Do you think Bangladesh Bank has implemented Floating Exchange regime too early? Discuss.

 To meet up the economic demand and to fulfill the IMF conditionality, on 29 May, 2003 Bangladesh Bank issued a circular stating- effective from 31st May, 2003, Bangladesh Bank floated its exchange rate and followed a fully market based exchange rate for Taka. Under this arrangement, exchange rate is determined on the basis of demand and supply of the respective currencies. Immediately after the inception of floating exchange rate banks, economists, currency traders and businessmen have welcomed the deregulation of the exchange rate saying that Country the country's foreign trade and remittance would get a boast up due to it and it would make the currency market more efficient and effective.

In 2003, the US dollar was traded at Bangladesh Taka (BDT) 55 to one US$. During the first few months after the switching-over to the floating exchange rate, the movement of local currency against USD was tolerable. But during mid-2004 and 2005 its movement was very rapid; so sometimes the central bank -- Bangladesh Bank (BB) -- had to intervene in the market turning to a managed float exchange rate system.

 The withdrawal of upper cap of interest rate and increase of policy interest rate (repo rate and reverse repo rate) may add more fuel to the depreciation of local currency against the greenback as it now requires more local currency to buy greenback from the market. Like increasing fuel import, import of capital machinery for power plant is keeping pressure on the USD.

 But some cooling down of pressures in the country's foreign exchange market is necessary at this stage. For this, the BB will require to come forward with some controlling measures in a cautious manner. It needs to further discourage imports of luxurious goods, fix the higher cap of margin for importing such items, encourage of import-substituting industries, allowing setting up of more exchange houses in countries where the Bangladeshi expatriates are largely concentrated and persuading the multilateral agencies to disburse aid and grant.

Introduction of floating exchange rate was debatable issue and also there were some criticisms about the competence of Bangladesh Bank's from some corner. But Bangladesh Bank performed a tremendous performance. There was no volatility; no speculation in price and market behaves rationally. If we consider the market statistics, we find that macro economic variables have positive performances over the period of time and I think Bangladesh Bank has implemented Floating Exchange regime in proper time.