ASSIGNMENT ON Foreign Exchange Market in Bangladesh
Introduction
Foreign
Exchange Market allows currencies to be exchanged to facilitate international
trade and financial transactions.
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.
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 curb market.
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 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.
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| Foreign Exchange Bangladesh- Sunar bangla24 |
Foreign exchange market
and Bangladesh:
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. Interbank foreign currency /Exchange Market operate through
electronic media using dealing room of Bank/ financial institution for buying
and selling of foreign currency among banks and other financial institutions at
floating rate based on market demand and supply. Only authorized dealers deal
directly with each other in foreign exchange markets that are licensed to
operate in the foreign market by the Bangladesh Bank. Authorized dealers who
are generally commercial bank on behalf of their customer handle all the
foreign transaction.
Function of Foreign exchange market:
v
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 exchange is the most
important and effective method of transferring purchasing power between
two parties.
v
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.
v
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.
v
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.
Inter bank transaction in
foreign exchange:
The inter bank market is the top-level foreign exchange market
where banks exchange different currencies. The banks can
either deal with one another directly, or through electronic brokering
platforms. The Electronic Brokering Services (EBS) and Reuters Dealing 3000
Matching are the two competitors in the electronic brokering platform business
and together connect over 1000 banks. The currencies of most developed
countries have floating exchange rates. These currencies do not have fixed
values but, rather, values that fluctuate relative to other currencies.
The inter-bank market is an important segment of the foreign
exchange market. It is a wholesale market through which most currency
transactions are channeled. It is mainly used for trading among bankers. The
three main constituents of the inter-bank market are:
- the
spot market
- the
forward market
- SWIFT
The inter-bank market is unregulated and decentralized. There is no
specific location or exchange where these currency transactions take
place.
Different foreign exchange
rate in Bangladesh:
i)
APPROPRIATE EXCHANGE RATE:
The
central bank may be in a better position to gather all the relevant information
than the other participants in the market. Hence it can appropriately predict
the future course of policies and their implications on the exchange rate. So,
it can plan its intervention in the market according to the situation and
influence the exchange rate. In absence of intervention, the market may indulge
in speculation due to lack of accurate information.
ii)
CONTROL OVER DISTORTIONS IN ECONOMIC ACTURTIES:
Exchange rate which deviates from the real
exchange rate (in relation to the purchasing power parity) may lead to
distortion in resource allocation between external and domestic sectors. Undervaluation
leads to inflationary pressure whereas overvaluation leads to higher rates of
unemployment. Either undervaluation or overvaluation brings in uncertainty and
affects investment decisions. This can be controlled by intervention of the
monetary authorities by making necessary adjustments in the exchange rates.
iii) SMOOTH ENS ECONOMIC ADJUSTMENT PROCESS:
A
persistent surplus or deficit in the balance of payments leads to changes in
the exchange rate to correct the disequilibrium. These changes may result in
disturbances in the domestic economic activities. Intervention can reduce such
disturbances and their effects.
iv)
OTHERS ARGUMENTS:
Managed
flexibility facilitates economic growth due to proper flow of foreign trade. Higher
economic growth increases employment and improves the standard of living of the
people. Managed flexibility also facilitates higher investment due to growth
potential which further boosts the economic growth of a nation.
Major Factors that Affect the Foreign Exchange Market
Some of the major factors that affect the foreign exchange market in Bangladesh are
Exchange Rate
Bangladesh Bank limits its market interventions to countering disorderlymovements 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.
(Source: Bangladesh Bank)
Remittances and Non-Official Channel Foreign Exchange
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
Foreign Exchange Reserve
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.
Foreign Exchange Regulations
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.
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