Bangladesh Bank Governor Dr Ahsan H Mansur on Wednesday announced that the country will receive $3.5 billion in total as loans next month from various lenders, such as the World Bank, Asian Development Bank and the International Monetary Fund (IMF.)
Joining a press conference virtually that was held in the central bank headquarters, he also announced a market-based exchange rate with immediate effect to meet conditions of the IMF.
Of the total loan, the IMF will release $1.3 billion.
On the market-exchange rate, the governor expressed hope that it would be around the existing rate due to available dollar liquidity.
Banks were already informed about market-based exchange rates at today's meeting, said the governor.
He also said the central bank will intervene in case of large foreign payments to keep the rate stable.
There will be a band exchange rate which will not be disclosed, said the governor.
Earlier, an IMF staff mission led by Chris Papageorgiou visited Dhaka on April 6-17 to conduct a combined third and fourth review of Bangladesh's economic reform program under the Extended Fund Facility (EFF), Extended Credit Facility (ECF), and the Resilience and Sustainability Facility (RSF).
According to meeting sources, the global lender insisted on implementing a truly flexible exchange rate -- one that went beyond minor adjustments and eliminated multiple exchange rate windows.
The central bank, however, insisted on being restrained, citing risks of inflationary shocks and political pushback.
So far, Bangladesh has received three installments totalling $2.3 billion from the IMF’s $4.7 billion loan package.
What is a band exchange rate
In April last, the IMF had reached an EFF agreement with Argentina that had similar conditions, including the band exchange rate, which the lender believed would allow the Argentine government to loosen its grip on the peso.
The South American nation's central bank then announced it would undo a fixed currency peg, letting the peso freely fluctuate within a moving band.
A central bank sets a range ("band") within which the exchange rate is allowed to move.
If the exchange rate moves outside the band, the central bank will intervene in the foreign exchange market by buying or selling its own currency to bring the rate back within the band.
This system provides some flexibility and allows for adjustments in the currency's value, but it also helps to maintain stability and prevent large, sudden shifts in the exchange rate.
China's Yuan (renminbi) is a prime example of a currency traded within a band.
This system is also known as a "managed float" because the central bank actively manages the exchange rate within the band rather than letting it float freely.