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DOLLAR PRICE SPIRAL

IMF pledge holds BB back from intervening

REJAUL KARIM BYRON
A commitment made to International Monetary Fund keeps Bangladesh Bank (BB) from interfering in the foreign exchange market, though the dollar price is skyrocketing everyday.
The price of greenback in the inter-bank market climbed further yesterday to Tk 65.20 from Wednesday's Tk 65 and for import to Tk 67.10, rising by Tk 0.10 in a day.
The foreign exchange market
had been more or less stable for more than a year and a half since floating of the exchange rate in May 2003. But, in early 2005, "The exchange rate system was tested under adverse conditions for the first time since the float," observed an IMF review mission in its report last month.
The mission said the unexpected pressures were created by a combination of factors including the initial impact of the elimination of MFA quotas, a surge in international oil
prices and a huge increase in postflood food imports.
According to the report, "Initially, the authorities allowed the taka to depreciate within 'acceptable' bounds (by 5 percent) to absorb the pressure. However, as the external shock persisted and the foreign exchange market came under continuous pressure, the authorities used suasion to avoid depreciation of the taka."
The suasion mentioned by the
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mission refers to the central bank's informal direction in March to the commercial banks to keep the highest price of dollar at Tk 63.70, which did help steady the dollar price for a few weeks.
The IMF report also pointed out that as the nationalised commercial banks (NCBs) were allowed to exceed the limits on their net open positions, a two-tier pricing developed between the NCBs and the private banks emerged, with a 0.6 percent spread at its peak.
Against this backdrop, the IMF urged the government to adhere to market-based principles in the foreign exchange market, not to control the exchange rate and to allow the exchange rate to reflect the market forces.
In response, BB Deputy Governor Allah Malik Kazemi in a letter dated June 26 to IMF Managing Director Rodrigo de Rato committed not to interfere in the foreign exchange market.
"Bangladesh remains committed to maintaining a market based flexible exchange rate system," he affirmed and said, "Relying on market mechanism to adjust to exchange market pressures, Bangladesh Bank is not now resorting to, and does not intend to resort to suasion for this purpose."
Kazemi also informed the IMF MD that the long-persisting divergence between the exchange rates quoted by the NCBs and other banks has been narrowed down. He assured, "Bangladesh Bank is keeping continuous watch to prevent tendency to re-emergence of any significant divergence and will ensure that this does not exceed 2 percent."
The binding commitment makes the BB unable to take any direct measure to halt the ongoing dollar price hike. But, the government is greatly worried over the situation, as it would further worsen the current inflationary spiral.
Sources said following the first-ever meeting of the high-powered fiscal co-ordination council early this week, where the dollar price spiral featured prominently, the BB took some indirect measures to stabilise the forex market.
Sources said on the central bank's informal instructions, Bangladesh Foreign Exchange Dealers Association (Bafeda) and the Association of Bankers, Bangladesh (ABB) held meetings on the issue and took a number of decisions to rein in price spiral.
ABB President Aminuzzaman said they would adopt a special mechanism so that taka cannot depreciate further. But he did not disclose any details of the mechanism.
However, the managing director of a private bank said, "The treasury managers of all banks will sit together in a day or two and set the buying and selling rates of dollar, which would be acceptable to all."
But some bankers are sceptical about the effectiveness of the move. It will take a week or two after fixation of the exchange rates of dollar to find out the efficacy.