A much-vaunted monetary-policy mechanism called 'crawling peg' meant for determining exchange rate seemingly crawls back as regulator's presumption of inflation upturn intercepts its introduction.
Sources say the "crawling peg exchange rate policy" is not being introduced for the time being as such real exchange-rate regime may worsen the inflationary pressure on the economy.
There have been growing pleas for market-determined floating currency-exchange regime. The central bank also had earlier planned to introduce the new exchange-rate policy this March. The Governor of Bangladesh Bank (BB) also announced that it will be executed within this month.
Under crawling-peg exchange, the exchange rate depreciates at a rate roughly equal to the inflation differentials between the country and its trading partners. The idea of a crawling peg is to maintain the real exchange rate in the economy.
When any country experiences inflation above the rates of its trading partners, holding the exchange rate fixed would imply a steady loss in competitiveness. In order to avoid the widening deficits, many countries follow a crawling-peg exchange-rate policy.
People familiar with the matter at the central bank of Bangladesh told the FE that the crawling- peg system would be introduced instead of the existing managed exchange rate in July.
"Inflation remained too high and so once the crawling peg is introduced, the local taka needs to be depreciated further. And the prices of imported goods that enter the consumer-price index will go up," says one central banker about possible cascading impact.
He says the February-2024 inflation decreased to some extent. "We will observe the inflationary trends few more months before the introduction of the crawling-peg system".
The February CPI inflation stood at 9.67 per cent, down by 0.19 percentage points from a month earlier (January 2024), according to Bangladesh Bureau of Statistics or BBS. But the urban inflation in February 2024 was recorded up at 9.88 per cent.
In the meantime, the International Monetary Fund or IMF TA mission will sit today (Wednesday) with the Bangladesh Bank officials for consultation on their lending-package terms. And this may be one agenda there.
Sources at the central bank have said they will further study the system and there is also a need for the green signal from government coordination council, the highest policymaking team on the fiscal side.
Such an issue came up following volatility on the forex market since the beginning of the war in Ukraine in 2022. Holding fixed the exchange rate erodes competitiveness.
However, Bangladesh has planned to introduce the crawling peg under REER model (real effective exchange rate), an index of a weighted average of Bangladesh's currency in relation to a basket of trading partners' currencies.
The REER index increased from 105.71 in January 2024 to 106.54 in February 2024. When the index adjusts with local-currency taka, US dollar prices will go up from the existing market rate of Tk 110.
It means the taka needs to be depreciated further to introduce the crawling-peg exchange-rate system in Bangladesh.
Economists, however, appear divided over the introduction of the new exchange-rate system in the country. Some argue there is no need to introduce such an intermediate system but rather go for straight market-based exchange rate while some argue this is necessary before going for the market-based operations.
Dr Zahid Hussain told the FE that the goal of crawling peg in Bangladesh is to facilitate market-based forex market. Now the dollar prices both in the formal and informal markets remained stable and the remittance inflow also encouraging.
"I think this is the right time to go for direct market-based foreign-exchange operation. The crawling peg is an intermediate measure to stabilize the forex market and raise the competitiveness."
Dr Masrur Reaz, CEO and chairman of Policy Exchange of Bangladesh, told the FE writer that this is the systematic way and the central bank should do it immediately.
"Right now direct market-based exchange rate is not possible."
He thinks a crawling peg introduction may be needed for further depreciation of the local currency. "If we hold the exchange rate fixed, the ultimate pressure will be big."
He refers to the experiences of 2022 at a time when the depreciation was around 31 per cent as the central bank held fixed the rate in the previous years.
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