Impact of Market-Driven Exchange Rate on Businesses in Bangladesh

A market-driven exchange rate is a major policy change that will have significant implications for the businesses in Bangladesh. While it may pose some challenges and risks for some sectors and companies, it will also bring many benefits and opportunities for others. A market-driven exchange rate will ultimately enhance the efficiency and transparency of the foreign exchange market and improve the economic performance and prospects of Bangladesh. Our report will examine the benefits and challenges of this move for different sectors and companies.

A market-driven exchange rate is a system where the value of the currency is determined by the supply and demand of the foreign exchange market. ​The Bangladesh Bank, the central bank of the country, has announced its plan to adopt a unified exchange rate by September this year 2023, replacing the existing multiple exchange rates. 
​
•  A market-driven exchange rate is expected to increase the dollar supply in the country, as it will encourage more foreign currency inflow through formal and informal channels. This will help replenish the foreign exchange reserves and reduce the pressure on the balance of payments.

•  A market-driven exchange rate will also benefit many import-dependent companies, especially in the steel, cement, and power sectors, which have been facing difficulties in opening letters of credit (LCs) due to dollar scarcity. With more dollars available, these companies will be able to import raw materials and machinery more easily and timely.

•  However, a market-driven exchange rate may also entail a further devaluation of the taka against the dollar, which will increase the import costs and inflation for the businesses. Some companies may have to pay more to get necessary imports or pass on the higher costs to their customers. This may affect their competitiveness and profitability in the domestic and international markets.

•  A market-driven exchange rate will also bring more stability and transparency to the foreign exchange market, as it will reduce the volatility and speculation that have been plaguing the market. The market-driven exchange rate will reflect the true value of the currency based on its demand and supply, rather than being influenced by artificial interventions or manipulations.

•  A market-driven exchange rate will also require more efficient management and regulation by the Bangladesh Bank and other participants in the market, such as banks, exporters, importers, remitters, etc. The Bangladesh Bank will have to monitor the market closely and intervene when necessary to prevent excessive fluctuations or shocks. The banks will have to adjust their margin rates and payment requirements for LCs based on their customer relationships. The exporters and remitters will have to accept lower rates for their foreign currency earnings, while the importers will have to pay higher rates for their foreign currency payments.