How do we stabilise the USD-BDT market?

Let me start by thanking the central bank for its recent circular on the foreign currency cash holding limit. This should help us not to dollarise our economy and face the fate of Cambodia, where a lot of people have forgotten their local currency's name over the years.  

A preliminary review validated that due to the recent volatility in the USD-BDT market and more so, due to a large difference between formal and informal market prices, many people were holding on to large sums of cash currency, particularly cash dollars.

It seems regulators and the foreign exchange dealing community both think that with further improvement in the foreign currency liquidity, the taka is likely to stabilise further against the American greenback. However, we should also be very cautious not to engage too many agencies to discipline this market, as they say, "too many cooks may spoil the broth".

A pegged-currency approach may drastically reduce the volatility in the short run but that may be detrimental in the long run

Bringing stability to a quasi-volatile foreign exchange market needs special expertise and diligent focus on supply-side economics.

We must always keep our exporters and remitters happy. The right level of foreign currency value is also very important to maintain export competitiveness. We should always tally with the value of the Indian or Pakistani rupees, the Vietnamese dong, or the Indonesian rupiah while trying to find the right level for the taka against the USD.

Talking of the exchange rate regime, I was trying to recall the Asian Currency Crisis of 1997-1998.

Malaysia took a very unorthodox measure of pegging the ringgit to the USD under its National Economic Recovery Plan to isolate its currency and stabilise the market. It is a measure that is defiant to philosophies of the free market and would put us at odds with International Monetary Fund requirements.

The other extreme is to fully allow free-floating without any interventions and allow market forces to determine the point of equilibrium. The Chinese-managed exchange rate is another model that allows the movement of rates in a range. There may not be a silver bullet but there must be a clearer and better direction.

A blended approach will most likely create market chaos which we do not need, but rather, we need to increase market confidence. A pegged-currency approach may drastically reduce the volatility in the short run but that may be detrimental in the long run.

When asked about the Indian rupee's depreciation a few years back, Raghuram Rajan, a former governor of the central bank of India, explained that it is best left to the market to determine the levels. The focus, rather, should be on building the forex reserves through higher exports, remittances, foreign direct investment, and foreign portfolio investment.

Rajan also stated that intervention will only breed more interventions.

In the case of Bangladesh, a free market or floating rate may have some short-term undesirable effects, but in the long run, such a system would most likely result in a more balanced outcome and increased stabilisation. That would certainly be preferable to the volatility we are facing right now.

The author is an economic analyst.