Moody’s sees Bangladesh taka weakening 4% as peg may be eased

Moody's Investors Service forecast the Bangladesh taka to decline 4% by June as limits on the currency may be eased, a move which it said could bolster the nation's dwindling foreign-exchange reserves.

Bangladesh Bank this month said it is evaluating a plan to introduce a crawling peg system for the local currency to keep it stable, which would be a step toward a flexible exchange-rate regime. The taka could trade at around 115 per dollar by the end of June, Moody's said, compared with 110 on Jan. 28.

"The introduction of the crawling peg would allow greater stability and predictability of the exchange rate, while further reflecting prevailing market forces compared to the current rate-fixing mechanism," said Marcus Yiu, analyst at Moody's in Singapore.

The falling reserves are putting pressure on Bangladesh officials to loosen their grip on the currency, which would help improve the current-account balance and ease the dollar shortage. In June, the nation pledged to allow the currency to float freely for the first time in the country's history, a key demand from the International Monetary Fund to keep its $4.7 billion loan program on track.

"Should successful implementation of the new regime allow a narrowing between the official rate and parallel market rates, it will allow greater capture of foreign currency flows and could bolster FX reserves that have deteriorated significantly over the past 1 to 2 years," Yiu said in an emailed response to questions.