Safeguarding Taka in A Floating Regime: Hard Choices, Smart Moves

 

Prescriptions are vital for a patient’s recovery. They provide direction, prevent complications, and guide the body back to health. In the realm of governance and economic management, the same logic applies. Rules, frameworks, and compliance are not constraints - they are preconditions for stability and sustained growth. Yet, governance also raises fundamental questions: Can good governance thrive under a controlled system? Is control synonymous with limited freedom? The answer lies not in absolutes but in balance. Control is useful when it sets the stage for discipline - but stifling when it suffocates innovation and initiative.

Liberalization, one of the hallmarks of a market-driven economy, promises efficiency and progress. It replaces administrative diktats with market signals. It allows demand and supply to shape outcomes. Economic agents - businesses, consumers, governments - compete in a framework where survival depends on performance. Ideally, this competition fosters innovation and weeds out inefficiency. But the reality is more nuanced. Markets are not always perfect or free from distortions. They are often influenced, sometimes manipulated, and rarely inclusive. In many cases, large players dominate, and smaller actors struggle to survive. Textbook ideals meet real-world imperfections.

Borrowers, whether individuals or nations, must comply with the conditions of their lenders. These conditions are meant to ensure that loans are used productively and repaid responsibly. Bangladesh, like many developing countries, is both a growing economy and a frequent borrower. It borrows from domestic and international sources to bridge the financing gaps in its development and external accounts. And, as the country integrates further into global markets, it faces new challenges - especially in managing its balance of payments and maintaining currency stability.

In 2023, Bangladesh entered a critical phase in its economic journey. Faced with dwindling foreign exchange reserves, a widening current account deficit, and mounting inflationary pressures - partly triggered by global disruptions like the Russia-Ukraine conflict - the country turned to the International Monetary Fund (IMF) for support. The IMF responded with a 4.7 billion US dollar support package under a mix of facilities: the Extended Credit Facility (ECF), the Extended Fund Facility (EFF), and the newly introduced Resilience and Sustainability Facility (RSF).

The RSF, introduced to help countries tackle long-term climate vulnerabilities, marked a new era of IMF engagement. Bangladesh became one of the first countries to access this facility. Of the total loan package, 3.3 billion US dollar was earmarked under the ECF and EFF for immediate balance of payments support, while 1.4 billion US dollar was allocated under the RSF to promote climate-resilient development.

But the assistance came with conditions. The IMF prescribed a comprehensive reform package: widening the tax base, phasing out energy subsidies, enhancing governance in state-owned banks, improving public financial management, strengthening anti-corruption measures, and - crucially - making the exchange rate more flexible and market-driven.

Bangladesh initially received 689 million US dollar after the IMF board approved the package in early 2023. The second tranche of approximately 1.15 billion US dollar followed in late 2024 and early 2025, based on progress against the reform commitments. However, delays in meeting some targets - particularly in financial governance and tax administration - slowed the release of the next set of funds.

To unlock the combined disbursement of the third and fourth tranches, totaling 1.33 billion US dollar, the Government had to take bold steps. The most significant of these was the decision to abandon the multiple exchange rate regime and shift to a market-based floating exchange rate system in May 2025. This was a historic policy shift. The floating regime, in principle, allows Taka’s value to reflect economic fundamentals. If more dollars flow in through exports, remittances, and investments, Taka appreciates. If demand for dollars outpaces supply - due to import payments, external debt obligations, or capital flight - Taka depreciates. In this system, flexibility becomes both a strength and a source of vulnerability.

Surprisingly, since the adoption of the floating regime, Taka has remained relatively stable. This is unexpected, given the history of volatility in developing economies following such transitions. Why has this stability emerged?

The key lies in improved external sector performance. Exports have outpaced imports in recent months, aided by favorable global demand and effective policy support. More importantly, remittance inflows have surged. The fiscal year is expected to close with remittances hitting a record exceeding 30 billion US dollar - a historic high for Bangladesh. Several factors have contributed: improved incentives for using formal channels, enforcement against informal money transfer systems (hundi), and a narrowing gap between official and unofficial exchange rates. With fewer incentives to use the shadow market, remitters have returned to banks.

However, this equilibrium is fragile. If remittance inflows falter or if illicit capital outflows rise again, the market could tip. In a floating system, such imbalances will quickly translate into depreciation pressure on Taka. And depreciation, for Bangladesh, is no minor issue. As a largely import-dependent economy, a weaker Taka translates into higher prices for essentials - fuel, food, medicines, and raw materials. Inflationary consequences follow almost immediately.

This raises a question that critics often pose: why did Bangladesh adopt a floating exchange rate system knowing its risks? The answer is both strategic and circumstantial. The IMF made it a prerequisite for continued support. But beyond that, the fixed or controlled regime was becoming unsustainable. It led to an artificial valuation of Taka, which discouraged remittance through formal channels, distorted the trade balance, and eroded foreign exchange reserves. A managed float, or dirty float, might offer a middle path, but without significant buffers, the country had to bite the bullet and let the market lead.

However, simply adopting a floating rate is not enough. Safeguarding Taka value now requires proactive management. First, we need to keep foreign exchange inflows healthy. That means protecting the growth of exports and remittances. While exports take time to ramp up, remittances can respond faster to policy shifts. Keeping the shadow market inactive, offering market-reflective exchange rates, and easing transaction processes will help sustain high remittance inflows.

Second, in times of shortfall, we must rely on external borrowing. Government-to-government loans, multilateral assistance, and bank-to-bank borrowing are all essential instruments. In this regard, the country’s banking sector must improve its global credibility. Many foreign banks offer credit lines to Bangladeshi banks. However, access depends on due diligence, payment history, and institutional strength. Unfortunately, delays in payments and poor governance have dented the credibility of some banks, raising the cost of credit and limiting access.

Here, the central bank has a pivotal role to play. It must enforce payment discipline, support the development of credit profiles, and strengthen oversight mechanisms. A healthy and credible banking sector will unlock cheaper international financing and reduce reliance on costly alternatives.

Third, the central bank must also manage expectations. In a floating regime, markets watch every move. Even if interventions are rare, the central bank must be prepared to step in during episodes of excessive volatility. This doesn’t contradict the floating principle - it reinforces confidence.

Finally, banking sector reforms cannot be ignored. The problem of non-performing loans, especially in state-owned banks, remains a ticking time bomb. Governance lapses, politically influenced lending, and weak risk assessment practices continue to erode public trust. While initial steps have been taken to set up an asset management framework and improve oversight, more radical changes are needed. Professional management, stricter regulation, and transparency must become the norm.

Transitioning to a floating exchange rate system was not a gamble - it was a necessity. But floating does not mean drifting. It demands strategy, discipline, and constant course correction. The value of Taka will now be determined by market forces - but those forces are not beyond our influence. Through sound policy, institutional reform, and proactive management, Bangladesh can preserve the value of its currency and steer its economy toward resilience and competitiveness. Taka may float - but with the right navigation, it would not sink.

 
Mehdi Rahman works in the development sector. He also writes
on business phenomena and
 monetary issues.