The central bank is expected to issue a circular today (Tuesday) introducing a reference-centric exchange rate as a latest innovation to bring stability on the overheated foreign-exchange market, ending virtually an inefficacious crawling-peg experiment.
Bangladesh Bank (BB) is set to issue the circular on the more flexible exchange-rate mechanism today, sources at the country's central bank said Monday.
In the existing crawling-peg system, there is a middle rate along with a band and the commercial banks are instructed to trade the US dollar within the precincts of corridor. But, in the new system, there will be no official mid-rate and band to go by.
Under the latest system, the sources said, the central bank will publish Bangladesh foreign-exchange-market spot reference rate and the foreign-exchange dealers are to do their buy-sale operations centering round the reference rate set daily in tune with the previous average deals.
Seeking anonymity, a BB official said they will replace the existing crawling-peg regime with a more flexible exchange-rate system in the second step before allowing the exchange regime to break free from any intervention.
Under the new system, the official says, the commercial banks will be instructed to report actual rate of buying the greenback to the BB daily and the central bank will make a reference rate twice a day based on the reporting on a regular basis.
"We will make the reference rate based on weighted average exchange rate. There will be no mid-rate. Of course, there will be a band and we will not disclose it as part of our strategy to monitor market," the central banker told The Financial Express.
Before making final decision on the issuance of such circular, BB Governor Dr Ahsan H. Mansur sat for a meeting with managing directors and chief executive officers of 27 authorised dealer banks at the BB headquarters on the day.
In the consultation, the governor expressed his dissatisfaction over the recent volatility on the forex (foreign exchange) market at a time when the inflow of foreign currencies, the American greenback in particular, keeps rising noticeably, according to meeting-insiders.
The attendee bankers shared multiple factors, including the payment pressure over clearing government import overdue this month and the central bank's recent decision not to buy the dollar from the reserves. The governor was not satisfied fully.
The governor shared their move about the possible circular with the bank executives in the meeting and directed them to keep the exchange rate for remittance and export receipts same in order to avert punitive regulatory action.
In the meeting, the high-ups of the banking regulator unofficially asked the banks to keep the exchange rate within Tk 123 a dollar.
The crawling peg crawls on as a dysfunctional mechanism for months under exigencies of volatility on the forex market. To avert shocks stemming from un-crawled state of the system, the commercial banks pass by interbank or spot market and largely trade their precious dollars through byways like interbank swap and cross-currency transactions, especially dollar-euro transactions, where the crawling-peg-determined exchange rate is not applicable.
Even the IMF representatives, who recently visited Bangladesh to review the country's progress in meeting their conditions, set in a lending package, on the economic-financial front, expressed their dissatisfaction over the malfunctioning of the peg.
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