In a bid to address the ongoing foreign exchange crisis and ensure stability in the forex market, the Bangladesh Bank (BB) recently released a circular, clarifying its previous announcement regarding forward forex contracts. The central bank’s decision has significant implications for banks, investors, and businesses engaged in currency exchange transactions. This article delves into the details of the central bank’s new guidelines and explores how they could impact the forex landscape in Bangladesh.
Understanding Forward Forex Contracts
A forward forex contract is an agreement between a bank and an investor to exchange one currency for another at a predetermined rate on a future date. This financial instrument is commonly used by businesses and investors to hedge against exchange rate fluctuations, ensuring a predictable cost of currency exchange in the future.
The Circular’s Background
The central bank’s recent circular follows a previous announcement made on September 24, where it stated that the forward premium would not exceed SMART plus 5 percent per annum. SMART, or the six-month moving average rate of the treasury bill, is a new system implemented by the central bank to determine lending rates.
The September circular generated some confusion among banks and investors, who believed they would be allowed to enter into forward exchange rate contracts for a duration of one year, as opposed to the initial three months.
Clarification and Implications
The Bangladesh Bank’s recent circular clarifies that forward exchange rate contracts will still be limited to a maximum duration of three months. Under a three-month contract, customers purchasing US dollars for future delivery will be subject to an exchange rate of Tk 113.85 per dollar. However, under a 12-month contract, this rate could soar to Tk 123.91 per US dollar.
The central bank’s decision to restrict the duration of forward forex contracts is a response to the forex crisis, where banks were charging different rates for forward dollar purchases. This disparity in rates created volatility in the foreign exchange market, prompting the BB to intervene and establish clear guidelines for such contracts.
International Implications
The Bangladesh Bank’s recent actions come at a time when international factors are also affecting the country’s forex operations. The BB has not received official communication from US authorities or the Asian Clearing Union (ACU) regarding restrictions on processing payments linked to the ACU mechanism.
The ACU, which facilitates intra-regional transactions among nine countries, including Bangladesh, India, Bhutan, Iran, the Maldives, Myanmar, Nepal, Pakistan, and Sri Lanka, plays a vital role in the settlement of import bills. However, reports suggest that banks in India have approached the Reserve Bank of India (RBI) after the US Office of Foreign Assets Control (OFAC) advised against processing payments linked to the ACU.
Conclusion
The Bangladesh Bank’s recent circular serves to clarify its stance on forward forex contracts, limiting their duration to three months. This move aims to address volatility in the forex market and provide a more stable environment for businesses and investors. However, the international dimension of this issue, with potential restrictions on ACU-related payments, adds another layer of complexity to the country’s forex operations. As the situation unfolds, market participants will closely monitor developments in the forex landscape to navigate the changing dynamics of currency exchange in Bangladesh.
