In 2023, the International Monetary Fund (IMF) approved a $4.7 billion loan package for Bangladesh. So far, the country has received $2.3 billion in three installments. However, disbursement of the fourth and fifth tranches was delayed due to differences over the exchange rate policy.On Wednesday, in a significant move to resolve the deadlock, Bangladesh agreed to one of the IMF’s core conditions—adopting a market-based exchange rate. This decision clears the way for the release of the stalled loan tranches.Managed Floating Exchange Rate IntroducedIn a virtual press conference from Dubai, Bangladesh Bank Governor Ahsan H. Mansur announced the immediate implementation of a “managed floating exchange rate” to align with IMF requirements. This new system allows the exchange rate to be determined by market forces, with the central bank reserving the right to intervene when necessary.He expressed confidence that, due to sufficient dollar liquidity in the market, the new exchange rate would remain close to the existing rate and would not cause volatility.IMF Tranches Expected by JuneAccording to central bank officials, after months of negotiations, the IMF has agreed to disburse the delayed fourth and fifth installments by June, as the disagreement over exchange rate flexibility has been resolved.Governor Mansur also stated that Bangladesh expects to receive a total of $3.5 billion by June from various multilateral lenders, including the World Bank (WB), Asian Development Bank (ADB), and the IMF. This influx of foreign funds is expected to ease pressure on the country’s foreign exchange reserves.Why a Market-Based Exchange Rate MattersA floating or market-determined exchange rate is one where the currency’s value is set by market forces—supply and demand—rather than a fixed government-imposed rate. The IMF has long advocated for such a system in Bangladesh to enhance transparency, attract foreign investment, and improve fiscal stability.Previously, Bangladesh maintained a somewhat fixed exchange rate regime, which often did not reflect real-time market dynamics. The shift to a managed floating rate introduces flexibility while allowing the central bank to step in during extreme fluctuations.Opportunities and Challenges AheadThis policy shift marks a critical step for Bangladesh’s economy. It is expected to stabilize foreign reserves and positively impact remittances and export earnings.However, economists warn that excessive flexibility may lead to inflation and rising import costs. Managing this balance without triggering volatility will be a key challenge for policymakers.Additionally, other IMF reform conditions—such as improving tax administration, ensuring transparency in the banking sector, and controlling public expenditures—must also be implemented to secure long-term macroeconomic stability.