An overriding reality now prompts the central bank to discard the virtually derelict crawling-peg regime and consider a more flexible exchange-rate mechanism to bring stability in the overheated foreign-exchange market.
The Bangladesh Bank (BB) has now been working on the new system which is possibly to be implemented from January 2025, according to officials in the know.
Following recommendation from the International Monetary Fund (IMF) as part of a US$4.7-billion lending package to stabilise Bangladesh's macroeconomic situation, the banking regulator introduced the much-touted crawling-peg system for interim period before transiting into fully market-driven exchange rate since June 2024.
But 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 swapping 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 on the economic-financial front, expressed their dissatisfaction over the non-functioning of the peg.
Seeking anonymity, a BB official says they have been working to 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 foreign currencies, the American greenback in particular, to the BB daily and the central bank will make a reference rate based on the reporting on a regular basis.
"And it (reference rate) will be declared before starting the forex trade daily and will allow the banks to continue buy-sale operations," the central banker said.
In fact, the new exchange-rate mechanism comes at a time when the forex market has become extremely volatile with the exchange rate overshooting Tk 127 per dollar from just over Tk 123 couple of weeks ago.
In a regulatory step, the central bank had already asked 13 banks' managing directors to explain why they are offering unusual dollar rates in case of collecting remittances from foreign-exchange houses by Sunday (December 22).
Another BB official, who also preferred to be anonymous, told the FE that the new system is expected to be enforced on the market from upcoming January after getting approval from BB Governor Dr Ahsan H. Mansur, who on a foreign trip now.
Asked how the BB monitors the market if any player disturbs the market trading forex at much higher rate than the reference rate, the central banker said there would possibly be a band of rates, which will not be disclosed.
"If we see any bank cross the band, we will warn them," the BB official said, without giving any further detail regarding structure of the band.
Managing Director and Chief Executive Officer of Mutual Trust Bank (MTB) Syed Mahbubur Rahman terms the coinage of new mechanism "a good and timely move".
With the new system once implemented, the banks will feel comfort to trade foreign currencies freely. "I think this will help bring transparency in the market," says the experienced banker about the switch.
Contacted, former lead economist of World Bank's Dhaka office Dr Zahid Hussain also hails as a good one the decision to declare reference rate based on the actual prices of the US dollar the banks maintain.
But the noted economist airs his concern about undeclared band, saying: "It could create speculations to the market, which will dampen the spirit of post-crawling regime."
Mr Hussain, a key member of the whitepaper-drafting committee appointed by the post-uprising government, suggests the central bank can apply its regulatory card through selling and buying dollars on the market if anyone tries to create volatility.
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