Professional Documents
Culture Documents
By Hashmi Rafsanjani
- 1020846
05.12.12
Contents
Abstract ......................................................................................................................................................... 4 Purpose Of The Study ................................................................................................................................... 4 Foreign Exchange ......................................................................................................................................... 5 Foreign Exchange Market ............................................................................................................................. 5 Foreign Exchange Market in Bangladesh ..................................................................................................... 6 Different Foreign Exchange Regimes ........................................................................................................... 7 Limits of Foreign Exchange Trading ............................................................................................................ 7 Role of Bangladesh Bank.............................................................................................................................. 7 Authorized Dealers of Foreign Exchange in Bangladesh ............................................................................. 9 Transaction in the Interbank Market ........................................................................................................... 10 Size of the Market ....................................................................................................................................... 11 Nature of Trading........................................................................................................................................ 12 Major Factors that Affect the Foreign Exchange Market ........................................................................... 13 Exchange Rate ........................................................................................................................................ 13 Remittances and Non-Official Channel Foreign Exchange (Hundi) ...................................................... 13 Foreign Exchange Reserve ..................................................................................................................... 15 Foreign Exchange Regulations and Major Changes ................................................................................... 16 Year 2003 ................................................................................................................................................ 16 Year 2004 ................................................................................................................................................ 16 Year 2005 ................................................................................................................................................ 17 Year 2006 ................................................................................................................................................ 17 Year 2007 ................................................................................................................................................ 17 Works Cited ................................................................................................................................................ 18
Abstract
The concept of foreign exchange and foreign exchange markets is one of the most dynamic arenas of modern finance. With the advent of technology and the proliferation of globalization, trading is now executed without boundaries, barriers globally. The globalization of business today calls for a proactive domestic framework in Bangladesh. Not only must it be flexible and dexterous, it must also be regulated and monitored so as to provide the benefits of trade without the propensity of abuse. This paper therefore analyzes the retrospect of foreign exchange market and its development through the years in Bangladesh. It then divulges into the dynamic and functionalities of the Bangladesh Bank, and its policies with respect to trading, servicing, limitations and activity allocations of the market. It illustrates the parameters of trade of foreign exchange and essentially showcases the diversity of activities omnipresent in the market. Furthermore, the paper analyzes the size, scope and sensitivity of the market in relation to global standards, financial obligations and various macroeconomic factors that induce the nature of the foreign exchange market in Bangladesh. Lastly, the paper analyzes the various elements of remittance, Hundi, and non-official exchanges and their subsequent effects. It also casts a view on the various, and significant changes to the regulations over the years done in order to empower the market by creating greater investment incentives, and local industrialization and development.
Foreign Exchange
The exchange of one currency for another, or the conversion of one currency into another currency. Foreign exchange also refers to the global market where currencies are traded virtually around-the-clock. The term foreign exchange is usually abbreviated as "forex" and occasionally as "FX." Foreign exchange transactions encompass everything from the conversion of currencies by a traveler at an airport kiosk to billion-dollar payments made by corporate giants and governments for goods and services purchased overseas. Increasing globalization has led to a massive increase in the number of foreign exchange transactions in recent decades. The global foreign exchange market is by far the largest financial market, with average daily volumes in the trillions of dollars. (Foreign Exchange, 2010)
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$) Particulars Purchase Sale 2002 507.1 63.9 2003 503.9 0.0 2004 314.0 0.0 2005 459.5 70.1 2006 413.0 77.0 2007 649.5 0.0
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. 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.
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.
10
8.11
9.00
8.28
9.32
10.43
12.53
13.97
16.22
17.39
18.72
18.21
20.51
22.44
26.52
30.86
36.00
N/A
56.00
98.40
91.08
56.39
19.90
20.30
19.20
N/A
7.19
33.70
24.65*
15.60
0.30
Nil
Nil
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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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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 Government or different International Organization. But USD/BDT buying and selling rates represent previous day inter-bank market's highest and lowest exchange rates. The exchange rate came under increasing pressure during much of 2006, 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.
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 regulationa 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. (Foreign Exchange Guidelines Volume 1 , 2008) Bangladeshs 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 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 14
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 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.
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. (Annual Reports, 2008)
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. (Quaterly Reports, 2008)
Year 2004
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. 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. 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. 16
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.
Year 2005
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. 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.
Year 2006
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. 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.
Year 2007
The major changes in foreign exchange regulations in 2007 were as under: 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. (Quaterly Reports, 2008)
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Works Cited
Annual Reports. (2008). Retrieved Dec 1, 2012, from Bangladesh Bank: http://www.bangladeshbank.org/pub/index.php Convertibility of Taka. (2012). Retrieved Sun 2, 2012, from Bangladesh Bank: http://www.bangladeshbank.org/aboutus/regulationguideline/foreignexchange/convertk.php Foreign Exchange. (n.d.). Retrieved Dec Wednesday, 2012, from Investopedia: http://www.investopedia.com/terms/f/foreign-exchange.asp#axzz2E9LLhETI Foreign Exchange. (2010). Retrieved Dec 5, 2012, from Investopedia: http://www.investopedia.com/terms/f/foreign-exchange.asp#axzz2E9LLhETI Foreign Exchange Guidelines Volume 1 . (2008). Retrieved Dec Sun , 2012, from Bangladesh Bank: http://www.bangladesh-bank.org/aboutus/regulationguideline/foreignexchange/fegv1cont.php Malik, Y. H. (2010). Forex Market In Bangladesh. Retrieved Wed 5, 2012, from Scribd: http://www.scribd.com/doc/35486756/Foreign-Exchange-Market-in-Bangladesh Quaterly Reports. (2008). Retrieved Dec 1, 2012, from Bangladesh Bank: http://www.bangladeshbank.org/pub/index.php Siddiqui, A. (2012, Jan 3). Bangladesh Speaks Out Against Online Forex. Retrieved Dec 2 , 2012, from Forexmagnates: http://forexmagnates.com/bangladesh-speaks-online-forex-trading/
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