 2003, the central bank had devalued the taka 86 times and revalued it 6 times.

In reality, by 2003, the shift toward a more market-based exchange rate was made with a good amount of preparation. M Saifur Rahman was the finance minister at the time. The US dollar wasn’t particularly strong, export performance was good, and state-owned banks held a decent amount of foreign currency. As a result, the exchange rate didn’t experience any major volatility.

Before the announcement, the mid-market rate for buying and selling US dollars was Tk 57.90. The new policy allowed authorised dealers to trade dollars at any rate between Tk 57.40 and 58.40. To maintain stability after the float, Bangladesh Bank reduced the money supply, which caused the interbank call money rate to spike to as high as 35 per cent for a few days. It later normalised.

On the day the exchange rate was floated, Bangladesh's foreign currency reserves stood at $1.895 billion. Within a week, this rose to over $2 billion.

At a press conference last Wednesday, Bangladesh Bank governor Ahsan H Mansur said, "Now is a good time to make the dollar exchange rate market-based. Remittance inflows are strong, reserves are stable, and the balance of payments has improved. By June, another $3.5 billion is expected to come in, which will further boost reserves. So this is the right time to allow the market to determine the exchange rate."

Overall, Bangladesh is heading toward a significant shift in its exchange rate policy. However, it cannot yet be said that the dollar is fully market-determined—Bangladesh Bank will continue to play a role. According to IMF data, 36 countries around the world have fully floating exchange rates. Most countries, however, follow some form of managed float or crawling peg system. Some still maintain fixed exchange rate regimes.

Bangladesh will follow a form of controlled or managed exchange rate. What happens in the future will depend on several factors—such as whether economic growth picks up or demand for dollars increases. It remains to be seen how the exchange rate responds, or how Bangladesh Bank will intervene if there’s a supply shortfall relative to demand.

For now, Bangladesh has created a $500 million currency intervention fund. Many countries—including India, Japan, South Korea, and Thailand—have similar funds. Moving forward, not only will this fund need to be expanded, but the government must also avoid risky decisions—such as using reserve funds to finance large infrastructure projects. Doing so would significantly reduce future economic risks