Foreign Exchange Market

Foreign exchange Market is a place in which foreign exchange transactions take place. In other word,
foreign exchange transaction is a market where foreign money were brought and sold. It is a part of
money market in financial centre.

Function of foreign exchange market: The basic and primary function of a foreign exchange
market is to transfer purchasing power between countries. The transfer function is performed
through T.T, M.T, Draft, Bill of exchange, Letters of credit, etc. the bill of exchange is the most
important and effective method of transferring purchasing power between two parties.

Another important function of foreign exchange market is to provide credit to the importer
debtor. The exporters draw the bill of exchange on importers on their bankers. On acceptance of
the bills by the importer or their bankers, the exporter will get the money realized on the
maturity of the bills. In case the exporters are anxious to receive the payment earlier, the bills
can be discounted from their bankers, or foreign exchange banks or discount houses.

The Foreign Exchange market performs the hedging function covering the risks on foreign
exchange transactions. There are frequent fluctuations in exchange rates. If the rate is favorable,
the exporter will gain and vice verse. In order to avoid the risk involved, the foreign exchange
market provides hedges or actual claims through forward contracts in exchange against such
fluctuations. The agencies of foreign currencies guarantee payment of foreign exchange at a
fixed rate. The exchange agencies bear the risks of fluctuation of exchange rates.

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)
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was allowed to grow parallel to the official exchange rate.

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 of US dollars with authorized dealers were to be decided without reference to any
pre-announced band and the Taka essentially became a floating currency of major trade
partners. The Bangladesh Bank had a preannounce one Taka wide band within which it would,
at its discretion, undertake US Dollar purchase and sale transactions with banks. The banks were
free to set their own rates for their interbank and customer transactions. Those rates generally
tended to be outside the announced rate band for transactions between the Bangladesh Bank
and authorized dealers.

Limits of Foreign Exchange Trading

The foreign exchange market of the country is confined to the city of Dhaka. The 32 scheduled
banks operating as authorized dealers in the inter-bank foreign exchange market are not
permitted to run a position beyond certain limits. In the event of speculation on an appreciation
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of the value, an authorized dealer may buy more foreign currencies than it needs, but at the
end of the day it must maintain its limit by selling excess currencies either in the inter-bank
market or to customers. Authorized dealers maintain clearing accounts with the Bangladesh
Bank in dollar, pound sterling, mark and yen to settle their mutual claims. If there any excess
foreign exchange holdings exist after these transactions, it is obligatory for them to sell it to the
Bangladesh Bank. In case of shortfall of the limit, authorized dealers have to cover it either
through purchase from the market or from the Bangladesh Bank.

Role of Bangladesh Bank

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 (RFER) intended to be kept close to the equilibrium rate. The players
in the foreign exchange market of Bangladesh are the Bangladesh Bank, authorized 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.

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.
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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 2002 2003 2004 2005 2006 2007

Purchase 507.1 503.9 314.0 459.5 413.0 649.5

Sale 63.9 0.0 0.0 70.1 77.0 0.0

Source: Bangladesh Bank Annual Reports 2002- 2007

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
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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.

Authorized Dealers of Foreign Exchange

The authorized 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
authorized dealership in foreign currencies only to scheduled banks. The amount of foreign
exchange holdings by the authorized 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 authorized 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
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are required to be retained with authorized 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 authorized dealers. Transactions by customers take
place mainly to satisfy customer demand for individual needs and to facilitate export, import,
and remittances.

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.

Objectives of BAFEDA

According to the Constitution of Bangladesh Foreign Exchange Dealers' Association, the

objectives of the Association are:

i. To create and promote inter-bank foreign exchange dealings and develop good fellowship that
is indispensable in foreign exchange dealings and relations;

ii. To function in the best interest of the members and also to do all such other things as may be
necessary or desirable in furtherance of the objectives of the Association;

iii. To arrange that the foreign exchange dealers of member banks keep one another informed
and they render assistance to one another without prejudice to the interests of their respective
institutions;

iv. To do all that is necessary in the power of the Association and the members, collectively and
individually, and also to uphold high standards of ethics by rendering quality service in foreign
exchange dealings.

For smooth functioning of the inter-bank foreign exchange market, a “Code of Conduct” for
Bangladesh Inter-Bank Foreign Exchange and Treasury Operations and also “BAFEDA Rules”
were formulated earlier, with the approval of Bangladesh Bank.
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Members of BAFEDA
The association may have two classes of members Committees-

Primary Members: This remains open to all scheduled banks in Bangladesh, who are authorized
dealers and actively engaged in dealing in foreign exchange. The members are represented by
the Chief Executives. However, after giving a due notice, a member may withdraw from the
Association.

Associate Member: This includes those who are authorized in sale and purchase of foreign
currencies and also active in financing import and export activities in Bangladesh. Associate
membership is subject to approval of the Executive Committee. Associate members have no
voting rights.

Transaction in the Interbank Market

Transactions volume in the inter-bank foreign exchange market was USD 56.0 billion in 2001,
and USD 98.4 billion in 2002. Forward transactions had a 4.7 fold increase from USD 7.19 billion
of 2001 to USD 33.7 billion in 2002. This ballooning of forward transactions volume was not a
balanced growth however; forward sales of dealers were covered mostly by spot purchases
rather than by matching forward purchases from exporters and other non-bank foreign
exchange earners. Soon after, Bangladesh Bank put up a series of restrictions, at the same time
paving the way for floating the currency as was done on May 31, 2003.

The interbank foreign exchange transaction volume in 2003 was USD 91.08 billion less than the
previous years, mainly because of the restriction imposed on building up forward sales covered
by spot rather than forward purchases. Due to further restrictions imposed on building up
forward sales covered by spot rather than forward purchases, the interbank foreign exchange
transaction volume in 2004 stood at USD 56.39 billion, and spot transactions at USD 40.8 billion.

In 2005, all authorized dealer banks were instructed not to undertake any non-real cross
currency forward and swap transactions, and consequently the interbank foreign exchange
transactions volume in 2005 stood at USD 19.9 billion and volume of forward transactions came
down to USD 0.3 billion in 2005
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As authorized dealer banks were instructed not to undertake any non-real cross currency
forward and swap transactions, volume of inter-bank forward transactions was almost nil in
2006, and the volume of inter-bank foreign exchange transactions in 2006 stood at USD 20.3
billion. This trend continued in 2007, and the volume inter-bank foreign exchange transactions
stood at USD 19.2 billion

Size of the Market

The size of the market may be difficult to measure but estimates can be made based on figures
of export, import, remittance, and interbank foreign exchange transactions.

Before deregulation of foreign exchange market the volume of inter-bank transaction was low.
The assured access to funds from Bangladesh Bank at known cost as well as the assured buy-sell
margins and transaction fees contained in the pre-determined exchange rate provided little
inducement for authorized dealers to engage in inter-bank transactions. However, the situation
has been changing and the reliance of authorized dealers on the Bangladesh Bank is gradually
declining.

The average monthly transactions of foreign exchange in the inter-bank market accounted for
$23.46 million in 1991-92 and crossed the $1 billion mark in 1998-99. The average monthly
turnover for the six months between July and December 2000 was $1.5 billion.

From the table bellow have some ideas regarding the volume of trade might be gathered:
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Foreign Exchange Components and Estimation of Market Volume

(Billion USD)

Components 2000 2001 2002 2003 2004 2005 2006 2007

Foreign Aid 1.58 1.37 1.44 1.59 1.03 1.49 1.57 1.63

Export 5.75 6.47 5.99 6.55 7.60 8.65 10.53 12.18

Remittances 1.95 1.88 2.50 3.06 3.37 3.85 4.80 5.98

Total Inflow 9.28 9.72 9.93 11.20 12.01 13.99 16.90 19.78

Import 7.57 8.43 7.70 8.71 9.84 11.87 13.30 15.51

Foreign 0.55 0.57 0.59 0.61 0.59 0.66 0.67 0.70

Debt
Servicing

Total Out 8.11 9.00 8.28 9.32 10.43 12.53 13.97 16.22
Flow

Total (major) 17.39 18.72 18.21 20.51 22.44 26.52 30.86 36.00
Transactions

Total N/A 56.00 98.40 91.08 56.39 19.90 20.30 19.20

Interbank
Transactions

Forward N/A 7.19 33.70 24.65* 15.60 0.30 Nil Nil

Transactions

* Estimated Source: Bangladesh Bank

However, the following table gives the current trading volume (according to HSBC)
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Daily Average FCY/BDT Turnover in Spot USD 15-20 million

Daily Average FCY/FCY turnover in Spot USD 70-80 million

Daily Average Forward turnover in Interbank Insignificant

Daily Average SWAP turnover in Interbank USD 2-3 million

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.

Major Factors that Affect the Foreign Exchange Market

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Some of the major factors that affect the foreign exchange market in Bangladesh are:

i) Exchange rates

ii) Remittances

iii) Foreign Exchange Reserve

iv) Foreign Exchange Regulations

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.

Forecast of USD-BDT Movement for the Year 2008:

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Forecast of USD-BDT for Year 2008

Month Taka per USD

Jan-08 68.60

Feb-08 69.00

Mar-08 67.00

Apr-08 69.50

May-08 69.00

Jun-08 68.50

Jul-08 68.00

Aug-08 67.00

Sep-08 66.50

Oct-08 68.00

Nov-08 68.50

Dec-08 67.75

Source: HSBC

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.

Buying and selling rates of other currencies in terms of taka

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Currency Buying Selling

USD 68.58 68.58

JPY 0.69 0.69

GBP 136.71 136.74

EUR 108.32 108.35

CAD 67.10 67.14

AUD 62.92 62.94

Nominal exchange rate (Source: Bangladesh Bank)

Remittances and Non-Official Channel Foreign Exchange (Hundi)

Experiencing a huge surplus of labor and economic stagnation immediately after its
independence in 1971, Bangladesh has pursued an active policy to locate overseas labor
markets for its nationals and has been amazingly successful in penetrating the labor markets of
the oil-rich Middle Eastern countries as early as the mid-1970s. Soon after penetrating the
Middle East market in the 1970s, Bangladesh began 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,
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with the growth of migrant networks over time, a growing number of prospective migrants are
able to circumvent the official regulation—a 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.

Bangladesh’s 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 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.
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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”.

Also, Bangladesh Bank has been making vigorous efforts for preventing flow of remittances
through unofficial channels. These include expansion of activities of drawing arrangements,
review of statements received from foreign banks/exchange houses, close monitoring and
supervision of banks etc. Besides, the concerned scheduled banks had ensured quick delivery of
remittances by reducing lead-time to the beneficiaries in Bangladesh, which brought substantial
development in the delivery system. It is to be mentioned that, drawing arrangements have
been made between 35 Bangladeshi banks and 380 foreign banks/exchange houses situated
throughout the globe. Furthermore, an annual remittance threshold has been fixed up
amounting to USD 3.00 million for each USA based exchange houses, GBP 2.00 million for UK-
based exchange houses and 2.5 million for Canadian exchange houses. For these measures,
remittances recorded a substantial increase by 24.8 percent to USD 4801.9 million during 2006,
Remittances as percentage of GDP increased by 1.37 percentage point to 7.74 in 2006 from 6.37
in 2005. Remittances reached an astounding USD 5,979 million in 2007.

Foreign Exchange Reserve

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Foreign Exchange Reserve is the stock of foreign currencies a country holds to buffer out
imbalances between foreign receipts and payments. Bangladesh Bank, the central bank of the
country, holds the stock of convertible foreign exchange reserve of the country in the form of
liquid assets. In the first 2-3 years after liberation, the foreign exchange reserve of the country
was composed mainly of aid/grants and export earnings. Subsequently, Bangladesh diversified
export products and expanded its export base. It could also geographically diversify the
direction of the export trade by exploring new areas. The export earnings gradually emerged as
the main source of the country's foreign exchange reserves. In 1974, Bangladesh introduced the
wage earners' scheme, which, by now, has become a significant source of foreign exchange.
Bangladesh receives financial assistance from IMF under various arrangements, which also
constitutes an important source of the foreign exchange reserve of the country. Moreover, as its
member, Bangladesh receives additional SDR allocations from IMF. Historically, the foreign
exchange reserves of Bangladesh has been largely inadequate compared to its needs for
financing imports, meeting debt service liabilities, and paying for factor earnings of the foreign
nationals. A growing demand for foreign exchange emanated from people traveling abroad for
education, training and medical service outside the country.

Since liberation, Bangladesh had been following a very restrictive import policy and rationing
scarce foreign exchange. In the process of economic reform and liberalization, restrictive
policies were gradually replaced by liberal policies. Generally, the reserve position of a country
is determined by factors such as vulnerability in balance of payments, the speed of reserve
depletion, opportunity cost of holding reserves, and the international liquidity position. The
supply of primary exportables from Bangladesh is inelastic in the short run and the country is
dependent on imports for supply of industrial consumer goods, machinery and industrial raw
materials. The prices of imported goods often fluctuate. As a result, the balance of payments
situation remains under pressure. The balance is influenced by internal shocks generating from
damages caused by floods or droughts as well external shocks originating from declines in prices
of exportables or rise in prices of imported goods.

Bangladesh does not have easy access to international liquidity, particularly to commercial
credit, and the availability of funds from official sources is subject to various conditionalities.
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This is why Bangladesh has to maintain a reasonable level of foreign exchange reserve
equivalent to an amount that covers payment for at least about 3 months' imports. The trend of
the reserve shows no uniform growth although there had been a rise in export earnings as well
as workers' remittances. The reserves of $122 million recorded during 1981-82 were equivalent
to less than a month's import payment. This occurred due to mainly a substantial decline in the
prices of the country's exportables, suspension of IMF's Extended Fund Facility Programme, and
lower aid disbursement. Amidst fluctuations, the reserves reached a peak level 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.

Foreign exchange controls

Foreign exchange controls are various forms of controls imposed by a government on the
purchase/sale of foreign currencies by residents or on the purchase/sale of local currency by
nonresidents.

Common foreign exchange controls include:

 Banning the use of foreign currency within the country

 Banning locals from possessing foreign currency

 Restricting currency exchange to government-approved exchangers

 Fixed exchange rates

 Restrictions on the amount of currency that may be imported or exported

Countries with foreign exchange controls are also known as "Article 14 countries," after the
provision in the International Monetary Fund agreement allowing exchange controls for
transitional economies. Such controls used to be common in most countries, particularly poorer
ones, until the 1990s when free trade and globalization started a trend towards economic
liberalization. Today, countries which still impose exchange controls are the exception rather
than the rule.

Foreign Exchange Regulations

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Of major note is, of course, that of May 31, 2003 to have a managed float of BDT, whereby
Bangladesh Bank will have a minimum interaction with the market except as in stabilizing role.
Also of not are those of 2005 and 2006 restricting swaps and forwards.

Some major changes in regulations are given below.

Year 2002

Bangladesh continued in 2002 with the policy of leaving the banks authorized to deal in foreign
exchange, free to set their spot and forward exchange rates for customer transactions and
interbank transactions, with the Bangladesh Bank announcing a one-Taka wide band within
which it will buy and sell US dollars from and to the Authorized Dealer banks on a spot basis.
This band was revised once in 2002, on 6 January 2002, to Taka 57.40--58.40 per US dollar from
the previous Taka 56.50 to 57.50, involving depreciation by 1.6 percent.

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.

The major changes in foreign exchange regulations in 2003 were:

a) With a view to ensuring balanced buildup of forward purchase and sale commitments,
authorized dealers were instructed to cover their forward sales of foreign exchange with
forward rather than spot purchases.
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b) The foreign exchange retention quota for exporters was enhanced from 40 percent to 50
percent for merchandise exports and software/IT exports. The retention quota for exports with
high import content was increased from 7.5 to 10 percent.

c) Exemption from declaration to the customs authorities of foreign exchange brought into
Bangladesh by an incoming passenger was lowered to USD 3,000 from USD 5,000.

Year 2004

The major changes in foreign exchange regulations in 2004 were as under:

a) In order to avoid risk/gain associated with transactions other than real transactions, the
authorized dealers instructed to establish contract of new cross currency forward and swap
transactions only against customer requirements without renewal of earlier non-real

Contracts of forward and swap transactions at their maturity.

b) 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.

c) Validity period for export of Crust Leather has been extended up to 30 June 2004.

d) 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.

e) 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.
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f) With a view to diversifying and expanding export of agricultural products 10% cash incentive
introduced for export of tobacco and 15% for export of potato.

g) 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.

h) For convenience of the incoming and outgoing tourists/travelers and to eliminate the illegal
activities in foreign exchange, Bangladesh Bank issued 636 money changers (MCs) licenses till
September 26, 1999. Subsequently, 376 licenses were cancelled upon detection of irregularities
committed by the MCs leaving 260 in operation. On-site and Offsite supervision on the activities
of money changers has been further strengthened to ensure disciplined operations in this area.

Year 2005

The major changes in foreign exchange regulations in 2005 were as under:

a) The compulsion of covering forward sales by forward purchases with the same amount

were relaxed. Under the new arrangement Authorized Dealers (AD) were required to cover at
least 50 percent of their forward sales by forward purchases. The remaining portion may be
covered by inter-bank forward purchase and spot purchase of export bills. Besides, forward
sales associated with swap transactions were not required to be covered by forward purchases.
However, outstanding swap transactions would have to be limited up to the open position limit
designated for the transacting AD. Banks were advised to undertake swap transactions in line
with counter party limit in accordance with core risk management guidelines issued by Banking
Regulation and Policy Department of Bangladesh Bank on October 7, 2003.

b) ADs were instructed to prepare and submit currency-wise daily foreign exchange position as
per revised format of exchange position statement.
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c) Cash incentives for export of agriculture and agricultural products (fresh vegetables/fruits/
agro-processing produces) would be 30 percent instead of 25 percent effective from July 1,
2004.

d) Non-packer exporters would get cash incentives at 10 percent in case of export of frozen
shrimp and other fish for retail packing.

e) Cash incentives or subsidy for export of jute and jute goods by Government and Private
sector jute mills at 7.5 percent effective from July 1, 2004 to June 30, 2005.

f) 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.

g) Restriction of advance payment against imports without the permission of Bangladesh Bank
were withdrawn subject to availability of bank guarantee issued by internationally recognized
and renowned foreign banks on behalf of the foreign beneficiaries/suppliers.

h) 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.

i) To ensure about entering of imported goods against import payments, commercial banks
were advised not to open new LCs on behalf of the importers against
outstanding/nonsubmitted bill of entries.
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Year 2006

The major changes in foreign exchange regulations in FY06 were as under:

a) 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.

b) It has been decided that prior Bangladesh Bank approval will, however, not be required for
Taka advances by way of purchase of cheques in freely convertible currencies drawn by foreign
embassies/international organizations/foreign nationals employed therein on their bank
accounts abroad, provided that

(i) The Authorized Dealer is fully satisfied about collectibility of cheque proceeds in foreign
currency within four weeks of purchase,

(ii) The expected collection period is fully factored in while deciding the purchase price in Taka,
and

(iii) The purchases are with recourse to drawers of the cheques for any difficulty in collection.

c) It has been clarified that balance in the Nonresident Investors Taka Account (NITA) held for
investment in Bangladeshi shares and securities may be transferred to the Foreign Currency
Account (FCA) of the same person with the respective AD without prior approval of Bangladesh
Bank. Similarly, balance in the FCA may also be transferred to NITA without prior approval of
Bangladesh Bank. However, in both the cases a written request of the account holder will be
required.

d) 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
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glucose shipped during July 1, 2005 to June 30, 2006.

e) A decision has been taken by the government of Bangladesh that subsidy facility will be given
against export of light engineering products (Carbon Rod for battery, UM-1/R-20/D size battery,
UM-3/R-06/AA size battery and locally manufactured glassware, manufacturing machinery,
moulds and parts) produced within the country. This facility will be applicable for the export
products where shipment will be made during 1 July 2005 to 30 June 2006. If these products
have value addition of more than 50 percent, then subsidy will be given at the rate of 10
percent of repatriated of net export value under prescribed conditions. In this connection, some
guidelines have been issued to the ADs for compliance.

f) Authorized Dealers are instructed that besides bills of lading and Air Way Bills issued by the
concerned carriers, negotiation of export bills may also take place against Forwarders' Cargo
Receipts (FCRs) and House Air Way Bills (HAWBs) issued by freight forwarders provided that

i) The export letter of credit and the export sale contract specifically provide for negotiation of
export bill against FCR/HAWB (as the case may be ) issued by a freight forwarder, and

ii) The freight forwarder issuing the FCR/HAWB is operating in Bangladesh with authorization
from the Bangladesh Bank under Section 18A of the FER Act 1947.

g) Under Export Development Fund (EDF) preshipment credit facility in US Dollar was initially
introduced for import of raw materials, accessories, spare parts and packing materials against
export letter of credits on sight basis. Now it has also been extended for import of the same
items on sight basis against export contract, provided that if any export proceeds becomes
overdue for not being repatriated within four months after the shipment, the concerned
exporter and/or business entity is not allowed to avail further facility under Export
Development Fund. A single borrower exposure limit is fixed up to a maximum of USD 1.00
million.

Year 2007

The major changes in foreign exchange regulations in 2007 were as under:

a) Export subsidy for export of Halal meat will be given at 20 percent during 2007.
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b) 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.

c) 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 1 July 2005 to 30 June 2008.

d) On August 2006, it was decided that term loans in Taka for capacity expansion/BMRE of
foreign owned/controlled industrial firms may henceforth be extended/renewed by banks
without prior approval of Bangladesh Bank provided that: 1) the term loan in Taka does not
exceed, as percentage of total term borrowing, the percentage of equity of the firm/company
held by Bangladeshi nationals and firms/ companies not owned or controlled by foreigners, and
2) total debt of the firm/company does not exceed the 50:50 debt equity ratio. Besides, if
requested, Bangladesh Bank may give consent to term borrowing proposals not confirming with
the stipulations stated above.

e) For implementation of Uniform Customs and Practices for Documentary Credits (UCPDC-600),
2007 Revision, the Authorized Dealers (ADs) are advised to explicitly mention that UCPDC-600
shall apply for all Letters of Credit (LCs) to be opened from 1 July 2007. Similarly, in case of
exports from Bangladesh against LCs are in conformity with the rule of UCPDC- 600. If
otherwise, ADs shall get the LCs amended accordingly.
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References
1. Multinational Business Finance by David K. Eiteman, Arthur I. Stinehill, Michael H. Moffet

2. Bangladesh Review & Outlook - 2007, HSBC

3. Bangladesh Bank, Annual Reports 2002, 2003, 2004, 2005, 2006, 2007

4. Weekly Currency roundup, Standard Chartered Bank

5. Bangladesh Bank Quarterly Report Oct-Dec, 2007

6. The Social Organization of Remittances: Channelling Remittances from East and

Southeast Asia to Bangladesh by Md Mizanur Rahman and Brenda S.A. Yeoh

7. http://www.bangladesh-bank.org

8. http://www.bafeda.com/

9. http://www.cpd-bangladesh.org

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