Published: 09:04 AM, 09 December 2025
How One Official Dollar Can Do the Work of Two
In a country where the foreign exchange market operates with dual realities—the official channel and the shadow market—every policy move that restores confidence in the formal system can have an outsized impact. Many assume that when one US dollar enters or exits through the banking system, its effect is confined to that single dollar’s worth of liquidity. But the impact is far greater. When we examine how the official and shadow markets interact, it becomes evident that a single dollar supplied through the official route can improve the combined balance of the foreign exchange system by the equivalent of two dollars. This simple arithmetic hides deep implications for monetary management, exchange rate stability, and the fight against informal currency trading.
To understand why this happens, one should first recognize how the shadow market functions. It is not a formal institution or a separate pool of foreign currency, but a chain of private transactions that distort legitimate market dynamics. When official supply restricts short of genuine demand—be it for imports, education, medical travel, or business services—remitters inevitably turn to informal dealers. Conversely, those who earn foreign currency are tempted to sell their proceeds through these informal networks, where the rate is higher and the transaction faster. Thus, the shadow market thrives on two simultaneous imbalances: excessive demand from buyers who cannot access banks, and excessive supply from sellers seeking a better rate. The gap between the two—say Tk 120 per US dollar officially and Tk 150 in the shadow market—represents not only a pricing distortion but also a leakage of trust from the formal financial system. Each dollar that migrates to this informal ecosystem weakens transparency, erodes the credibility of the central bank, and makes the currency system more volatile.
An example can be cited. The central bank facilitates an outward payment of one US dollar through the official channel. At first glance, it appears to be a simple outflow—Tk 120 exchanged through a bank to settle a legitimate foreign obligation. But in behavioral and systemic terms, that one-dollar release performs two corrective actions at once. First, it directly reduces demand in the shadow market, because the remitter who needed that dollar no longer has to purchase it from an unofficial dealer at Tk 150. Second, it indirectly strengthens supply in the official market, as foreign currency earners perceive that the system is functioning efficiently and that scarcity premiums are shrinking. When confidence rises, they are more likely to repatriate funds through banks. When demand falls and confidence grows, the incentive to operate outside the formal system diminishes. In short, one official dollar simultaneously subtracts pressure from the shadow market and adds strength to the official one.
This dual effect can be illustrated through a basic mathematical analogy. Suppose before any intervention, the shadow market has demand of one US dollar, while the official market registers zero inflow, leaving a net balance of minus one. After the official payment, shadow demand falls to zero while official inflow rises to one, changing the balance to plus one. The shift from minus one to plus one is a total swing of two units. The equation is elementary: (+1) - (-1) = +2. Yet its meaning is powerful—it represents a two-dollar improvement in the system’s effective balance, even though only one physical dollar was involved.
This dynamic can also be viewed through the price differential. If the shadow market trades at Tk 150 while the official rate is Tk 120, every dollar transacted informally embodies a Tk 30 inefficiency. When a bank processes a legitimate outward payment at Tk 120, it not only fulfills a genuine transaction but also removes an equivalent amount of illicit demand that sustains the Tk 30 premium. As parallel demand contracts, the premium begins to erode, prompting foreign currency earners to return to the official system.
The reason this occurs lies in expectations and market velocity. In the shadow market, the same dollar often changes hands multiple times—among importers, travelers, and intermediaries—each using it for a distinct purpose. The velocity of this informal dollar may be 1.5 or even 2.0, meaning that one real dollar satisfies the appearance of two dollars’ worth of transactions because it circulates rapidly. When the official system steps in to meet demand, that chain of speculative turnover is disrupted. Economically, this mirrors the concept of a confidence multiplier—a small restoration of trust can set off a self-reinforcing cycle of stability, just as a small loss of trust can amplify instability.
It is true that restrictions in legitimate outward remittances lead demand flows into informal channels. That leakage pushes up the parallel rate, widens the gap with the official rate, and makes it more profitable for remitters to use unofficial agents. A vicious cycle then takes hold: constrained official demand fuels unofficial demand; rising parallel rates deter official inflows; and the market spirals into distrust.
The only sustainable exit from this cycle is timely and transparent facilitation of genuine transactions through banks. Every dollar officially released is not just an outflow—it is a vote of confidence in the system. Each such transaction yields a twofold improvement in market balance—reducing shadow pressure and increasing formal inflows.
Let us put this into numbers for clarity. Suppose a bank authorizes payments of USD 10 million for legitimate purposes. At Tk 120 per dollar, this equals Tk 1.2 billion in official transactions. However, in terms of market equilibrium, the real effect could be twice that. The USD 10 million of official supply reduces shadow demand by USD 10 million while simultaneously attracting USD 10 million more into the banking channel from foreign currency earners. The total improvement equals USD 20 million, which at the shadow rate of Tk 150 represents Tk 3 billion worth of stabilizing effect. Thus, Tk 1.2 billion of official outflow can neutralize Tk 3 billion of informal market imbalance—a striking demonstration of how policy credibility multiplies the value of reserves.
The psychology of market participants further strengthens this logic. Remitters are highly sensitive to signals about convertibility. When outward payments are restricted, market actors infer future shortages and rush to hedge by buying from informal dealers—pushing the parallel rate even higher. Conversely, when access to legitimate remittances is smooth, expectations shift instantly. The fear of being cut off diminishes, speculative buying slows, and informal trading loses traction. This reversal of expectations explains why one physical dollar can create a two-unit swing in market equilibrium. It is not financial alchemy—it is the mathematics of trust.
The same reasoning extends to remittance behaviour.Non-resident Bangladeshis constantly compare rates offered by money transfer operators against informal agents. When the rate gap is large, informal routes dominate. But as soon as the formal market rate becomes competitive—because the official system reflects real demand and supply—the incentive to use unofficial agents diminishes sharply. In that sense, every policy step that narrows the gap between the official and curb markets serves double duty: it reduces outflows through informal channels and increases inflows through banks. Therefore, managing foreign exchange is not merely about counting dollars—it is about managing confidence, credibility, and timing.
The Tk 30 gap between official and shadow rates may appear modest in absolute terms, but multiplied across billions of dollars of trade and remittances, it represents a huge implicit tax on the economy. Official transactions are injections into the legitimate circular flow of economic activity, while informal transactions are leakages that erode control and compliance. When a policy action converts leakage into injection, the system benefits twice: it removes one source of weakness and adds one source of strength.
Bangladesh’s ongoing challenge is to maintain that credibility consistently. The existing framework—export retention quotas, foreign currency accounts, offshore banking units, and swap arrangements—provides a sound architecture. But success depends not only on regulations but on perceived reliability. Stakeholders need to be convinced that their transactions will be settled smoothly and that they will receive fair value. Each time a legitimate outward payment is executed promptly at the official rate, the system gains twice: once by meeting real demand, and again by curbing the alternative market.
Mehdi Rahman works in the
development sector. He also writes on foreign trade
and monetary issues.
