In a historic move, Bangladesh’s central bank has decided to allow its currency, the taka, to float freely for the first time. The decision comes in response to demands from the International Monetary Fund (IMF) and aims to unlock additional funds from a $4.7 billion loan program.
While Bangladesh is not heavily indebted, the country joins a growing list of nations, including Pakistan, Egypt, and Lebanon, that have opted to loosen control over their local currencies to secure financing from the Washington-based lender.
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What does floating currency mean?
To float a currency is to make the exchange rate of this currency fully liberalized so that the government or the central bank does not interfere in setting it directly. Rather, it is automatically emptied into the currency market through a supply and demand mechanism that allows setting the national currency’s exchange rate against foreign currencies.
The exchange rate of floating currency constantly fluctuates with every change in the supply and demand of foreign currencies so that they can change even several times per day. The supply and demand for a currency is affected by a number of factors, including but not limited to:
- Global trade
- Interest rates
- Foreign and international investment
Any or all of these factors may have a significant impact on the value of a currency in the international forex market.
Benefits of floating currency:
Balance of payments – Balance of payments plays an important role in the local currency exchange rate. Balance of payments refers to the transactions between one country and the rest of the world during a specific period of time.
High market efficiency – Floating currencies, unlike fixed-rate currencies, are allowed to be traded in the currency markets without further management from central banks and governments.
Does not require large foreign currency reserves – To use floating currency, central banks do ot need to hold large amounts of foreign exchange reserves to balance the exchange rate.
Protection from import inflation – The problem of import inflation can result from a balance of payments surplus or rising costs of imports by countries with fixed exchange rates. Countries with floating exchange currencies don’t face this.
Impact of floating currency on Healthcare
The shift from a fixed economy to a floating economy in Bangladesh can have a positive impact on healthcare facilities improvement in the surgical sector. Here’s how this transition can contribute to the advancement of healthcare infrastructure and the adoption of new technologies:
1. Increased Investment Opportunities: Moving to a floating economy allows for greater investment opportunities, including in the healthcare sector. With increased foreign direct investment (FDI) and domestic investment, healthcare facilities, including surgical infrastructure, can be developed and upgraded. Investors are more likely to be attracted to a floating economy due to improved economic stability, leading to increased funding for modernizing healthcare infrastructure.
2. Access to Foreign Expertise: A floating economy encourages the entry of foreign investors, healthcare providers, and specialists. This influx of expertise can introduce new technologies and surgical techniques to Bangladesh’s healthcare sector. Foreign investors may bring advanced surgical equipment, knowledge of cutting-edge procedures, and international best practices. The exchange of knowledge and collaboration with international experts can lead to significant advancements in surgical care.
3. Market Competition and Efficiency: The shift to a floating economy promotes market competition and efficiency. This can incentivize healthcare providers to invest in the latest surgical technologies to remain competitive. In an open market, healthcare facilities will strive to attract patients by offering state-of-the-art surgical services, leading to infrastructure improvements and the adoption of new technologies in the surgical sector.
4. Access to International Medical Institutions: A floating economy can facilitate collaborations between local healthcare institutions and international medical institutions. These partnerships can involve technology transfer, training programs, and knowledge-sharing initiatives. International medical institutions can contribute by sharing their expertise, conducting joint research, and providing guidance on improving surgical infrastructure and practices.
5. Telemedicine and E-health Solutions: A floating economy can spur the development and adoption of telemedicine and e-health solutions in the surgical sector. As the economy becomes more open and connected, there are increased opportunities for remote consultations, telemonitoring, and telesurgeries. These technologies can improve access to surgical expertise, especially for patients in remote areas, and reduce the need for physical travel.
6. Research and Development: A floating economy encourages research and development activities, which can lead to advancements in surgical technologies. With increased investment in R&D, local researchers and institutions can collaborate with international experts and organizations to develop innovative surgical techniques, new medical devices, and surgical solutions. This can enhance surgical infrastructure and patient outcomes in Bangladesh.
To leverage the benefits of a shift to a floating economy, the government should create an enabling environment by implementing supportive policies, regulations, and incentives for investment in healthcare infrastructure. Efforts should also be made to ensure affordable access to new technologies, develop skilled healthcare professionals, and address any disparities in healthcare provision across different regions of the country.
Benefits of a Market-Driven Exchange Rate Regime
The new market-driven exchange rate regime will provide “greater transparency and efficiency in foreign exchange transactions, benefiting businesses, individuals and the economy,” the Bangladesh central bank said in a statement on Sunday. It also doesn’t see any major depreciation of the taka, which has declined about 5% this year.
Bangladesh Bank will now adopt a unified exchange rate regime between the taka and the dollar or any other foreign currency and from July 1, it will no longer sell any foreign exchange at a discounted rate. By the third quarter of 2023, all international transactions will be based on the new exchange rate structure and this will close the gap between formal and informal markets, the central bank said.
The government received $476 million as the first installment of the IMF loans in February, while the disbursement of the second tranche is expected in November. Prime Minister Sheikh Hasina has said her country is in a position to pay back the loan taken from the IMF, saying the lender only gives “assistance to countries that can repay their bill.”
Impact on Financial Markets
Following the announcement, the taka experienced a decline of up to 0.9% against the dollar. However, the broader index of the Dhaka Stock Exchange recorded a notable increase of up to 0.3%, the largest gain since June 7. This positive movement reflects the potential for a looser currency regime to bolster Bangladesh’s reserves by making its exports more attractive.
Financial Considerations
Bangladesh’s central bank has already sold approximately $13 billion in the current fiscal year, ending on June 30, due to increased demand for foreign currency. The government received the first installment of $476 million from the IMF loans in February, with the second tranche expected in November. Prime Minister Sheikh Hasina has expressed confidence in her country’s ability to repay the loan, emphasizing that the IMF provides assistance to nations capable of meeting their financial obligations.
Tight Policy
Bangladesh is seeking a path to boost economic growth to 7.5% for the next fiscal year starting July 1 and eventually graduating from being a least developed country. But inflation remains a major concern due to pandemic-related spending, soaring commodity prices, and the weaker taka.
Consumer prices rose 9.94% in May, overshooting the average inflation target of 6%, while the government sees 6.03% growth estimate for the current fiscal year, led by a “deceleration” in industries, services and agriculture.
The central bank “will adopt a tight monetary policy” for the first half of the new fiscal year, Bangladesh Bank Governor Abdur Rouf Talukder said. He made the comments after raising the repurchase agreement rate by 50 basis points to 6.5% and the standing deposit facility by 25 basis points.
Bangladesh Bank also introduced a market-driven reference lending rate for all types of bank loans, replacing the three-year-old lending rate cap that helped to keep easy credit available for private businesses.
“This approach provides utmost priority to containing inflation to the desired level while ensuring the necessary flow of funds to productive and employment-generating sectors to support the targeted economic growth,” the central bank said.
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