Tuesday, May 7, 2024
Year : 2, Issue : 19
Generation Desk, Dhaka: The crawling peg system for the taka is a delayed and, perhaps, inadequate response to the bleeding of forex reserves. Some economists suggest the central bank should go beyond this formula and open the exchange rate to market forces to stop the continuous erosion of reserves. Either way, exporters and remitters will celebrate more flexibility in the exchange rate.
Since becoming an independent country in 1971, Bangladesh managed currency volatility through a series of fixed exchange rates.
The crawling peg, a system of exchange rate adjustments, falls between two extremes: the fixed rate and the floating or market-based rate. The key difference is that a crawling peg allows for limited fluctuations within a predefined range, while a fixed exchange rate has almost no flexibility.
The new system is primed to bring more flexibility to the exchange rate regime by loosening the central bank’s grip on the taka, a key prescription from the International Monetary Fund. “The crawling peg is just a formula. If the dollar-taka exchange rate based on the crawling peg comes close to the informal market rate, it may yield some benefits because that will discourage dollar flows into the informal market,” said Zahid Hussain, former lead economist of the World Bank’s Dhaka office.
Hussain’s observation reflects wider concerns over the deterioration in external buffers with official reserves slipping below $20 billion, less than half their historic peak in 2021. Since mid-2022, the taka has been depreciating against the dollar, a trend primarily attributed to a balance of payments deficit leading to a significant reduction in reserves. The weakening of the taka has fuelled domestic inflation as the cost of imports has risen.
The crawling peg system would be linked to a carefully selected set of currencies and operate within a predefined exchange rate band. This strategy is aimed at tempering unusual fluctuations in the currency’s value.
Before the buzz over the crawling peg was in the air, the central bank in July 2023 introduced the market-based exchange rate. That was only on paper.
According to an IMF assessment, the exchange rate not being market-based was the reason behind the deficit in the financial account, which widened to $8.36 billion in the July-February period from $2.32 billion a year earlier. As a result, much of the export proceeds did not return home to Bangladesh, while remittances were still flowing through unofficial channels. Bangladesh is navigating a combination of risks — elevated inflation and slowing economic growth. The crawling peg system, if introduced, will hopefully bring cheers to exporters and remitters.
