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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.
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
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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.
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.
(Million US$)
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.
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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.
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.
Members of BAFEDA
The association may have two classes of members Committees-
Associate Member: This includes those who are authorized in sale and
purchase of foreign currencies and also active in financing import and export
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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
From the table bellow have some ideas regarding the volume of trade might
be gathered:
(Billion USD)
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Compone 2000 2001 2002 2003 2004 2005 2006 2007
nts
Total Out 8.11 9.00 8.28 9.32 10.43 12.53 13.97 16.22
Flow
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.
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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
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
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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,
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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/$1
in June 2006, representing an 8.5% depreciation against the US dollar in
2006 (see figure below). The marked depreciation in the nominal rate offset
Bangladesh's higher inflation relative to its trading partners, and the real
effective exchange rate of the taka depreciated by 5.3% in 2006, boosting
the country's external competitiveness.
Currency Buying
Selling
USD 68.58
68.58
JPY 0.69
0.69
GBP 136.71
136.74
EUR 108.32
108.35
CAD 67.10
67.14
AUD 62.92
62.94
As the labour markets in East and Southeast Asia are limited and controlled
by strict regulatory measures, the flow of documented migrants to this
region is mainly demand-driven. However, with the growth of migrant
networks over time, a growing number of prospective migrants are able to
circumvent the official regulation—a phenomenon that has given rise to
undocumented migration in the region. According to some available data,
the total cumulative figure for Bangladeshi documented migrants overseas
until 2004 was approximately 4 million and for East and Southeast Asia
alone, it was around half a million. However, it is understood that the size of
undocumented migrants will be much higher in both regions. In the last
decade, around 200,000 Bangladeshis annually migrated overseas for work
through the official channel.
remittances from its migrant population between 1976 and February 2005.
The formal remittance to Bangladesh has increased in congruence with the
flow of migrant workers overseas. While in 1976 only US$ 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.
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
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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.
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.
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.
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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.
Year 2002
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.
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The major changes in foreign exchange regulations in 2003 were:
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.
Year 2004
Year 2005
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.
Year 2006
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
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(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.
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
Year 2007
a) Export subsidy for export of Halal meat will be given at 20 percent during
2007.
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.
References
1. Multinational Business Finance by David K. Eiteman, Arthur I. Stinehill,
Michael H. Moffet
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7. http://www.bangladesh-bank.org
8. http://www.bafeda.com/
9. http://www.cpd-bangladesh.org
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