Regulatory mood swings and corruption during the Awami League regime created disorderly conditions in the foreign exchange market, which led the foreign exchange reserves declining to levels too low for comfort, according to the White Paper on the State of Bangladesh economy submitted to chief adviser Muhammad Yunus on Sunday.
The white paper submitted by a 12-member committee headed by economist Debapriya Bhattacharya observed that the Bangladesh Bank鈥檚 erratic policies, lack of transparency, and their consequences were responsible for the country鈥檚 financial health.
鈥楤B鈥檚 mood swings on exchange rate policy turned lethal when a multiple fixed exchange system was put in place in September 2022, disrupted the foreign exchange market. It discouraged the repatriation of export proceeds and remittance through formal channels and incentivised capital flight,鈥� it said.
Confidence among international lenders deteriorated, leading to credit downgrades and reduced external financing options, it said.
The government sought an International Monetary Fund programme to mitigate external imbalances, but policy inconsistencies remained a concern.
Historically, the BB operated under a managed floating exchange rate system from 2003 to 2022, but the recent shift to a multiple fixed exchange rate regime marked a departure from this approach.
The resulting market distortions highlighted the challenges of sustaining an artificially controlled exchange rate in the face of global and domestic pressures.
With the dollar being central to Bangladesh鈥檚 trade and finance, underpricing and multiplicities in exchange rates created loopholes for bypassing the system.
The report revealed that the BB overstated its foreign exchange reserves. While the central bank claimed $46 billion in June 2021, an IMF review identified only $39 billion in reserves.
Trade and current account deficits exerted significant pressure on reserves.
The trade deficit tripled from $9.5 billion in FY17 to $33.2 billion in FY22, while the current account deficit surged from $1.3 billion to $18.6 billion during the same period.
These deficits were exacerbated by rising global commodity prices, a stronger US dollar, and declining exports to non-US markets.
Another concerning trend was the rapid increase in unaccounted outflows, reported under errors and omissions.
Between FY22 and FY24, these outflows totalled at $19 billion, compared with those of just $1.5 billion in the preceding three years.
The report linked these figures to capital flights, saying that it was supported by anecdotal evidence of funds leaving the country before the August 2024 political transition.
The foreign exchange market faced persistent shortages as BB鈥檚 interventions failed to address underlying issues.
Artificially low exchange rates widened the gap between official and parallel markets, diverting dollar inflows to informal channels.
Banks depleted their NOSTRO accounts, and the BB sold substantial amounts of foreign currency 鈥� $13.58 billion in FY23 and $12.79 billion in FY24 鈥� to settle import bills, particularly for state-owned entities like the Bangladesh Petroleum Corporation.
However, a lack of public disclosure about these transactions fuelled speculation and mistrust.
Exchange rate volatility further aggravated inflation.
The taka depreciated steadily against the US dollar, moving from Tk聽60 a dollar in FY2003 to Tk 84.81 in FY21, with sharper declines from FY22 onward.
The US dollar reached a two-decade high in September 2022, driving inflation higher.
The white paper noted a strong correlation between the exchange rate and inflation, with headline inflation and food inflation closely tracking currency depreciation.
Corruption and regulatory inefficiencies during the Awami League regime eroded the credibility of Bangladesh鈥檚 financial institutions, exacerbating economic vulnerabilities, the report observed.