Bangladesh Bank’s new forward dollar selling rules promote transparency and standardization but pose challenges for banks and customers in implementation
The Bangladesh Bank recently made significant revisions to its rules regarding forward foreign currency selling, impacting the way banks can sell dollars in the future. This change aims to create transparency and standardization in the foreign exchange market.
According to a statement from central bank spokesperson Md Mezbaul Haque, banks are now permitted to engage in forward dollar sales for a maximum period of three months, in contrast to the previous allowance of one year outlined in a circular issued on a Sunday, October 8.
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This alteration implies that banks will now calculate the premium based on this three-month time frame rather than the previous one-year term when establishing the dollar rate for import payments.
In practical terms, this means that using the current rate as a reference, banks can levy a maximum of Tk113.85 per dollar for forward sales. The newly issued circular, dated Tuesday, also specifies that if a forward contract is settled early, the premium must be adjusted to correspond with the actual duration of the contract.
Before the introduction of these new guidelines, there were no uniform procedures in place to regulate how banks determined the value of the dollar in these transactions, with each bank setting their forward dollar selling and buying rates independently.
Forward foreign currency selling’s revised rules
Forward foreign currency selling is an agreement where a party undertakes to sell a specified quantity of foreign currency at a fixed exchange rate on a future date. This contractual arrangement is a common tool used by individuals, businesses, and financial institutions to mitigate the risks associated with exchange rate fluctuations.
Earlier on Sunday, October 8, the central bank issued a directive stating that banks have the authority to determine the forward dollar rate. This rate can be calculated by adding the maximum six-month moving average rate of treasury bills (SMART) plus 5% per annum to the current dollar rate. To put it differently, if we consider the SMART rate as 7.14%, banks are allowed to charge a maximum additional fee of 12.14% per annum on top of the prevailing dollar rate for forward dollar transactions. While it establishes time limits for dollar forward sales related to import letters of credit (LCs) provided to customers, the previous practice of open-ended forward dollar purchases from exporters remains unchanged.
Several senior officials from private banks have indicated that the new regulations governing forward dollar sales aim to curb banks’ ability to impose higher rates for dollar transactions. They revealed that recent inquiries into the higher dollar rates by the treasury departments of ten banks prompted this change.
“With the introduction of these new rules, banks are now obligated to adhere to specific guidelines when conducting forward dollar transactions,” stated one of the officials.
Implementation Challenges and Potential Alternatives
Zahid Hussain, a former lead economist at the World Bank’s Dhaka Office, pointed out that in the most recent monetary policy for the July-December period, the central bank indicated that they would implement a market-based exchange rate for the dollar in September. Furthermore, he noted that banks faced penalties for trading dollars at high prices, a departure from the previous practice where banks themselves determined the exchange rate for buying and selling dollars. Under the new regulations, banks now have a predetermined ceiling for future dollar transactions.
Highlighting the absence of a time limit for forward dollar buying, the economist emphasized that the new rules allow banks to engage in forward selling of dollars for a maximum of three months, while the previous circular’s provisions remain unchanged for dollar purchases. Consequently, if a bank enters into a forward purchase agreement with exporters for six months, they are obliged to purchase dollars at a higher rate. Conversely, in the case of selling, they won’t receive a similar rate. Zahid Hussain expressed concerns that this could lead to a disparity.
Despite the central bank’s efforts to establish new regulations, bankers are skeptical about their ability to fully comply. They argue that payments for sight letters of credit (LCs) for imports should be settled within a few days of placing an order. Currently, to meet these LC payments, banks must purchase dollars at a maximum rate of Tk116-117. The price at which dollars can be sold after three months is lower than what the central bank’s rules dictate.
The Banks may explore alternative methods to offset the challenges posed by these changes. One potential solution is collecting additional fees from customers or devising strategies to bridge the gap between forward selling and purchasing rates. This could involve risk management practices to mitigate the impact of rate disparities on customers.
Typically, when customers engage in forward dollar purchases, they are effectively managing their exchange rate risk. For instance, in the case of deferred LCs for imports, customers must pay for their imported goods three months down the line. However, they face uncertainty about the future dollar exchange rate at that time. This is because the customer sets the selling price of their imported products based on the dollar’s value at the time of payment. The rate at which customers will purchase dollars after three months is predetermined by the forward dollar selling rate offered by banks.
Similarly, the forward dollar buying rate determines the amount an exporter will receive when their export proceeds in dollars arrive after a specified period.
Conclusion
The Bangladesh Bank’s revised rules for forward dollar selling represent a significant change in the foreign exchange market. While they aim to create transparency and standardization, there are concerns and challenges that banks and customers must navigate. As the market adapts to these new regulations, it remains to be seen how effectively they will be implemented and whether any further adjustments will be necessary to ensure fairness and stability in the foreign exchange market.
