Reasons behind Bangladesh’s dollar crisis

Bangladesh is shifting towards a free-floating currency system by redirecting banks to obtain foreign exchange 

from the interbank market instead of receiving direct dollar sales from the central bank. This policy change aims to address the country's rapidly depleting forex reserves. Previously, the Bangladesh Bank (BB) sold $12.80 billion and bought $3.38 billion in the fiscal year 2023-2024, but has now reduced sales significantly, with $678 million sold in July and $170 million in August, while buying only $115 million.

In response to rising dollar prices, treasury heads of 47 banks have set a maximum exchange rate of Tk 120 per dollar for remittances, interbank transactions, and import payments. This decision follows concerns over unwarranted increases in dollar rates and aims to stabilize the forex market. Banks will adhere to this rate, monitor its implementation, and form a committee to oversee market movements. The move is also intended to address competition among banks that led to higher rates for remittances and imports. Treasury heads will meet regularly to ensure compliance and coordinate efforts.

Former Prime Minister Sheikh Hasina, who resigned amid a mass uprising and fled to India, left behind a foreign exchange reserve of $16.57 billion. The newly formed interim government, led by Nobel laureate Professor Muhammad Yunus, inherits this reserve as it begins its term.

 The country's reserves stand at $20.48 billion, according to the Bangladesh Bank report, following the IMF's BPM6 formula. In the same period last year, reserves were at $29.42 billion.  To prevent further depletion, Bangladesh Bank implemented a crawling peg system earlier this year, in line with IMF conditions. The USD exchange rate was initially set at Tk 117, but by Thursday, it had increased to Tk 120.

Bangladesh's taka has further depreciated, reaching up to Tk 120 per US dollar in interbank transactions, driven by a shortage of the US currency. The Bangladesh Bank recently increased flexibility in forex transactions, widening the crawling peg band from 1% to 2.5% on August 18, aiming to boost foreign currency inflows.

The recent introduction of a 'crawling peg' system allows banks to sell dollars at up to 2.5% above the intermediate rate of Tk 117, setting a maximum rate of Tk 120 for import settlements. During a meeting at Bangladesh Bank, the governor clarified this policy and emphasized the timely settlement of all foreign payments.