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Dhaka Tribune

IMF pushes for market-based exchange rate

They also asked if the strategies suggested by the IMF for reducing inflation has been effective in reducing the high rate of defaulted loans, as well as the progress of Smart interest rate policies in controlling inflation

Update : 16 Oct 2023, 09:55 PM

One of conditions for the International Monetary Fund's (IMF) $4.7 billion loan assistance is to make the exchange rate market-based i.e letting supply and demand control the rate. However, Bangladesh Bank has yet to implement this condition.

This issue was brought up during a meeting with bankers and the visiting IMF delegation prior to disbursing the second installment in December.

Will it be possible to implement a floating exchange rate by December? 

Bankers say this system may not be possible to implement until 2024. 

Before disbursing the second installment of the $4.7 billion loan assistance, the visiting IMF delegation spoke directly with banks for the first time. 

Traditionally, the IMF holds discussions with the government, ministries, departments, and regulatory bodies before and after loan negotiations. 

Governor Abdur Rouf Talukder, in announcing the last monetary policy, said the goal was to achieve a floating exchange rate by September. 

However, even though the deadline has passed, the exchange rate has yet to become fully market-oriented.

Selim RF Hussain, chairman of the Association of Bankers Bangladesh (ABB) and managing director and CEO of Brac Bank was present at the meeting.

“IMF representatives discussed various issues going on in the banking sector. Meanwhile, we told them that the process of market-oriented exchange rate is being implemented.” 

“We also told them that it will take more time to be fully market-oriented,” he added.

At the meeting on Sunday, they also asked if IMF’s strategies have been effective in reducing the high rate of defaulted loans and the potential role of SMART interest rate policies in controlling inflation.

The discussions included strategies to boost remittance inflow and address the practice of expatriates conducting transactions through the informal hundi market due to higher open market dollar rates compared to banks.

Types of exchange rate

There are three types of exchange rates; namely, Fixed Exchange Rate, Floating Exchange Rate, and Managed Floating Exchange Rate.

A fixed exchange rate system is when the exchange rate for the currency is fixed by the government. Thus, the government is responsible for maintaining the stability of the exchange rate. 

Under the floating exchange rate system, the exchange rate for the currency is fixed by the forces of demand and supply of different currencies in the foreign exchange market. This system is also called Flexible Exchange Rate or Free Exchange Rate. It is so because it is determined by the free play of supply and demand forces in the international money market.

The managed floating exchange rate is the combination of the fixed rate system (the managed part) and the flexible rate system (the floating part), thus, it is also called a Hybrid System. It refers to the system in which the foreign exchange rate is determined by the market forces and the central bank stabilizes the exchange rate in case of appreciation or depreciation of the domestic currency.

Now the way the exchange rate of the dollar is determined in Bangladesh is still a fixed exchange rate system, but Bangladesh Bank has given this responsibility to the Association of Bankers, Bangladesh (ABB) and Bangladesh Foreign Exchange Dealers' Association (BAFEDA) to determine the rate here.

They are in negotiations with Bangladesh Bank to determine buying and selling prices, thus eliminating multiple dollar rates.

IMF’s visit

The IMF delegation will hold a series of meetings with officials of more than a dozen ministries and government divisions until October 19.

The review mission will evaluate the success and failures in achieving the targets and set new ones for next December and June 2024.

The team is supposed to report to IMF's regional executive director Krishnamurthy, who will visit Dhaka on October 18th and seek an appointment with Prime Minister Sheikh Hasina.

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