Bangladesh's new forex rules to stem taka losses: analysts

Bangladesh Bank's new currency strategy may help stabilize the taka this year, after it underperformed most Asian peers in 2024, according to analysts.

The approach, which involves a daily recalibration of the exchange rate, is a step toward a freely floating currency. It builds on the crawling peg system introduced last year, allowing movement in the currency within a band. That has helped bring down the six-month volatility in the taka after a spike last year, data compiled by Bloomberg showed.

"As the regime aims to reflect more closely the supply and demand of the taka and transaction data from banks, it could lead to more consolidation of the local currency," said Young Kim, an analyst at Moody's Ratings in Singapore. "The strategy also aims to define clear foreign exchange intervention operations."

The taka is down about 2% this year, weakening by the most among Asian currencies. This follows a decline of more than 8% in 2024 — its fourth straight year of depreciation — as the nation saw domestic unrest, leading to the ouster of longtime leader Sheikh Hasina.

Bangladesh Bank last month allowed dealers to buy and sell foreign currency at freely negotiable rates within a band. It also started publishing twice a day a reference benchmark exchange and plans to develop an auction-based foreign exchange intervention strategy to intervene in the spot markets.

The shift from the use of fixed exchange rates in the past builds on a series of reforms in the South Asian country after the political turmoil last year. The interim government, led by Nobel prize winner Muhammad Yunus, reached an agreement in December to unlock $645 million in funds from the International Monetary Fund.

"The IMF has been advocating for greater exchange rate flexibility, and the new regime is aligned with the suggestions from the IMF and other international financial institutions," said Kim at Moody's. It will help with continued disbursements, Kim said.

Still, risks such as the global trade war threaten to weigh on the taka. Yunus, who's under pressure to hold elections as soon as possible, is trying to rebuild the crisis-ridden economy and clear import bills.

"The authorities still appear to be prioritizing a stable currency to minimize imported inflation," said Hasnain Malik, head of emerging and frontier markets strategy at Tellimer, an independent research provider. "Pressure on the taka should subside as exports and remittances recover, inflation decelerates, and the IMF program remains on track."