Foreign Exchange Market

Foreign Exchange Market allows currencies to be exchanged to facilitate international trade and financial transactions. Evolution of the market in Bangladesh is closely linked with the exchange rate regime of the country. In fact, a full-fledged foreign exchange market development process began in Bangladesh after 1993. Before this time, there was a kind of regulated foreign exchange market system in the country. bangladesh bank, as agent of the government, was the sole purveyor of foreign currency among users. It tried to equilibrate the demand for and supply of foreign exchange at an officially determined exchange rate, which, however, ceased to exist with introduction of current account convertibility.

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 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. This gave rise to a informal foreign exchange market or kerb market. Up to 1990, multiple exchange rates were allowed under different names of export benefit schemes such as, Export Bonus Scheme (EBS), Export Performance Licensing (XPL), Export Performance Benefit (XPB), Exchange Rate Fluctuation Absorption Scheme (EFAS), Import Entitlement Certificate Scheme (IECS), and Home Remittances Scheme (HRS). 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 authorised dealers. Initially the spread was Tk 0.10, which was gradually widened to Tk 0.30. 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 (REER) intended to be kept close to the equilibrium rate.

The players in the foreign exchange market of Bangladesh are the Bangladesh Bank, authorised 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 Foreign Exchange Guidelines published by the Bangladesh Bank. The authorised 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 authorised dealership in foreign currencies only to scheduled banks. The amount of foreign exchange holdings by the authorised 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 authorised 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 authorised 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 authorised dealers. Transactions by customers take place mainly to satisfy customer demand for individual needs and to facilitate export, import, and remittances.

Foreign exchange market of Bangladesh is mostly Dhaka based. Currently 60 scheduled banks are participating in the inter-bank foreign exchange transaction as Authorized Dealer (AD) of foreign exchange. AD may hold excess foreign currency up to the limit of long or short position determined by Bangladesh Bank based on their regulatory capital. Foreign exchange holdings beyond the open position limit, AD is supposed to sell the excess amount to customer or interbank markets or to Bangladesh Bank.

It is important that the volume of inter-bank foreign exchange transactions has increased significantly after currency convertibility took place in 1993. In fiscal year 1992, just the previous year of convertibility, the average monthly interbank foreign exchange transaction was USD 23.46 million. It crossed to USD 1.5 billion in July-December 1999. During fiscal year 2021 total interbank transactions was USD 45.8 billion, in which spot transaction was USD 6.0 billion and swap and forward transaction amount was USD 39.8 billion. It proved the interbank foreign exchange market has improved from its scope, volume and depth but considering foreign exchange dimension, the market is assumed still in primary stage. In the year of currency convertibility foreign exchange regulation was liberalized and on 12 August 1993 Bangladesh Foreign Exchange Dealers Association (BAFEDA) formed to formulate a code of conduct among the members. Besides, there is a kerb market of foreign exchange in operation and an informal remittance channel called hundi can offer a very competitive rate. However, the foreign exchange market has been increased by scope, dimension and depth.

Since May, 2003 with the floating of BDT, foreign exchange market of Bangladesh entered into a new phase with deregulated characteristics. In their dealings for the first time, market players were free from government or Bangladesh Bank intervention. Although, there had been a fear of adverse consequences of floating, the market responded rationally to the change in foreign exchange dealing system. It was recorded that Bangladeshi taka gained in first interface with international market in Floating Exchange Rate (FER) regime. US dollar was traded between Tk 58.55 and Tk 58.63 on next day after floating as compared to Tk 58.55 and Tk 58.70 on the previous day. Around US $22 million was transacted in the market in one day without any abnormal market behaviour. In the secondary market, the rate of dollar varied between Tk 60.00 and Tk 61.30 during the week as compared to the range of Tk 59.80 to Tk 60.35 in the preceding week. From the trend, it was revealed that Bangladesh taka maintained its strength against US dollar throughout the first week after the float, although the exchange rate of dollar showed somewhat upward bias. The strong supply position, particularly, adequate supply from the authorised dealer reasonably offset the strong demand for dollar. However, in the informal market, as before, dollar was traded a bit higher compared to the inter-bank market. It may be mentioned that Bangladesh Bank had taken necessary cautionary steps to avert possible erratic behaviour of the market. To this end the vigilance team of Bangladesh Bank visited the commercial banks throughout the week to monitor the market behaviour. However, the local call money market on the other hand depicted a high trend after the float. High investments by few banks along with withdrawal of excess fund from the market by the Bangladesh Bank through "reverse repo" might have led to fund crunch in the local currency market which exerted positive influence in foreign currency market. Possibly, there might had been a seesaw effect between the rise of call rate and fall in foreign currency price.

After currency convertibility, Bangladesh Taka (BDT) depreciated early 3.9 percent on average during 1994-2000. BDT depreciated by 4.0 percent on average during 2001-2010 and the depreciation rate fell down to 1.9 percent each year on average during 2011-2020. By analysing figure, it is observed that the gradual lower rate depreciation ofTaka in fact, favored export as well as foreign exchange market stability. At the end of June 2021, the exchange rate was BDT 84.81 per USD.

During COVID Pandemic that started in March 2020, Bangladesh import operation fell down sharply and made available foreign currency supply in the foreign exchange market. It results in BDT appreciation pressure. To abate the pressure Bangladesh Bank bought about USD 17.9 billion from commercial banks in 13 months June 2020 to June 2021. In August 2021, the economy opened up along with global economic re-opening and rapid expansion of digital transactions resulting in higher demand of foreign currency and BDT depreciation pressure against USD. To manage the pressure Bangladesh Bank sold about USD 1.5 billion in a 3 months period August-October 2021. This is the central bank market managing tools widely known as foreign exchange market intervention by which manage the market stability. In addition, interbank transactions through future, option, derivatives and price hedging helped minimize their customers’ risks. These foreign exchange activities improved market depth and dimension.

Now the country's foreign exchange market is not confined to Dhaka city only rather, it is extended to Chittagong, Khulna, Sylhet and other important cities also. All the banks are allowed to deal in foreign exchange. Bangladesh Bank has fixed the open position limit for the banks by which, banks are to operate in the interbank market. [Syed Ahmed Khan and A Samad Sarker]