June 23, 2024
Bangladesh Bank
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Bangladesh Bank

Bangladesh Bank, the central bank of Bangladesh, has lately presented a ‘market-based’ US dollar exchange amount. This new scheme, which contains a rate cap, is a noteworthy shift from the previous command and aims to bring superior transparency and competence to foreign exchange dealings.

The New Exchange Rate System

On July 4th, 2023, Bangladesh Bank announced the introduction of a ‘market-based’ US dollar exchange rate. The central bank is now selling dollars to commercial banks at Tk 108.85 per dollar, an increase of Tk 2.85 from the previous rate. This new rate is part of a broader shift towards a floating exchange rate regime, which Bangladesh adopted on May 30, 2003. 

The Floating Exchange Rate Regime

A floating exchange rate regime permits the value of exchange to be determined by supply and demand in the foreign exchange marketplace. While the benefits of such a system are famous, its suitability for emergent countries like Bangladesh is still a subject of debate. However, the Bangladesh Bank trusts that this new market-driven exchange rate regime will deliver “greater transparency and competence in foreign exchange dealings,” benefiting industries, individuals, and the budget.

The Role of the Rate Cap

In addition to the new exchange rate, Bangladesh Bank has also introduced a rate cap. An interest percentage cap is fundamentally an insurance policy on a suspended rate. It pays out to the customer of the cap if the catalog rate upsurges above a predetermined verge, known as the “strike rate”. In the context of Bangladesh’s new exchange degree system, the amount cap sets a boundary on the supreme rate for the first part of the new financial year 2023–24.

Impact on the Economy

Variations in the exchange rate can have a noteworthy impact on the budget. A depreciation of the local currency can make exportations more modest abroad and introductions less competitive locally, thereby increasing demand for domestically produced properties. As such, the new exchange rate scheme could hypothetically influence skill and financial currents between Bangladesh and the rest of the ecosphere.

Challenges and Controversies

Despite the latent benefits, the new exchange rate organization has not been without argument. The foreign exchange market remains unstable, and banks are selling US dollars at dissimilar rates to clients. Some dealers have raised queries about whether the exchange rate is truly market-based or merely reflects the partialities of the banks. 

Conclusion

The overview of a ‘market-based’ US dollar exchange rate with a rate cap signifies a noteworthy change in Bangladesh’s financial policy. While it has the potential for greater slide and efficiency, its operation and impact on the economy will necessarily be closely checked. As Bangladesh steers this new economic countryside, the central bank’s choices will play a crucial role in shaping the nation’s future.

Summary:

Bangladesh Bank has introduced a ‘market-oriented’ US dollar exchange rate, marking a significant shift from its previous system towards a floating exchange rate regime, which allows the value of the exchange rate to be determined by supply and demand.

As part of this new approach, Bangladesh Bank is selling dollars to commercial banks at an increased rate. Alongside this, a rate cap has been implemented, which sets a limit on the maximum rate for the first half of the new fiscal year 2023–24. While this new system promises greater transparency and efficiency, it has also sparked debate regarding its operation and potential impact on the economy. As the country navigates this new economic terrain, the central bank’s decisions will be crucial in shaping the nation’s future.

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