The interbank exchange rate in Bangladesh has surged to Tk 109.5 per dollar amid an ongoing dollar crisis, depreciation of taka by about 25 per cent over the past two years. The current exchange rate has climbed from Tk 94.7 in July 2022 and Tk 84.8 in July 2021.
The impact of the sharp decline in dollar rate has been felt across various sectors of the economy, with businesses facing higher import costs and challenges in sourcing foreign currency. The higher import costs are often passed on to consumers in the form of higher prices for goods and services, which 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 takes 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.
The ongoing dollar crisis is attributed to various factors, including a significant gap between the supply of and the demand for dollars in the country.
The depletion of foreign exchange reserves, poor inflow of remittances and 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.
To stabilise the foreign exchange market, Bangladesh Bank (BB) has sold about $22 billion in the last 25 months, including $13.5 billion to banks in financial year 2022-23 and $7.62 billion in FY22.
Additionally, BB sold $1.14 billion in the first month of FY24, highlighting the high demand for dollars and the limited supply in the market. The dollar sales had unintended consequence of reducing the foreign reserve of the BB, while also mopping up local currency, which created another problem - a liquidity crisis in the banking sector.
The foreign currency reserve in Bangladesh dropped to $29.6 billion on July 26 from $41.82 billion in June 2022.
According to Ahsan H Mansur, executive director of Policy Research Institute of Bangladesh, a gradual devaluation of the dollar would have less severe consequences for the economy compared with sudden and sharp fluctuations in the exchange rate.
He emphasised that implementing restrictions on the dollar rate would not be a beneficial approach. Currently, the Bangladesh Foreign Exchange Dealers' Association fixes the dollar rate for transactions, which creates a restrictive system, he noted.
While the dollar rate has been unified, it is not completely free-floating, leading to a high demand for dollars and prompting people to seek alternative options like the kerb market, he said.
BB officials said that the government and the Bangladesh Bank had implemented measures to curb imports and control the outflow of foreign currency, which contributed to the stabilisation of the foreign exchange market to some extent.
However, Mansur warned that keeping import levels low for an extended period can negatively impact the domestic manufacturing industry. Many businesses rely on imports for raw materials and capital goods and limiting their access to foreign currency can hinder production and growth.
A large deviation between formal and informal rates can divert remittance inflow from the official to the hundi channel, leading to potential under-invoicing of imports or informal capital outflows, financial market analysts said.
The Bangladesh Bank will soon adopt a unified and market-driven single exchange rate regime, allowing the exchange rate between the taka and the dollar or any other foreign currency to be determined by market forces.
The move is aimed at bringing stability to the currency market and reducing the pressure on foreign reserves.
