Foreign Exchange Market

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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. It had virtually no foreign exchange market up to 1993. 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 kerb market.

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 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 Exchange Control Manual 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.

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 observed that the value of one dollar increased by around Tk 1.00 to Tk 61.30 in the market amid a buying pressure caused by the speculator. However, this situation might be due to the closure of the most of the money market around the world. 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.

The foreign exchange market experienced some occasional pressure due mainly to seasonal pattern in the flow of imports and exports and the speculative factors. The FY 2005 and FY 2006 the country's foreign exchange market showed some substantial instability. The highest volatility of exchange rate was observed in March 2006. In the interbank market, the taka/US$ exchange rate reached its peak at 71.75 on 21 March 2006. From the overall pattern of transactions, it was found that in these two fiscal year BDT rapidly lost its value against US $ and average TK/$ rate stood at 61.39 and 67.08 respectively. However, taka further lost its value in FY 2007 and stood at 69.03 reflecting more than 17 percent depreciation from FY 2004. To ease the pressure Bangladesh Bank intervened in the market through selling US$ in the interbank market. In addition Bangladesh Bank approved the banks limited excess withdrawal from their foreign exchange clearing account and made some relaxation on restrictions forward and SWAP transactions. During FY 2008 and 2009 taka fairly appreciated against US$ and amidst some fluctuation stood at 68.80 on average in FY 2009 due mainly to sufficient inflow of remittances and export receipts and the trend is continuing. To prevent further falling of the value of US$ Bangladesh Bank purchase US$ 499.2 million (net) in FY 2009. The scope of foreign exchange market has been further widened with the allowing of the ADs for hedging of the price risk of the commodities of their customers through standard exchange traded future/options and over the counter derivatives on commodities with the prior permission of Bangladesh Bank. The volume of interbank transaction in the country's foreign exchange market including spot, forward and swap also increased substantially during FY 2009 which stood at US$ 4.4 billion which is more than 25 percent higher than in the preceding year. This reflects that the market is rapidly gaining maturity and the dependency of the banks on Bangladesh Bank is gradually reducing.

Now the country's foreign exchange market is not confined to Dhaka city only rather, it is extended to Chittagong, Khulna, Sylhet ond 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]