BB fixes forward forex rate for first time

For the first time, the Bangladesh Bank has decided to determine the rate of foreign exchange, namely the US dollar, to be delivered in future, widely known as forward contract -- a move that has created mixed reactions among businesses.

The forward exchange rate is the rate at which a bank agrees to exchange one currency for another at a future date when it enters into a forward contract with an investor.

The development comes amidst the backdrop of the forex crisis, with banks charging different rates to firms for forward purchase of dollars.

The central bank on Sunday issued a notice, saying the forward premium would not exceed SMART plus 5 percent per annum, with declared spot rates for forward dealings with customers.

The six-month moving average rate of the treasury bill (SMART) is a new system of the central bank, which is applicable for fixing the lending rate. In September, the SMART stood at 7.14 percent.

The USD is currently trading at Tk 110.50.

As a result, if customers collect US dollars through forward purchases, they will have to pay Tk 123.91 per dollar in future.

Before fixing the rate, banks were imposing different rates for forward selling of US dollars, causing volatility in the foreign exchange market, a senior official of the central bank said.

A private banker said the additional cost of foreign currencies was a sort of insurance premium. A buyer who buys a dollar at the forward rate now will get the currency at this specified rate in future, regardless of the exchange rate that will prevail at that time.

However, a senior official of a commodity importer and processor says this may create panic in the foreign exchange market.

He said that the central bank was indirectly raising the US dollar rate.

"We were collecting the US dollars through forward purchase at different rates. Sometimes, we manage the American greenback at a lower rate depending on the relationship."

The forward trading of US dollars in Bangladesh is not new.

"It has been happening for a long time as banks do not have adequate US dollars," he said.

BSM Group Chairman Abul Bashar Chowdhury, however, thinks banks should impose the US dollar rate in a compliant way.

"When different banks impose different rates, there is a chance to create unhealthy competition among businesspeople, which ultimately raises the price of products."

Fixing the forward forex rate is a good initiative because banks will not be able to impose different rates for forward forex trading, said a senior official of a business group based in Chattogram.

Industry insiders say that the central bank fixed the forward rate because almost all banks are now trading US dollars on a forward basis despite the BAFEDA and the ABB fixing the rate of American greenback every month since last year.

On Sunday, the Bangladesh Foreign Exchange Dealers Association (BAFEDA) and the Association of Bankers, Bangladesh (ABB) decided to buy the US dollar at Tk 110 and sell them at Tk 110.50.

The new rates came into effect yesterday. But most of the banks are not following the rate due to a shortage of the currency.