Forward dollar selling rules revised, max tenure now 3 months

The Bangladesh Bank has revised the rule for fixing the rate of forward foreign currency selling, saying banks can now sell dollars in forward for a maximum of three months instead of one year mentioned in a Sunday circular.

According to central bank spokesperson Md Mezbaul Haque, banks will have the flexibility to engage in forward dollar sales for up to three months, which means that the premium will be calculated for this three-month period rather than the one-year term as per the existing dollar rate for import payment.

In practical terms, this means, based on the current rate, banks can charge a maximum of Tk113.85 per dollar for forward sales.

The new circular issued on Tuesday specified that for early settlement of a forward contract, the premium must be adjusted according to the actual duration.

Forward foreign currency selling is a financial transaction wherein a party commits to selling a specified amount of foreign currency at a predetermined exchange rate on a future date. This contractual arrangement is commonly employed by individuals, businesses, and financial institutions as a means of safeguarding against potential fluctuations in exchange rates.

Prior to the implementation of these new guidelines, there were no standardised procedures governing how banks established the value of the dollar in such transactions. Each bank determined their forward dollar selling and buying rates independently.

Earlier on Sunday, the central bank said in a directive that banks can fix the rate of forward dollars by adding the maximum six-month moving average rate of treasury bill (SMART) + 5% per year with the current dollar rate.

This means the SMART rate is 7.14%. Banks can charge a maximum of 12.14% additional per year with the present dollar rate in the case of a forward dollar buy and sell.

However, according to that instruction, the period for which the banks can buy or sell forward dollars was not specified. The new guidelines specify time limits for dollar forward sales to customers in payment of import letters of credit (LCs). However, the timeframe for buying forward dollars from exporters remains open as before.

Senior officials at several private banks told The Business Standard that the new rule of forward dollar sales has been made to prevent banks from charging higher rates for dollar sales. They said, recently, the heads of the treasury departments of 10 banks were asked why dollars were being sold at higher rates. Some banks then responded that the dollar was sold at a higher price because they sold the dollar three months forward. 

"The central bank had no answer to this argument. Because, even though the central bank fixed the spot or BC selling rate of dollars through ABB and Bafeda, there was no rule as to how banks would charge the forward selling rate of dollars," said one of the officials.

"As a result, banks themselves set the price in terms of forward dollars. Therefore, the central bank could not punish banks for selling dollars at higher prices. Now that the new rules have been made, banks will have to follow the rules even in the case of selling forward dollars."

However, the treasury department head of a bank told TBS that the base interest rate of the respective currency has to be taken into consideration when buying and selling foreign currency forward. For example, the Overnight Financing Rate (SOFR) should be taken into account in the case of dollar forward trading. But according to the central bank circular, it is not being taken into consideration.

He commented that the dollar rate would have been lower if SOFR had been taken into consideration.

Zahid Hussain, a former lead economist of the World Bank's Dhaka Office, said, in the latest monetary policy for the July-December period, the central bank mentioned that the market-based rate of the dollar will be implemented in September. But actually, they could not do that.

"On top of that, banks were punished for buying and selling dollars at high prices. Earlier, banks had set the rate for dollar buying and selling at present, but now they have set a ceiling for dollar buying and selling in the future. The central bank is doing the opposite of what it said in monetary policy," he added.

Pointing out that there is no time limit in the case of forward dollar buying, the economist said, under the new rules, banks can forward a maximum of three months in the case of selling dollars, but the previous circular has been maintained in the case of buying. That is, if a bank buys dollars from exporters six months forward, it has to buy dollars at a higher rate. But in the case of selling, he will not get this rate. Zahid Hussain commented that a mismatch will be created here.

Even if the central bank fixes the new rules, bankers are doubting how much banks will be able to comply with the rules. They say that the payment of sight LCs for import should be done within a few days of placing an order. Now, to pay for these LCs, the dollar has to be bought at a maximum of Tk116-117. The price of the dollar to be sold after three months is lower than the rules of the central bank.

Why should a bank sell dollars at a lower price after three months instead of selling them at a higher price at present? If the rules are made this way, banks will find an alternative way.

In such a case, they commented that they would collect the additional part of the fixed dollar price from the customer in another way.

Usually, by buying forward dollars, a customer essentially mitigates his exchange rate risk. For instance, in the case of a deferred LC of import, a customer has to pay the price of his imported goods after three months. Now the customer has to be uncertain about what the price of the dollar will be after that time. This is because the customer determines the selling price of his imported products by taking into account the dollar value at the time of payment. The rate at which the customer will buy dollars after three months is determined in advance by the forward dollar selling rate of banks.

Similarly, the forward dollar buying rate predetermines how much an exporter will get after the dollar of his export proceeds arrives after a certain period.