Bangladesh needs more time for fully flexible exchange rate, says IMF

Bangladesh is currently going through a transition towards a fully flexible exchange rate regime, and the process may take time, said the International Monetary Fund (IMF).

But both the authorities and the market must brace for the change, said the multilateral lender at a virtual press briefing yesterday.

Chris Papageorgiou, IMF mission chief for Bangladesh, said the country had entered a transitional phase as part of its economic reform commitments under the IMF credit programme.

In May, the Bangladesh Bank introduced a more flexible exchange rate system to meet conditions tied to the IMF's $5.5 billion loan package. However, an unofficial band continues to run in the foreign currency market.

"The design of this crawling peg with a band aims to provide the flexibility that is needed right now," said Papageorgiou.

Chris Papageorgiou, IMF mission chief for Bangladesh, said the country entered a transitional phase as part of its economic reform commitments under the IMF credit programme

The IMF arranged the briefing following the Executive Board's completion of the combined third and fourth reviews of Bangladesh's reform programme.

The support comes under three arrangements — the Extended Fund Facility, the Extended Credit Facility, and the Resilience and Sustainability Facility.

Asked about the new exchange rate mechanism, Papageorgiou described the crawling peg with a band as a stopgap measure.

"It is not a fully flexible exchange rate; it is a system designed to gradually achieve full flexibility in the future," he said.

"The reason for designing the reform this way is that we recognise Bangladesh is at a stage in its development where a transitional regime is beneficial."

He said the end goal is to achieve a fully flexible exchange rate as the economy continues to mature.

"Of course, all of this needs to be part of a strategy that we will support, but which must ultimately be owned by the Bangladesh Bank," he added.

Regarding inflation, Papageorgiou said taming rising prices had been a key focus since the beginning of the IMF programme, as consumer inflation had remained stubbornly high.

"We saw food inflation reach 14.5 percent and overall inflation near 12 percent.

There is now some encouraging news that inflation is on a downward trend."

Headline inflation has come down to 9 percent, but he cautioned that this was still far from comfortable.

"We are not satisfied with such levels of inflation," he said, welcoming the tight monetary policy by the authorities and efforts to bring inflation within the 5 to 6 percent target range.

"We must remain vigilant because other shocks could affect the economy — for example, a potential oil shock stemming from the war in the Middle East."

While such external shocks may or may not arise, Papageorgiou said that recent reforms, particularly around the exchange rate, had created some cushion for the economy.

"Unfortunately, supply-side issues such as food inflation cannot be controlled by monetary policy tools. But the good news is that food inflation, too, has started to decline," he said.

Addressing concerns in the banking and financial sectors, Ivo Krznar, IMF deputy mission chief for Bangladesh, called for reforms that would strengthen transparency, corporate governance, and legal protections.

"These are all steps in the right direction," he said.

"I would say now is the right time to maintain momentum on reforms, and one of the critical steps is for the central bank and Ministry of Finance to agree on a government-wide strategy."

Krznar identified three core elements of such a strategy: a full diagnostic of the banking sector, including a system-wide assessment of capital requirements; an evaluation of fiscal support; and a plan to deal with the weak banks.

Jayendu De, IMF resident representative in Bangladesh, also took part in the press conference, which was moderated by Randa Elnagar, director of the IMF Communications Department.