BB’s exchange rate framework incomplete: IMF

Although the authorities say the foreign exchange rate is now fully market-determined, the International Monetary Fund (IMF) has described the system as “incomplete”. 

“Foreign exchange intervention practices remained flawed,” the IMF said in its Article IV consultation report released yesterday.

According to the report, the Bangladesh Bank (BB) either did not announce intervention volumes or failed to adhere to those announced. Instead, the central bank decided actual purchases to keep the dollar-taka rate near a nearly flat, preferred level.

“As a result, the market exchange rate flexibility was constrained, with rates consistently below the band’s lower bound guided by the intervention rates,” the IMF said.

When the new system launched, market participants could freely quote the exchange rate. The official reference rate was set using actual market transactions, establishing a new mid-point for the exchange rate band. 

The rate was allowed to move within this band, which initially improved interbank liquidity and helped prices reflect supply and demand from mid-May to June 2025.

The multilateral lender said favourable conditions caused the taka to appreciate below the band’s lower limit in July. In response, the BB intervened, buying over $2 billion in foreign currency in the July-November period last year. 

However, the government told the IMF that since the launch of the new arrangement in May last year, the exchange rate has been fully market-determined, which has helped BB to add about $2 billion to FX reserves through interventions so far in FY26.

The IMF said the new exchange rate regime should be implemented fully, with greater flexibility within the band. Purchases during foreign exchange auctions should follow pre-announced volumes and not target the cut-off rate. 

The Fund said free quoting of the exchange rate should continue, as it is essential for allowing the market to adjust naturally. Past reliance on moral suasion or regulatory measures to maintain a “preferred” rate disrupted market functioning and price discovery.

The Fund said that interventions should follow best practices agreed under the IMF-supported programme. 

Otherwise, market participants could underestimate exchange rate risks, especially in calm market conditions, and take excessive short positions in foreign currency. 

“If market conditions deteriorate and foreign exchange liquidity tightens, BB’s commitment to flexibility may be tested, risking substantial foreign reserve losses if stability remains prioritised over adjustment,” it said.

The IMF also noted that implementing the new system has been challenging. 

In May 2024, Bangladesh Bank devalued the official rate from Tk 110 to Tk 117 per US dollar to align with the market, temporarily restoring a transparent interbank FX market. 

However, the market soon became shallow again as BB continued to use moral suasion, restricting free quoting and rate flexibility within the band.

Although foreign reserves have risen recently, the IMF said reserve coverage remains inadequate. The Fund considers a safe threshold to be 4.9 months of import cover, with a range of 4 to 6.2 months depending on reserve costs. 

The depletion of reserves and deterioration of import coverage since FY21 had raised concerns. The recent build-up in reserves, combined with more flexible rates and reduced interventions, provides “a temporary reprieve.” 

“Allowing a market-determined and more flexible exchange rate remains critical to rebuild foreign exchange reserves and should remain a near-term priority,” the IMF said.

Recent interventions have not always followed the crawling peg introduced in May 2025, the report added. 

By end-FY25, gross foreign exchange reserves covered about 3.6 months of imports, projected to exceed four months by FY27 under the programme, supported by greater exchange rate flexibility and aligned FX interventions. 

IMF said that over the medium term, policies to maintain flexibility, diversify exports, and attract FDI should help sustain adequate reserve coverage.

It said that the BB should ensure the proper implementation of the new exchange rate arrangement and continue reducing quasi-fiscal lending in foreign currency to maintain reserve sustainability.

Regarding foreign direct investment (FDI), the IMF said flows remain critically low compared with other developing countries. Recent unrest may limit any near-term increase until after the elections. Targeted measures, including through Export Processing Zones (EPZs), have seen limited success because of macroeconomic uncertainty and a weak investment climate.

The IMF also assessed the broader external sector. The country’s external position in FY25 was moderately weaker than medium-term fundamentals would suggest. 

Running moderate current account deficits is consistent with the country’s per capita income, growth prospects, and development needs. The current account was broadly balanced in FY25, aided by a recovery in exports, record-high remittances, and still subdued imports.

Meanwhile, the financial account remained relatively stable, with slightly higher trade credit outflows and amortisations offset by lower banking sector outflows. 

Stronger exports and remittances, together with lower capital outflows, helped accumulate foreign reserves in FY25, the IMF said.