Taka Floats Freely

Introduction of free floating Stops leakages and brings foreign financing.

Bangladesh Bank formally introduced fully floated exchange rate,removing the last obstacle getting the third and fourth installments of the IMF credit package. The decision is greeted with cautious optimism. However, many are waiting to see how the market will behave next week.

Fully floated exchange rate will reduce the incidence of illicit financial flow. From now onwards, unofficial rate will be much higher than the official rate as Taka is aligning to its true value, increasing the cost of sending money abroad clandestinely. Another reason is that it will prevent leakeges in the development projects that depend heavily on imported materials. When value of Taka drops, the cost of import rises and part of the money identified for siphoning off will get reduced. Less booty from the projects in case of frequent depreciation of Taka in a given year. Perhaps this is the reason Taka had been pegged at a certain value for a long time.

The 90-day long 30% tariff on Chines goods gives Yuan some advantages for further depreciation in this period. Instead of 145% depreciation in the worst case, this 30% depreciation seems a much more acceptable bet though inflationary pressure may spread. Given the nature of Chinese govt, they can deal with it. Meanwhile, we have to be contended with the 10% depreciation during this time provided that we have the right market conditions to do so. The spot exchange rate shows that Taka has already depreciated. Next week if dollar becomes stronger it will be depreciated even more. That is indeed a good news.

Though Bangladesh's credit rating deteriorated, foreign banks may encourage to bring more USD from abroad to widen their operations/ coverage here. Few years ago, a great part of their operating profit came from selling USD. Though the USD they bring may be small compared to remittances and export earnings ,this USD will greatly help lending credit to local investors and SMEs.

Despite the accompanying challenges, the free floating of Taka opens the possibility of thwarting the abuse of public fund. It also opens the possibility of foreign financing of local projects through operations of foreign banks.