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In a major move to stabilise the foreign exchange market, the Bangladesh Bank (BB) has established a $500 million intervention fund, as part of its ongoing transition toward a more flexible exchange rate regime—a key condition under the International Monetary Fund’s (IMF) $4.7 billion loan programme.

The formation of the fund was officially confirmed in the central bank’s Monetary Policy Review 2024–25, released yesterday.

During negotiations for the fourth and fifth tranches of the IMF loan in April and May, BB committed to creating the fund to ensure smoother transition dynamics as the country moves away from a managed exchange rate system.

A senior BB official, speaking on condition of anonymity, explained that the fund will be governed by specific IMF criteria. “There will be no restrictions on BB’s dollar purchases,” the official noted. “However, dollar sales from the fund must comply with pre-defined conditions.”

Controlled Intervention Within a Market-Led Framework

Under the updated framework, BB retains the authority to intervene in the market, though within the size limitations of the newly formed fund. This marks a significant shift from previous years, when unrestricted dollar sales were used to maintain exchange rate stability.

The central bank emphasized that the transition to a flexible exchange rate will be market-driven, with limited interventions aimed at managing excessive volatility. This approach is expected to enhance export competitiveness, attract foreign investment, and support broader macroeconomic stability.

However, BB cautioned that the success of the new regime hinges on effective communication, timely execution, and continuous monitoring of both domestic and global economic conditions.

From Tight Control to Gradual Liberalisation

The central bank has already begun loosening controls to foster a market-responsive environment. In a notable regulatory shift, BB repealed the Tk 1 interbank spread cap, previously imposed on authorised dealers (ADs). Banks can now freely negotiate forex rates with clients and other dealers, aligning pricing more closely with market conditions.

This marks a continuation of the reform path that began with the rollout of the Crawling Peg Mid Rate (CPMR) in May 2024, pegged to a currency basket and aligned with the Real Effective Exchange Rate (REER) index. Initially set at Tk 117 per US dollar, the CPMR was revised to Tk 119 from January 1 this year, with a ±2.5% trading band to allow greater flexibility.

FX Reserve Pressures Drive Policy Shift

Bangladesh’s foreign exchange reserves have come under pressure in recent years due to sustained interventions. Net dollar sales by BB reached $7.4 billion in FY22, $13.4 billion in FY23, and $9.4 billion in FY24. These interventions, though critical in containing volatility, significantly eroded reserves and prompted a strategic pivot toward a more sustainable exchange rate regime.

To counter recent appreciation pressures—which risk undermining remittance inflows and export competitiveness—BB has recently purchased around $484 million from banks, reversing its earlier interventionist stance.

A Historical Pivot

Bangladesh maintained a fixed exchange rate from independence until 2003, followed by a managed float. With the current reforms, the country is now deepening its commitment to a flexible, market-oriented system, in line with global best practices and IMF guidance.

The newly created $500 million stabilisation fund marks a key step in this journey, offering the central bank a limited yet strategic tool to manage volatility while preserving market integrity.

As BB moves forward with exchange rate liberalisation, stakeholders—especially exporters, remitters, and financial institutions—will be watching closely to assess how the evolving framework balances flexibility with stability.