Foreign Exchange Market of Bangladesh

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1. Introduction

1.1 Objective

Objective of this report is to give an overview of the Foreign Exchange Market. Towards that, an attempt has been made to describe the nature of the market, identify the traders and factors, and give an idea about the size of the market and the volume of trading.

1.2 Methodology

This report has been primarily based on secondary research – various publications of Bangladesh Bank and other banks, notably HSBC and Standard Chartered Bank, newspaper reports, web-sites on the internet, and some informal discussions with bank officials were the main sources for the information..

1.3 Scope and Limitations

A true assessment regarding the aspects covered in the report would have be more rigorous and is beyond the scope of this report. Essentially, direct access to the information available to the members of Bangladesh Foreign Exchange Dealers Association (BAFEDA) BAFEDA would be required which was not available for the preparation of the report. However this report may be used as the basis for further research.

2.1 Functions of the Foreign Exchange Market

Foreign Exchange Market allows currencies to be exchanged to facilitate international trade and financial transactions.

Foreign 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.

2.2 Different Foreign Exchange Regimes

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 authorized dealers. Initially the spread was Tk 0.10, which was gradually widened to Tk 0.30.

Until late in 2003, Bangladesh followed an exchange rate policy of occasionally adjusting the rate with an eye on maintaining export competitiveness, mainly with reference to the trend of Real Effective Exchange Rate Index based on a trade weighted basket of currencies acted as a sort of benchmark for the banks to set their own rates.

From May 31, 2003, the exchange rates for the Bangladesh Bank’s spot purchase and sale transactions...
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