Crawling peg offers cushion against forex volatility

Exchange rates are seen almost stable by the central bank under crawling peg just introduced in Bangladesh and top bankers also say the system is helping heal the forex volatility.
They said the weighted average exchange rate remained "almost stable" since the introduction of the new system under a reform recipe that brusquely raised the US dollar value in exchange with the domestic currency.
Under crawling-peg exchange, the rate of currency exchange depreciates at a rate roughly equal to the inflation differentials between the country and its trading partners. The idea 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.
"The weighted average exchange rate on May 09, the first day of the new system in operation, was Tk 117.49 and at the end of May 14 it stood at Tk 117.45," said a senior central banker.
"This is almost stable," he told the FE correspondent about the official arithmetic of dollar-taka standings, although open market maintained a degree of unrest as yet.
On May 14, the lowest rate was recorded at Tk 117 and the highest at Tk 117.50, according to Bangladesh Bank's official data.
The exchange rates of taka for interbank and customer transactions are determined by the dealer banks, based on demand-supply interaction.
The central banker, however, cites reports of 'kerb' market remaining volatile, as before. "We found the kerb-market selling dollar at Tk 120/121."
There are media reports the dollar prices on the kerb market were up to Tk 125.
"We are expecting more stability in the coming weeks," said the central banker, who monitors the daily update on the dollar deals.
Letter of credit or LC opening is also now based on the rate as the interbank transaction is more active now.
"We can now source from interbank transactions, so LC opening is now being transacted at the market rate," says Syed Mahbubur Rahman, managing director and CEO of the Mutual Trust Bank or MTB.
He finds this new system of pegging so far good as "there is very narrow gap between formal market and informal market".
Emranul Huq, managing director and CEO of Dhaka Bank, says: "The importers are getting the dollar as they like on the market."
There is now availability of dollars in the market. "We earlier used to buy at more prices than the official rate from the remittance houses and other sources," he told the FE.
"Imports are now controlled "so there is hardly chance for a large hike in terms of taka-dollar exchange rate," Mr. Huq added.
The Bangladesh Bank (BB) announced some important monetary-policy measures on May 8, 2024, in an attempt to rein in inflation and improve the declining foreign-exchange reserves of the country.
This decision has been taken by the central bank prior to the release of the third tranche from the International Monetary Fund (IMF) under its ongoing support package of US$4.7 billion to Bangladesh.
The IMF had suggested market-based interest and exchange rates earlier, but the central bank shied away from adopting those measures until the situation eventually turned for the worse.

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