An unusual spike in the dollar rate pushed inflation to nearly 10.49% last August
August 9, 2025, 07:10 AM
Last revised: August 9, 2025, 12:57pm
Infograph: TBS
Highlights:
- The dollar shortage eased, raising reserves to $250 billion and inflation fell
- Central Bank Reform Target Governance, Default Loans, and Bank Mergers
- Some banks have temporarily nationalized to protect depositors
- The Banking Corporations Act has been amended to limit the management of committee families
- Market-based exchange rates increased remittances to $300 million per month
- Asset recovery efforts are slow. Estimated $1.7-200 billion in laundry abroad
The country’s banking sector faced a severe dollar shortage affecting numerous banks that couldn’t repay their depositors. This crisis became evident when the interim government stepped in last August, following a significant rise in foreign exchange rates and a liquidity disaster.
Inflation surged to about 10.49% in August primarily due to the abrupt increase in dollar rates.
Over the past year, though, many of these critical problems have been managed. Inflation has cooled, and the foreign exchange market is more stable, thanks to corrective measures by the Bangladesh Bank after the governmental shift.
The interbank exchange rates that peaked at TK128 per dollar have since dropped to TK120 as of July, aided by increased dollar inflow.
Foreign exchange reserves rose by $6 billion, nearing $25 billion in July, which significantly decreased from $186.1 billion in November last year.
With a better dollar supply, inflation dropped to 8.55% in July, down from 10.49% the previous August. The Bangladesh Bank anticipates inflation could dip below 5% by March next year.
The central bank has undertaken significant reforms in the banking sector, amending the Bank Companies Act and introducing the Bank Resolution Act, which facilitates the mergers of struggling banks and aligns loan classification rules with international standards.
Bangladesh Bank Governor Ahsan H Mansoor, who assumed office last August, has highlighted alarming levels of corruption in the banking system, stating that the scale of default loans had been vastly underestimated.
Before his tenure, he believed if official data indicated default loans at 9%, the real figure could be around 25%. However, he discovered it exceeded 30% in reality.
Instead of concealing the severity of default loans, the Bangladesh Bank aims to unveil a clearer picture of the banking situation while enforcing international classification standards.
Reorganization of troubled banks
The governor’s immediate goal is to manage 12-13 troubled banks and ensure depositor funds are regained. Legal reforms are in progress, moving to classify late loans within three months instead of a year.
Positive governance has helped some banks, like Islami Bank and UCB, rebound, although others with a high percentage of bad loans may face mergers or temporary nationalization for depositor safety, operating briefly as state-owned entities before transitioning back to private ownership backed by domestic and foreign investments.
Reducing familial influence over banking committees
Amendments to the Banking Corporations Act aim to limit board members from four families and ensure that at least half of the directors are independent, while also necessitating their withdrawal from the Bangladesh Banking Authorization Committee.
The Money Loan Court Act has also been revised to expedite loan recoveries, recognizing defaulters even if they secure a stay order from the High Court.
The governor mentioned the need to adjust the 1972 Bangladesh Bank order for better inflation control, placing this responsibility clearly on the central bank. If targets are missed, the bank must provide justifications, whether due to global disruptions or price surges. The inflation objective will be set by an enhanced advisory committee involving both the Bangladesh Bank and the Ministry of Finance.
Additionally, safeguarding the financial sector’s stability is paramount. The current state of this sector is considered weak, requiring the central bank to possess the authority to manage banks, request additional capital, and intervene directly as necessary.
Transition to market-based exchange rates
On May 14, 2025, a market-based exchange rate system was implemented, allowing banks to trade dollars based on negotiated rates per IMF guidelines.
This shift has stabilized the forex market and enhanced remittances by minimizing informal charges, encouraging international lenders to provide funding. Monthly remittances surged to nearly $3 billion, and the central bank began purchasing dollars to enhance reserves.
Interest rate hikes for inflation control
The interim government inherited a policy rate of 8.50%. By October 2024, it was increased to 10%. Although aimed at bringing inflation down to around 6%-7% by mid-2025, figures dipped below 9% by June.
Bank mergers in focus
Since August 2024, restructuring has been underway for the boards of 14 banks, including Islami, Social Islami, IFIC, UCBL, and others. Plans are being formed to consolidate five Islamic banks facing rising default loans of 60-90%.
The Bank Resolution Ordinance 2025 establishes procedures for mergers and holds individuals accountable for fraudulent financial actions.
Slow recovery of stolen assets
Despite the formation of the Asset Recovery Task Force nine months ago, no cases have been presented internationally as of yet. The task force, which comprises 11 agents and joint investigative teams, struggles to follow international asset trail largely due to lack of coordination and expertise in building strong cases.
When asked about expected recoveries, Governor Mansoor remarked, “I don’t want to make predictions just now. Most of it is still ‘birds in the bushes.'” They aim to freeze and secure assets, anticipating that the complete process could take 4-5 years.
He acknowledged frustrations regarding the pace of the proceedings, clarifying that it’s a complex legal process. While some individuals remain inside the country, a portion of their wealth is overseas. The goal is to dismantle criminal networks and retrieve funds through negotiations.
Estimates suggest that between $1.7 billion to $20 billion may have been illicitly moved from the banking sector.
