BB forms $500m forex intervention fund

The Bangladesh Bank (BB) has formed a $500 million fund to contain erratic movements in the foreign exchange market, as the country moves towards a more flexible exchange rate regime in line with International Monetary Fund (IMF) conditions.

The formation of the fund was disclosed in the Monetary Policy Review 2024-25, released yesterday.

During discussions over the fourth and fifth tranches of the IMF loan programme in April and May, BB assured the multilateral lender that it would form the fund as part of the conditions for transitioning to a flexible exchange rate regime.

Preferring anonymity, a central bank official said the fund will be used according to IMF guidelines.

"In buying dollars by the BB, this fund will have no relation," said the official. "But, in the case of selling dollars, there will be some specific conditions."

While the central bank faces no restriction in buying dollars from the market, sales will be capped at the size of the fund. The official added that the IMF has outlined specific criteria under which BB can sell dollars.

According to the policy review, Bangladesh is transitioning towards a flexible exchange rate system, where the market will play a greater role in determining the value of the taka.

The transition is expected to improve export competitiveness by aligning exchange rates with market realities, while also making the country more attractive to foreign investors and supporting broader industrial growth.

Referring to the stabilisation fund, BB says the success of this policy, however, will depend on effective communication, swift implementation, and regular monitoring of both domestic and international economic developments.

The review said that by promoting transparency and adopting a more market-driven approach, Bangladesh hopes to integrate more seamlessly with the global economy and support long-term growth.

To counter the recent appreciation of the local currency against the dollar, a trend that could dissuade remitters and exporters, the central bank has recently bought around $484 million from banks.

In contrast, BB frequently sold dollars during the peak of the Covid-19 pandemic to stabilise the exchange rate.

Over FY22, FY23 and FY24, net foreign currency sales reached $7.4 billion, $13.4 billion and $9.4 billion, respectively, reflecting increased intervention efforts to support the taka.

This approach, however, contributed to a decline in foreign exchange reserves, prompting the authorities to gradually allow the taka to depreciate.

In a further step towards exchange rate liberalisation, the central bank has repealed the previous circular that imposed a Tk 1 spread limit.

This rule required authorised dealers (ADs) to maintain uniformity in their buy and sell rates across all transactions for a given business day.

Under the revised framework, ADs are now permitted to negotiate rates freely with both clients and other dealers.

The policy review recalls that Bangladesh maintained a fixed exchange rate from independence until May 30, 2003, with occasional adjustments to preserve export competitiveness.

A floating exchange rate was adopted on May 31, 2003, allowing market forces to determine the value of the taka.

To manage excessive volatility, BB has retained the option of intervening in the market by buying or selling dollars when deemed necessary.

Until April 2022, the exchange rate was largely stable at Tk 86.45 per US dollar, thanks to active intervention by the central bank.

But recognising that the overvalued taka was not sustainable, BB permitted gradual depreciation of 9.3 percent in FY22, 11.84 percent in FY23 and 10.14 percent in FY24.

To introduce greater flexibility, BB rolled out a crawling peg system on May 8 last year, pegged to a currency basket with a mid-rate aligned to the Real Effective Exchange Rate (REER) index. The Crawling Peg Mid Rate (CPMR) was set at Tk 117 per dollar, with trading permitted around that benchmark.

Initially, on May 9 last year, BB allowed a trading band of Tk 1 above and below the CPMR.

This was widened to 2.5 percent on either side from August 19 last year to allow more efficient market functioning and ease the transition towards a market-led exchange rate.

On December 30 last year, the BB governor announced that the CPMR would be revised upwards to Tk 119 per dollar, effective from January 1 of this year. The 2.5 percent band remained unchanged.