Vous êtes sur la page 1sur 28

Foreign Exchange Market

Foreign exchange Market is a place in which foreign exchange transactions take


place. In other word, foreign exchange transaction is a market where foreign money
were brought and sold. It is a part of money market in financial centre.

Function of foreign exchange market: The basic and primary function of


a foreign exchange market is to transfer purchasing power between
countries. The transfer function is performed through T.T, M.T, Draft, Bill of
exchange, Letters of credit, etc. the bill of exchange is the most important
and effective method of transferring purchasing power between two parties.

Another important function of foreign exchange market is to provide credit to


the importer debtor. The exporters draw the bill of exchange on importers on
their bankers. On acceptance of the bills by the importer or their bankers, the
exporter will get the money realized on the maturity of the bills. In case the
exporters are anxious to receive the payment earlier, the bills can be
discounted from their bankers, or foreign exchange banks or discount houses.

The Foreign Exchange market performs the hedging function covering the
risks on foreign exchange transactions. There are frequent fluctuations in
exchange rates. If the rate is favorable, the exporter will gain and vice verse.
In order to avoid the risk involved, the foreign exchange market provides
hedges or actual claims through forward contracts in exchange against such
fluctuations. The agencies of foreign currencies guarantee payment of foreign
exchange at a fixed rate. The exchange agencies bear the risks of fluctuation
of exchange rates.

Different Foreign Exchange Regimes


Immediately after liberation, the Bangladesh currency taka was pegged with
pound sterling but was brought at par with the Indian rupee. Within a short
time, the value of taka experienced a rapid decline against foreign
currencies and in May 1975, it was substantially devalued. In 1976,
Bangladesh adopted a regime of managed float, which continued up to
Page27

August 1979, when a currency-weighted basket method of exchange rate


was introduced. The exchange rate management policy was again replaced
in 1983 by the trade-weighted basket method and US the dollar was chosen
as intervention currency. By this time a secondary exchange market (SEM)
was allowed to grow parallel to the official exchange rate.

Up to 1990, multiple exchange rates were allowed under different names of


export benefit schemes such as, Export Bonus Scheme, XPL, XPB, EFAS,
IECS, and Home Remittances Scheme. This led to a wide divergence between
the official rate and the SEM rate. The situation also gradually gave rise to a
number of conflicting regulations, poor risk management, and various types
of implicit or explicit government guarantees to the users of foreign
exchange. This resulted in a number of macro-economic imbalances
prompting the government to adjust the official rate in phases and to
liquidate its difference with the rate at SEM. The two rates were finally
unified in January 1992. The first step towards currency convertibility was
taken on 17 July 1993 and this marked the beginning of a relatively open
foreign exchange market in the country. Until then the Bangladesh Bank
used to declare mid-rate along with the buying and selling rates for dollar
applicable to authorized dealers. Initially the spread was Tk 0.10, which was
gradually widened to Tk 0.30.

Until late in 2003, Bangladesh followed an exchange rate policy of


occasionally adjusting the rate with an eye on maintaining export
competitiveness, mainly with reference to the trend of Real Effective
Exchange Rate Index based on a trade weighted basket of currencies acted
as a sort of benchmark for the banks to set their own rates.

From May 31, 2003, the exchange rates for the Bangladesh Bank’s spot
purchase and sale transactions of US dollars with authorized dealers were to
be decided without reference to any pre-announced band and the Taka
essentially became a floating currency of major trade partners. The
Bangladesh Bank had a preannounce one Taka wide band within which it
would, at its discretion, undertake US Dollar purchase and sale transactions
with banks. The banks were free to set their own rates for their interbank
and customer transactions. Those rates generally tended to be outside the
announced rate band for transactions between the Bangladesh Bank and
Page27

authorized dealers.
Limits of Foreign Exchange Trading
The foreign exchange market of the country is confined to the city of Dhaka.
The 32 scheduled banks operating as authorized dealers in the inter-bank
foreign exchange market are not permitted to run a position beyond certain
limits. In the event of speculation on an appreciation of the value, an
authorized dealer may buy more foreign currencies than it needs, but at the
end of the day it must maintain its limit by selling excess currencies either in
the inter-bank market or to customers. Authorized dealers maintain clearing
accounts with the Bangladesh Bank in dollar, pound sterling, mark and yen
to settle their mutual claims. If there any excess foreign exchange holdings
exist after these transactions, it is obligatory for them to sell it to the
Bangladesh Bank. In case of shortfall of the limit, authorized dealers have to
cover it either through purchase from the market or from the Bangladesh
Bank.

Role of Bangladesh Bank


At present, the system of exchange rate management in Bangladesh is to
monitor the movement of the exchange rate of taka against a basket of
currencies through a mechanism of real effective exchange rate (RFER)
intended to be kept close to the equilibrium rate. The players in the foreign
exchange market of Bangladesh are the Bangladesh Bank, authorized
dealers, and customers. The Bangladesh Bank is empowered by the Foreign
Exchange Regulation Act of 1947 to regulate the foreign exchange regime.
It, however, does not operate directly and instead, regularly watches
activities in the market and intervenes, if necessary, through commercial
banks. From time to time it issues guidelines for market participants in the
light of the country's monetary policy stance, foreign exchange reserve
position, balance of payments, and overall macro-economic situation.
Guidelines are issued through a regularly updated Exchange Control Manual
published by the Bangladesh Bank.
Page27
According to Bangladesh Bank “banks and authorized dealers are free to set
their own rates of foreign exchange against Bangladesh Taka for their inter-
bank and customer transactions. The exchange rate is being determined in
the market on the basis of market demand and supply forces of the
respective currencies. However, to avoid any unusual volatility in the
exchange rate, BB occasionally engages itself to intervene in the market
through purchase and sale US Dollar as and when it deems necessary to
maintain stability in the foreign exchange market. Bangladesh Taka is fully
convertible for current international transactions.” However, only authorized
dealers are allowed to participate in trading with license from Bangladesh
Bank, and license may be revoked due to irregularities or if the Bangladesh
Bank regulations are not followed.

The exchange rates of Bangladesh Taka were left on the market forces after
the floatation where any intervention in the foreign exchange market by the
Bangladesh Bank is not enviable. The exchange rates of Bangladesh Taka
against major international currencies witnessed somewhat stability since
then, which did not warrant any intervention in the foreign exchange market
by the Bangladesh Bank. In view of keeping foreign exchange reserve at a
comfortable level, however, the Bangladesh Bank had to participate in the
market. Data as shown at the table below indicate that the Bangladesh Bank
did not sell any foreign currency during the last two fiscal years.

Purchases and Sales of Foreign Exchange by the Bangladesh Bank

(Million US$)

Particul 2002 2003 2004 2005 2006 2007


ars

Purchas 507.1 503.9 314.0 459.5 413.0 649.5


e

Sale 63.9 0.0 0.0 70.1 77.0 0.0

Source: Bangladesh Bank Annual Reports 2002- 2007


Page27
The Bangladesh Bank only purchased US $ 503.9 million and US $ 314.0
million during 2003 and 2004 respectively. Overall trends in both the sales
and purchases of foreign currency by the Bangladesh Bank show declining
trends during 2002-2004 indicating gradually less necessity for intervention
by the Bangladesh Bank.

Because of relatively faster growth in import payments than export receipts,


the demand for foreign exchange than that of supply was much stronger
during the last half of 2005 generating some depreciating pressure on the
Taka-Dollar exchange rate. With a view to mitigating the mismatch between
the supply and demand for foreign exchange, the Bangladesh Bank
intervened by selling a sizeable of amount of foreign currency in the foreign
exchange market. The Bangladesh Bank sold USD 459.5 million as against
the purchase of USD 70.1 million in 2005. Bangladesh Bank's intervention
helped stabilize the exchange rate to Taka 63.70 during fourth quarter of
2005, although pressure on forex market continued, reflecting widening
current account deficit.

Bangladesh Bank also allowed limited overdraft facility on foreign currency


clearing account with the Bangladesh Bank to NCBs and some private sector
banks facing temporary mismatch in liquidity and relaxed restrictions on
swap and forward operations in order to give banks some flexibility to
manage their liquidity.

Pressure in the foreign exchange market continued due to price hike of oil
and petroleum products and major import commodities coupled with higher
growth in lending to the private sector, which led to rapid growth in imports
demand in the face of slowdown in export earnings in the first half of 2006.
But due to adoption of contractionary monetary policy together with
substantial inflow of foreign exchange from export earnings and remittances,
the situations eased later on. To increase the supply of foreign currencies in
the market, BB sold USD 413.0 million as against the purchase of USD 77.0
million in 2006. Overall trend in purchases of foreign currency by the BB,
were showing declining trends during 2004 to 2006 indicating gradually less
necessity for intervention by the Bangladesh Bank.
Page27
According Bangladesh bank annual report, in 2007, to absorb excess liquidity
from the foreign exchange market, Bangladesh Bank purchased USD 649.50
million from banks and had no sales. However, an HSBC report (Bangladesh
Review & Outlook) quoting newspapers mentioned that Bangladesh Bank
sold USD 220.0 million near the end of 2007 to support the market for
commodity import payments.

Authorized Dealers of Foreign Exchange


The authorized dealers are the only resident entities in the foreign exchange
market to transact and hold foreign exchange both at home and abroad.
Bangladesh Bank issues licenses of authorized dealership in foreign
currencies only to scheduled banks. The amount of foreign exchange
holdings by the authorized dealers are subject to open position limits
prescribed by Bangladesh Bank, which itself purchases and sells dollars from
and to the dealers on spot basis. The size of each such transaction with
Bangladesh Bank is required to be in multiples of $10,000, subject to a
minimum of $50,000. In addition to authorized dealers, there are registered
moneychangers to buy foreign currencies from tourists and sell them to
outgoing Bangladeshi travelers as per entitlement. Their excess holdings
beyond the permitted balance are required to be retained with authorized
dealers. Some service institutions like hotels and shops have also obtained
limited money changing licenses to accept foreign currencies the foreign
tourists, but those are to be sold to authorized dealers. Transactions by
customers take place mainly to satisfy customer demand for individual
needs and to facilitate export, import, and remittances.

The phenomenal growth of inter-bank transactions was due mainly to


relaxation of exchange control regulations and expansion of the activities of
the Bangladesh Foreign Exchange Dealers Association (BAFEDA) formed on
12 August 1993. The association was incorporated as a non-profit
organization under the Companies Act (Act.XVIII) of 1994 on March 30, 1998.
At present, 44 banks operating in Bangladesh are member of the association.
Page27
Objectives of BAFEDA

According to the Constitution of Bangladesh Foreign Exchange Dealers'


Association, the objectives of the Association are:

i. To create and promote inter-bank foreign exchange dealings and develop


good fellowship that is indispensable in foreign exchange dealings and
relations;

ii. To function in the best interest of the members and also to do all such
other things as may be necessary or desirable in furtherance of the
objectives of the Association;

iii. To arrange that the foreign exchange dealers of member banks keep one
another informed and they render assistance to one another without
prejudice to the interests of their respective institutions;

iv. To do all that is necessary in the power of the Association and the
members, collectively and individually, and also to uphold high standards of
ethics by rendering quality service in foreign exchange dealings.

For smooth functioning of the inter-bank foreign exchange market, a “Code


of Conduct” for Bangladesh Inter-Bank Foreign Exchange and Treasury
Operations and also “BAFEDA Rules” were formulated earlier, with the
approval of Bangladesh Bank.

Members of BAFEDA
The association may have two classes of members Committees-

Primary Members: This remains open to all scheduled banks in


Bangladesh, who are authorized dealers and actively engaged in dealing in
foreign exchange. The members are represented by the Chief Executives.
However, after giving a due notice, a member may withdraw from the
Association.

Associate Member: This includes those who are authorized in sale and
purchase of foreign currencies and also active in financing import and export
Page27

activities in Bangladesh. Associate membership is subject to approval of the


Executive Committee. Associate members have no voting rights.
Transaction in the Interbank Market
Transactions volume in the inter-bank foreign exchange market was USD
56.0 billion in 2001, and USD 98.4 billion in 2002. Forward transactions had a
4.7 fold increase from USD 7.19 billion of 2001 to USD 33.7 billion in 2002.
This ballooning of forward transactions volume was not a balanced growth
however; forward sales of dealers were covered mostly by spot purchases
rather than by matching forward purchases from exporters and other non-
bank foreign exchange earners. Soon after, Bangladesh Bank put up a series
of restrictions, at the same time paving the way for floating the currency as
was done on May 31, 2003.

The interbank foreign exchange transaction volume in 2003 was USD 91.08
billion less than the previous years, mainly because of the restriction
imposed on building up forward sales covered by spot rather than forward
purchases. Due to further restrictions imposed on building up forward sales
covered by spot rather than forward purchases, the interbank foreign
exchange transaction volume in 2004 stood at USD 56.39 billion, and spot
transactions at USD 40.8 billion.

In 2005, all authorized dealer banks were instructed not to undertake any
non-real cross currency forward and swap transactions, and consequently
the interbank foreign exchange transactions volume in 2005 stood at USD
19.9 billion and volume of forward transactions came down to USD 0.3 billion
in 2005

As authorized dealer banks were instructed not to undertake any non-real


cross currency forward and swap transactions, volume of inter-bank forward
transactions was almost nil in 2006, and the volume of inter-bank foreign
exchange transactions in 2006 stood at USD 20.3 billion. This trend
continued in 2007, and the volume inter-bank foreign exchange transactions
stood at USD 19.2 billion
Page27
Size of the Market
The size of the market may be difficult to measure but estimates can be
made based on figures of export, import, remittance, and interbank foreign
exchange transactions.

Before deregulation of foreign exchange market the volume of inter-bank


transaction was low. The assured access to funds from Bangladesh Bank at
known cost as well as the assured buy-sell margins and transaction fees
contained in the pre-determined exchange rate provided little inducement
for authorized dealers to engage in inter-bank transactions. However, the
situation has been changing and the reliance of authorized dealers on the
Bangladesh Bank is gradually declining.

The average monthly transactions of foreign exchange in the inter-bank


market accounted for $23.46 million in 1991-92 and crossed the $1 billion
mark in 1998-99. The average monthly turnover for the six months between
July and December 2000 was $1.5 billion.

From the table bellow have some ideas regarding the volume of trade might
be gathered:

Foreign Exchange Components and Estimation of Market Volume

(Billion USD)
Page27
Compone 2000 2001 2002 2003 2004 2005 2006 2007
nts

Foreign 1.58 1.37 1.44 1.59 1.03 1.49 1.57 1.63


Aid

Export 5.75 6.47 5.99 6.55 7.60 8.65 10.53 12.18

Remittanc 1.95 1.88 2.50 3.06 3.37 3.85 4.80 5.98


es

Total 9.28 9.72 9.93 11.20 12.01 13.99 16.90 19.78


Inflow

Import 7.57 8.43 7.70 8.71 9.84 11.87 13.30 15.51

Foreign 0.55 0.57 0.59 0.61 0.59 0.66 0.67 0.70


Debt
Servicing

Total Out 8.11 9.00 8.28 9.32 10.43 12.53 13.97 16.22
Flow

Total 17.39 18.72 18.21 20.51 22.44 26.52 30.86 36.00


(major)
Transacti
ons

Total N/A 56.00 98.40 91.08 56.39 19.90 20.30 19.20


Interbank
Transacti
ons

Forward N/A 7.19 33.70 24.65 15.60 0.30 Nil Nil


Transacti *
ons

* Estimated Source: Bangladesh Bank


Page27
However, the following table gives the current trading volume (according to
HSBC)

Daily Average FCY/BDT Turnover in Spot USD 15-20 million

Daily Average FCY/FCY turnover in Spot USD 70-80 million

Daily Average Forward turnover in Interbank Insignificant

Daily Average SWAP turnover in Interbank USD 2-3 million

Nature of Trading
The-inter bank foreign exchange market of Bangladesh is still at its
rudimentary stage. The market is an oligopolistic one and is dominated by a
few relatively large banks, which have remained only as dealers instead of
developing themselves into buyers or sellers. The most widely used practice
is spot transaction; this covers 95% of the total transactions. Only forward
transactions offer protection against foreign exchange risks. Deals in foreign
exchange market are usually confirmed over telephone, followed by a
written advice. Confirmed deals may be cancelled on payment of necessary
costs.

There also exists a ‘kerb’ market, where currency racketeers transact foreign
currencies through a chain of middlemen. This market emerged in the
restricted regime of foreign exchange transaction but continues to be active.
This market operates in the alleys or lanes and by-lanes of Dhaka city around
the foreign exchange branches of authorized banks. Dealers of hundi also
form part of this market. A sizeable amount of foreign currencies is
channeled through this market every year.
Page27
Major Factors that Affect the Foreign Exchange
Market

Some of the major factors that affect the foreign exchange market in
Bangladesh are:

i) Exchange rates

ii) Remittances

iii) Foreign Exchange Reserve

iv) Foreign Exchange Regulations

Exchange Rate
Bangladesh Bank limits its market interventions to countering disorderly
movements and to building a more comfortable reserves position consistent
with the macroeconomic program agreed with the International Monetary
Fund. A managed floating exchange rate system in force since May 2003 has
served the economy well, enabling it to adjust relatively smoothly to the
changing external environment, especially in absorbing the oil price shock,
supporting export growth, and protecting reserves.

The exchange rates of Taka for inter-bank and customer transactions are set
by the dealer banks themselves, based on demand-supply interaction. The
Bangladesh Bank is not present in the market on a day-to-day basis and
undertakes purchase or sale transactions with the dealer banks only as
needed to maintain orderly market conditions. The exchange rates are used
as reference rates to purchase or sale transactions for Bangladesh Bank with
Page27

Government or different International Organization. But USD/BDT buying and


selling rates represent previous day inter-bank market's highest and lowest
exchange rates.

Forecast of USD-BDT Movement for the Year 2008:

Forecast of USD-BDT for Year 2008

Month Taka per USD

Jan-08 68.60

Feb-08 69.00

Mar-08 67.00

Apr-08 69.50

May-08 69.00

Jun-08 68.50

Jul-08 68.00

Aug-08 67.00

Sep-08 66.50

Oct-08 68.00

Nov-08 68.50

Dec-08 67.75

Source: HSBC

The exchange rate came under increasing pressure during much of 2006,
Page27

because of slowing financial account inflows and higher import prices for oil
and some other products. The currency stabilized in the last quarter of the
fiscal year, as the tighter monetary policy started to have an effect, and the
current account strengthened notably. The exchange rate stood at Tk69.7/$1
in June 2006, representing an 8.5% depreciation against the US dollar in
2006 (see figure below). The marked depreciation in the nominal rate offset
Bangladesh's higher inflation relative to its trading partners, and the real
effective exchange rate of the taka depreciated by 5.3% in 2006, boosting
the country's external competitiveness.

Buying and selling rates of other currencies in terms of taka

Currency Buying
Selling

USD 68.58
68.58

JPY 0.69
0.69

GBP 136.71
136.74

EUR 108.32
108.35

CAD 67.10
67.14

AUD 62.92
62.94

Nominal exchange rate (Source: Bangladesh Bank)

Remittances and Non-Official Channel Foreign


Exchange (Hundi)
Page27
Experiencing a huge surplus of labor and economic stagnation immediately
after its independence in 1971, Bangladesh has pursued an active policy to
locate overseas labor markets for its nationals and has been amazingly
successful in penetrating the labor markets of the oil-rich Middle Eastern
countries as early as the mid-1970s. Soon after penetrating the Middle East
market in the 1970s, Bangladesh began targeting the comparatively
developed economies of East and Southeast Asia. Some countries of East
and Southeast Asia had experienced labour shortages in the late 1980s and
started hiring a large number of foreign workers. Bangladesh established
contacts with these countries and began sending thousands of its nationals
to these new destinations since the early 1990s. To Bangladeshi migrants,
these new destinations were economically more rewarding as they could
draw higher wages compared to their counterparts in the Middle East.

This possibility of higher earnings induced the migration of better educated


and enterprising Bangladeshis who were mostly unemployed or
underemployed in Bangladesh.

As the labour markets in East and Southeast Asia are limited and controlled
by strict regulatory measures, the flow of documented migrants to this
region is mainly demand-driven. However, with the growth of migrant
networks over time, a growing number of prospective migrants are able to
circumvent the official regulation—a phenomenon that has given rise to
undocumented migration in the region. According to some available data,
the total cumulative figure for Bangladeshi documented migrants overseas
until 2004 was approximately 4 million and for East and Southeast Asia
alone, it was around half a million. However, it is understood that the size of
undocumented migrants will be much higher in both regions. In the last
decade, around 200,000 Bangladeshis annually migrated overseas for work
through the official channel.

Bangladesh’s attempt to earn foreign currencies through the export of


surplus labor has shown remarkable success. According to official data of
Bangladesh Bank and BMET, Bangladesh received more than US$ 32 billion
Page27

remittances from its migrant population between 1976 and February 2005.
The formal remittance to Bangladesh has increased in congruence with the
flow of migrant workers overseas. While in 1976 only US$ 24 million entered
the country through formal channels, this number rose to around 1.09 billion
in 1993, around 2.07 billion in 2001 and, finally, US$ 3.18 billion in 2003. The
data on informal remittances is sketchy. An ILO study on remittances in
Bangladesh revealed that ten out of 100 remittance receiving families faced
problems with the hundi, whereas 19 people encountered problems with
official transfer methods. The ILO study also found that the minimum time
required to transfer the remittances was one hour and the maximum time
was 25 days (bank draft). It is thus obvious that a large amount of cash
enters the country informally.

To increase the inflow of remittances through formal channels, Bangladesh


Bank, as the central bank of the country, plays a crucial role. Bangladesh
Bank permits banks to establish drawing arrangements with foreign banks
and Exchange houses for facilitating remittance by Bangladeshi nationals
living abroad. Persons willing to remit their earnings

Through official channels can buy either Taka draft (Bangladeshi currency) or
US dollar draft from these foreign banks and Exchange houses with drawing
arrangements with different banks in Bangladesh. Bangladeshi nationals
living abroad can send Foreign Exchange directly to their own bank accounts
maintained in Bangladesh or to their nominated person's/relative's bank
accounts in Bangladesh. Banks that are allowed to deal with foreign
exchange either have their own exchange branches or link up with
international banks or money exchange companies in the host countries.
Private Banks are not allowed to have branches in cities overseas. However,
they have correspondent banks.

Some NCBs and PCBs had opened their operations in East and Southeast
Asia in the 1990s. Some Bangladeshi banks that have arrangements with
foreign banks and exchange houses in East and Southeast Asia are Sonali
Bank, Janata Bank, National Bank, Agrani Bank, Islami Bank and United
Commercial Bank. Transfers of money from these banks usually take a week
in the case of receiving banks situated in the capital city Dhaka. However, if
Page27

the receiving banks are situated in the district cities, the delivery time to
banks extends to a few weeks. Migrant workers often blame the malpractices
and unfriendliness of bank officials in Bangladesh. Likewise in some host
countries, especially Singapore and Malaysia, it has been observed that
there is a lack of customer-friendly attitude among the agents of exchange
houses established by Bangladeshi banks.

Besides the facilitation measures for the remittance, strengthening of anti-


hundi surveillance also aided the growth in remittances. Vigilance was
tightened against bank accounts in Bangladesh being used for local transfers
of funds to cover hundi transactions diverting away inward remittances of
workers abroad. This surveillance was supported strongly with the
enactment in April 2002 of a new law for prevention of money laundering
activities in Bangladesh “The Money Laundering Prevention Act, 2002”.

Also, Bangladesh Bank has been making vigorous efforts for preventing flow
of remittances through unofficial channels. These include expansion of
activities of drawing arrangements, review of statements received from
foreign banks/exchange houses, close monitoring and supervision of banks
etc. Besides, the concerned scheduled banks had ensured quick delivery of
remittances by reducing lead-time to the beneficiaries in Bangladesh, which
brought substantial development in the delivery system. It is to be
mentioned that, drawing arrangements have been made between 35
Bangladeshi banks and 380 foreign banks/exchange houses situated
throughout the globe. Furthermore, an annual remittance threshold has been
fixed up amounting to USD 3.00 million for each USA based exchange
houses, GBP 2.00 million for UK-based exchange houses and 2.5 million for
Canadian exchange houses. For these measures, remittances recorded a
substantial increase by 24.8 percent to USD 4801.9 million during 2006,
Remittances as percentage of GDP increased by 1.37 percentage point to
7.74 in 2006 from 6.37 in 2005. Remittances reached an astounding USD
5,979 million in 2007.

Foreign Exchange Reserve


Foreign Exchange Reserve is the stock of foreign currencies a country holds
Page27

to buffer out imbalances between foreign receipts and payments.


Bangladesh Bank, the central bank of the country, holds the stock of
convertible foreign exchange reserve of the country in the form of liquid
assets. In the first 2-3 years after liberation, the foreign exchange reserve of
the country was composed mainly of aid/grants and export earnings.
Subsequently, Bangladesh diversified export products and expanded its
export base. It could also geographically diversify the direction of the export
trade by exploring new areas. The export earnings gradually emerged as the
main source of the country's foreign exchange reserves. In 1974, Bangladesh
introduced the wage earners' scheme, which, by now, has become a
significant source of foreign exchange. Bangladesh receives financial
assistance from IMF under various arrangements, which also constitutes an
important source of the foreign exchange reserve of the country. Moreover,
as its member, Bangladesh receives additional SDR allocations from IMF.
Historically, the foreign exchange reserves of Bangladesh has been largely
inadequate compared to its needs for financing imports, meeting debt
service liabilities, and paying for factor earnings of the foreign nationals. A
growing demand for foreign exchange emanated from people traveling
abroad for education, training and medical service outside the country.

Since liberation, Bangladesh had been following a very restrictive import


policy and rationing scarce foreign exchange. In the process of economic
reform and liberalization, restrictive policies were gradually replaced by
liberal policies. Generally, the reserve position of a country is determined by
factors such as vulnerability in balance of payments, the speed of reserve
depletion, opportunity cost of holding reserves, and the international liquidity
position. The supply of primary exportables from Bangladesh is inelastic in
the short run and the country is dependent on imports for supply of industrial
consumer goods, machinery and industrial raw materials. The prices of
imported goods often fluctuate. As a result, the balance of payments
situation remains under pressure. The balance is influenced by internal
shocks generating from damages caused by floods or droughts as well
external shocks originating from declines in prices of exportables or rise in
prices of imported goods.
Page27
Bangladesh does not have easy access to international liquidity, particularly
to commercial credit, and the availability of funds from official sources is
subject to various conditionalities. This is why Bangladesh has to maintain a
reasonable level of foreign exchange reserve equivalent to an amount that
covers payment for at least about 3 months' imports. The trend of the
reserve shows no uniform growth although there had been a rise in export
earnings as well as workers' remittances. The reserves of $122 million
recorded during 1981-82 were equivalent to less than a month's import
payment. This occurred due to mainly a substantial decline in the prices of
the country's exportables, suspension of IMF's Extended Fund Facility
Programme, and lower aid disbursement. Amidst fluctuations, the reserves
reached a peak level of $3.37 billion in April 1995 and then declined to $1.3
billion or equivalent to about 2 months' of import payment in December
2001.

Foreign exchange controls


Foreign exchange controls are various forms of controls imposed by a government on the
purchase/sale of foreign currencies by residents or on the purchase/sale of local currency by
nonresidents.

Common foreign exchange controls include:

• Banning the use of foreign currency within the country


• Banning locals from possessing foreign currency
• Restricting currency exchange to government-approved exchangers
• Fixed exchange rates
• Restrictions on the amount of currency that may be imported or exported

Countries with foreign exchange controls are also known as "Article 14 countries," after the
provision in the International Monetary Fund agreement allowing exchange controls for
transitional economies. Such controls used to be common in most countries, particularly poorer
ones, until the 1990s when free trade and globalization started a trend towards economic
liberalization. Today, countries which still impose exchange controls are the exception rather
than the rule.
Page27
Foreign Exchange Regulations
Of major note is, of course, that of May 31, 2003 to have a managed float of
BDT, whereby Bangladesh Bank will have a minimum interaction with the
market except as in stabilizing role. Also of not are those of 2005 and 2006
restricting swaps and forwards.

Some major changes in regulations are given below.

Year 2002

Bangladesh continued in 2002 with the policy of leaving the banks


authorized to deal in foreign exchange, free to set their spot and forward
exchange rates for customer transactions and interbank transactions, with
the Bangladesh Bank announcing a one-Taka wide band within which it will
buy and sell US dollars from and to the Authorized Dealer banks on a spot
basis. This band was revised once in 2002, on 6 January 2002, to Taka
57.40--58.40 per US dollar from the previous Taka 56.50 to 57.50, involving
depreciation by 1.6 percent.

Year 2003

Effective from 31st May 2003, Bangladesh stepped into fully market based
exchange rate for the Taka, with BB notifying that it no longer had a pre-
announced rate band for transactions with banks and that it would intervene
in the market only as and when needed to ensure orderly market conditions.
The BB took elaborate preparation prior to this changeover to equip itself
with the necessary instruments to maintain the stability of the market
exchange rate and interest rates. Monitoring of key market variables and
forecasting of liquidity were strengthened; monitoring of open exchange
positions of the banks and of the capital controls were paid special attention.
Repo and reverse repo with banks by the BB were introduced to enable a
firm grip on market liquidity.
Page27
The major changes in foreign exchange regulations in 2003 were:

a) With a view to ensuring balanced buildup of forward purchase and sale


commitments, authorized dealers were instructed to cover their forward
sales of foreign exchange with forward rather than spot purchases.

b) The foreign exchange retention quota for exporters was enhanced from 40
percent to 50 percent for merchandise exports and software/IT exports. The
retention quota for exports with high import content was increased from 7.5
to 10 percent.

c) Exemption from declaration to the customs authorities of foreign


exchange brought into Bangladesh by an incoming passenger was lowered
to USD 3,000 from USD 5,000.

Year 2004

The major changes in foreign exchange regulations in 2004 were as under:

a) In order to avoid risk/gain associated with transactions other than real


transactions, the authorized dealers instructed to establish contract of new
cross currency forward and swap transactions only against customer
requirements without renewal of earlier non-real

Contracts of forward and swap transactions at their maturity.

b) To boost up the garments industries, cash incentives payment systems on


fob export value of local garments in lieu of bonded warehouse or duty draw
back facilities have been revised.
Page27

c) Validity period for export of Crust Leather has been extended up to 30


June 2004.
d) To increase the export of agricultural goods and to encourage the
exporter of such goods, cash incentive has been increased from 15 percent
to 25 percent in case of export of fresh vegetables and agro-based products.
It has also been extended from 20 percent to 25 percent in case of fruits
export.

e) A facility of 5 percent cash incentive has been declared in 2004 against


the export of jute goods produced by government and non- government jute
mills.

f) With a view to diversifying and expanding export of agricultural products


10% cash incentive introduced for export of tobacco and 15% for export of
potato.

g) The ceiling of foreign currency to be brought into Bangladesh without


declaration to the customs authority was refixed at USD 5,000 from USD
3,000.

h) For convenience of the incoming and outgoing tourists/travelers and to


eliminate the illegal activities in foreign exchange, Bangladesh Bank issued
636 money changers (MCs) licenses till September 26, 1999. Subsequently,
376 licenses were cancelled upon detection of irregularities committed by
the MCs leaving 260 in operation. On-site and Offsite supervision on the
activities of money changers has been further strengthened to ensure
disciplined operations in this area.

Year 2005

The major changes in foreign exchange regulations in 2005 were as under:

a) The compulsion of covering forward sales by forward purchases with the


Page27

same amount
were relaxed. Under the new arrangement Authorized Dealers (AD) were
required to cover at least 50 percent of their forward sales by forward
purchases. The remaining portion may be covered by inter-bank forward
purchase and spot purchase of export bills. Besides, forward sales associated
with swap transactions were not required to be covered by forward
purchases. However, outstanding swap transactions would have to be limited
up to the open position limit designated for the transacting AD. Banks were
advised to undertake swap transactions in line with counter party limit in
accordance with core risk management guidelines issued by Banking
Regulation and Policy Department of Bangladesh Bank on October 7, 2003.

b) ADs were instructed to prepare and submit currency-wise daily foreign


exchange position as per revised format of exchange position statement.

c) Cash incentives for export of agriculture and agricultural products (fresh


vegetables/fruits/ agro-processing produces) would be 30 percent instead of
25 percent effective from July 1, 2004.

d) Non-packer exporters would get cash incentives at 10 percent in case of


export of frozen shrimp and other fish for retail packing.

e) Cash incentives or subsidy for export of jute and jute goods by


Government and Private sector jute mills at 7.5 percent effective from July 1,
2004 to June 30, 2005.

f) To prevent the irregularities regarding non-entering of imported goods and


non-tracing of the importers against imports and import payments, all banks
were advised to make themselves confirmed about the authenticity of
importers, importers present and permanent addresses, their business, their
good will, their previous transactions, eligibility etc. before opening of letter
of credit. However banks have also been advised to make sure about
entering of imported goods against import payments.
Page27
g) Restriction of advance payment against imports without the permission of
Bangladesh Bank were withdrawn subject to availability of bank guarantee
issued by internationally recognized and renowned foreign banks on behalf
of the foreign beneficiaries/suppliers.

h) To encourage more foreign investment in Bangladesh and to create scope


for local commercial banks to profitably invest their funds, local banks were
given authorization to provide working capital loan facilities to B and C type
industries in EPZs.

i) To ensure about entering of imported goods against import payments,


commercial banks were advised not to open new LCs on behalf of the
importers against outstanding/nonsubmitted bill of entries.

Year 2006

The major changes in foreign exchange regulations in FY06 were as under:

a) In order to attract more investment "The US Dollar Premium Bond Rules


2002” and “The US Dollar Investment Bond Rules 2002” have been revised
with effect from 3 July 2005. According to the revised US Dollar Premium
Bond Rules and Investment Bond Rules, non-resident account holder means
an individual of Bangladesh or foreign national residing abroad and holding a
non-resident foreign currency account in a bank branch in Bangladesh with
Authorized Dealership in foreign exchange.

b) It has been decided that prior Bangladesh Bank approval will, however,
not be required for Taka advances by way of purchase of cheques in freely
convertible currencies drawn by foreign embassies/international
organizations/foreign nationals employed therein on their bank accounts
abroad, provided that
Page27
(i) The Authorized Dealer is fully satisfied about collectibility of cheque
proceeds in foreign currency within four weeks of purchase,

(ii) The expected collection period is fully factored in while deciding the
purchase price in Taka, and

(iii) The purchases are with recourse to drawers of the cheques for any
difficulty in collection.

c) It has been clarified that balance in the Nonresident Investors Taka


Account (NITA) held for investment in Bangladeshi shares and securities may
be transferred to the Foreign Currency Account (FCA) of the same person
with the respective AD without prior approval of Bangladesh Bank. Similarly,
balance in the FCA may also be transferred to NITA without prior approval of
Bangladesh Bank. However, in both the cases a written request of the
account holder will be required.

d) To attract investment in agro-based industry in Ishwardi EPZ it has been


decided that subsidy facility would be given for the export of liquid glucose
produced in this EPZ and the rate of subsidy will be 20 percent of net
repatriated fob value. This facility will be applicable for liquid glucose
shipped during July 1, 2005 to June 30, 2006.

e) A decision has been taken by the government of Bangladesh that subsidy


facility will be given against export of light engineering products (Carbon Rod
for battery, UM-1/R-20/D size battery, UM-3/R-06/AA size battery and locally
manufactured glassware, manufacturing machinery, moulds and parts)
produced within the country. This facility will be applicable for the export
products where shipment will be made during 1 July 2005 to 30 June 2006. If
these products have value addition of more than 50 percent, then subsidy
will be given at the rate of 10 percent of repatriated of net export value
under prescribed conditions. In this connection, some guidelines have been
issued to the ADs for compliance.
Page27

f) Authorized Dealers are instructed that besides bills of lading and Air Way
Bills issued by the concerned carriers, negotiation of export bills may also
take place against Forwarders' Cargo Receipts (FCRs) and House Air Way
Bills (HAWBs) issued by freight forwarders provided that

i) The export letter of credit and the export sale contract specifically provide
for negotiation of export bill against FCR/HAWB (as the case may be ) issued
by a freight forwarder, and

ii) The freight forwarder issuing the FCR/HAWB is operating in Bangladesh


with authorization from the Bangladesh Bank under Section 18A of the FER
Act 1947.

g) Under Export Development Fund (EDF) preshipment credit facility in US


Dollar was initially introduced for import of raw materials, accessories, spare
parts and packing materials against export letter of credits on sight basis.
Now it has also been extended for import of the same items on sight basis
against export contract, provided that if any export proceeds becomes
overdue for not being repatriated within four months after the shipment, the
concerned exporter and/or business entity is not allowed to avail further
facility under Export Development Fund. A single borrower exposure limit is
fixed up to a maximum of USD 1.00 million.

Year 2007

The major changes in foreign exchange regulations in 2007 were as under:

a) Export subsidy for export of Halal meat will be given at 20 percent during
2007.

b) Cash incentives for export of selected items during 2007 is as follows; 5


percent for export oriented local textile sector, 10 percent for frozen shrimp
and fishes, 15 percent for leather products, 15 percent and 20 percent
(depend on using local material) for products made by hoogla, straw, coir of
sugar cane, 10 percent for tobacco, 10 percent for potato, 15 percent for
bicycle and crust bone, 7.5 percent for jute products, 15 percent for hatching
eggs and dayold chicken of poultry industries, 10 percent for light
engineering products and 20 percent for agro and agro processing products.
Page27
c) To attract investment in agro-based industry in Ishwardi EPZ it has been
decided that

subsidy facility would be given for the export of liquid glucose produced in
this EPZ and the rate of subsidy will be 20 percent of net repatriated fob
value. This facility will be

applicable for liquid glucose shipped during 1 July 2005 to 30 June 2008.

d) On August 2006, it was decided that term loans in Taka for capacity
expansion/BMRE of foreign owned/controlled industrial firms may henceforth
be extended/renewed by banks without prior approval of Bangladesh Bank
provided that: 1) the term loan in Taka does not exceed, as percentage of
total term borrowing, the percentage of equity of the firm/company held by
Bangladeshi nationals and firms/ companies not owned or controlled by
foreigners, and 2) total debt of the firm/company does not exceed the 50:50
debt equity ratio. Besides, if requested, Bangladesh Bank may give consent
to term borrowing proposals not confirming with the stipulations stated
above.

e) For implementation of Uniform Customs and Practices for Documentary


Credits (UCPDC-600), 2007 Revision, the Authorized Dealers (ADs) are
advised to explicitly mention that UCPDC-600 shall apply for all Letters of
Credit (LCs) to be opened from 1 July 2007. Similarly, in case of exports from
Bangladesh against LCs are in conformity with the rule of UCPDC- 600. If
otherwise, ADs shall get the LCs amended accordingly.

References
1. Multinational Business Finance by David K. Eiteman, Arthur I. Stinehill,
Michael H. Moffet
Page27

2. Bangladesh Review & Outlook - 2007, HSBC


3. Bangladesh Bank, Annual Reports 2002, 2003, 2004, 2005, 2006, 2007

4. Weekly Currency roundup, Standard Chartered Bank

5. Bangladesh Bank Quarterly Report Oct-Dec, 2007

6. The Social Organization of Remittances: Channelling Remittances from


East and Southeast Asia to Bangladesh by Md Mizanur Rahman
and Brenda S.A. Yeoh

7. http://www.bangladesh-bank.org

8. http://www.bafeda.com/

9. http://www.cpd-bangladesh.org

Page27