Crawling peg exchange rate needed to rebuild reserve: World Bank

The crawling peg would need to be a market-clearing exchange rate mechanism that reduces the gap between the formal and informal exchange rates, said the World Bank.

"This would help rebuild external buffers by attracting remittances through formal channels, making informal channels less attractive, and reducing the financial account deficit by expanding trade credit and other forms of external financing," said the World Bank in its latest Bangladesh Development Update report published today (2 April).

At present, the official exchange rate is Tk110 per dollar, while the unofficial rate is above Tk115-120.

From January to June 2024, the Bangladesh Bank (BB)'s Monetary Policy Statements (MPS) indicated it is considering adopting a crawling peg system.

However, the timeline for implementation and a technical methodology have not been announced, said the report.

The World Bank report suggested that exchange rate reforms are urgently needed to rebuild the external buffers.

"The reform would also help ensure sufficient foreign exchange liquidity, essential for fulfilling debt service and other external payment commitments.

"Significant downside risks to the outlook stem from delayed implementation of external and financial sector reforms. Delays in exchange rate reforms can result in continued depletion of international reserves to critically low levels," according to the report.

Failure to make timely adjustments could result in the persistence of arbitrage opportunities and reduced foreign currency inflows through official channels, thereby perpetuating import restrictions and input shortages, reads the report. 

The World Bank report also said inadequate supply of natural gas during the peak season and the inability to import sufficient LNG due to foreign exchange shortages can disrupt industrial production and investment.

"Gross foreign exchange reserves have declined sharply over the past year, reaching $20.8 billion in February 2024. Implementing a sustainable exchange rate policy is key to stemming the significant.