Bangladesh Bank now plans to establish a stabilisation fund within its gross foreign -exchange reserves to forestall any volatility on the forex market.
The move comes amid rising concerns over exchange- rate fluctuations that have put pressure on import costs, inflation, and overall stability in the economy.
The proposed fund, estimated to range between $1.0 billion and $1.5 billion, will be deployed as needed to support banks in financing essential imports, particularly during periods of liquidity stress.
At present, banks primarily source foreign exchange from the open market or aggregators when they do not have adequate funds-a practice that often leads to an artificial hike in the value of the U.S. dollar, further destabilising the market.
Unlike ad-hoc interventions, the stabilisation fund will function as a structured mechanism, engaging in both buying and selling operations to smooth out excessive volatility.
Its design is expected to be similar to the existing Export Development Fund (EDF), which provides concessional financing to exporters.
However, while the EDF is tailored for trade financing, the new stabilization fund will be dedicated to broader forex -market interventions.
A central banker told the FE that once a bank faces shortage of foreign exchange, the central bank will provide support.
"Our aim is to provide the funds so that the banks do not have to buy the dollars at higher rates."
However, the Bangladesh Bank will establish the fund only after ensuring that foreign -exchange reserves remain sufficient to cover at least five months' import costs.
To support the effective implementation of this initiative, the regulator has already drafted a comprehensive strategy paper outlining its foreign-exchange -intervention framework.
The plan aligns with the country's recent transition to a crawling-peg exchange -rate system with a designated band, a shift aimed at ensuring greater flexibility while preventing erratic currency swings.
The central bank has also prepared a guideline for determining a spot reference exchange rate on the forex market.
This guideline will define the regulatory framework under which the Bangladesh Bank will administer exchange- rate policies, ensuring greater transparency and predictability in currency management.
Economists and industry insiders believe that a well-managed stabilisation fund could help contain speculative pressure on the Bangladeshi taka, reduce excessive reliance on market-driven rate adjustments, and provide a cushion against external shocks. However, questions remain about the fund's replenishment strategy and whether it will be sufficient to counteract prolonged foreign -exchange market instability.
Dr. M. Masrur Reaz, chairman and CEO of the Policy Exchange Bangladesh, welcomes this as a good move as it will not hit the net foreign- exchange reserves. "It may fight the volatility on the foreign market," he says. He further says: "This will be easier to monitor while ensuring its transparency."
In the meantime, the Bangladesh Bank is adopting a pegged exchange- rate system, where the exchange rate remains fixed in the short term but is periodically adjusted to reflect supply- and -demand pressures.
As part of this approach, the central bank now publishes the foreign-exchange-market spot exchange rate (Reference Rate in USD/BDT) twice daily. On February 27, 2025, the published rate (effective until 5:00 PM) stood at 121.9690.
jasimharoon@yahoo.com
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