DURING the last few months several articles written by financial experts and experienced bankers have been published in newspapers regarding the price of US dollar in terms of Taka. Similar discussions on the subject have also been telecast in the electronic media. It is observed that all the important issues relating to the subject have not been discussed and in certain cases partial clarification of some of the issues have been focused. Here an attempt has been made to discuss the maximum issues of the subject as far as practicable.
As per reports published in newspaper, the demand for US Dollar and its price in terms of taka is soaring due to a number of reasons. Thus, a few banks have already extended their credit facilities without maintaining the norms of cash reserve requirement (CRR) and statutory liquidity requirement (SLR) relating to their deposits. In such a situation, it is also alleged that they have already issued L/Cs without making any arrangement for payment of import liabilities. As a result, when the documents arrived, they had to borrow money from the call market at a higher rate for purchasing dollars from the major operators (banks) in the forex market. These activities of the banks have put extra pressure on the money market as well as on the demand for dollars. The banks that are selling the dollars have got the opportunity to charge more price for dollars from the purchasing bank as a business game.
In certain cases, LCs have already been opened but the suppliers did not ship the goods unless unit price was enhanced. The extra price so charged by the suppliers is usually met up through underhand payment. Furthermore, very recently goods are being shipped without any import LC but against direct payment of dollar, which is in fact smuggling.
Some banks are also found to visit exchange houses abroad for procurement of foreign remittances offering extra commission and thereby creating unhealthy competition among themselves. This, in turn, makes the price of US dollar costlier at the purchase point.
All such above-mentioned activities have created an extra demand for dollar resulting in its price hike and the country experienced the highest price of dollar at Tk. 66.04 while on the curb market it rose up to 68.00 during the first week of August 2005. The raw materials and finished goods imported at the above rate fuelled the internal prices to rise to a maximum level.
As a matter of fact, all foreign currencies have got the characteristic of commodities which are bought and sold against national currencies basing on the golden rules of demand and supply. Accordingly in a free economy the price of currencies is to be determined by the forces of demand and supply. Naturally the prices of US dollar is to be determined in terms of Taka on the same rules as Bangladesh is practising the floating rate with effect from May 31, 2003 and followed a fully market-based exchange rate for Taka, instead of the policy of occasionally adjusting the rate. Under the system, the exchange rate is determined on the basis of demand for, and supply of, respective currencies.
Under the Bangladesh Bank order 1972, the activities of the country's central bank include, among others, keeping reserves and managing monetary and credit system of Bangladesh with a view to stabilising domestic monetary value and preserving the par value of Bangladesh Taka.
But, under the present system "intervention" in the market by the central bank, keeping the value of Taka stabile through supply of foreign currencies -- in case of scarcity and contraction of foreign currencies -- due to oversupply is not possible as a matter of policy. It has been hinted that the Bangladesh Bank has to build up reserves of foreign currency in order to meet the emergent situation for payment of due foreign loan and to make payment against obligation of priority sectors like imports of food items and petroleum products.
In spite of the Bangladesh Bank's best efforts to maintain the price of dollar stabile through moral persuasion, the result is not so effective. The market is volatile and the price of the dollars has shown a soaring tendency. In order to keep the price of dollar within a reasonable level and considering greater interest of the country, the Bangladesh Foreign Exchange Dealers Association (BAFEDA) has come into the picture. It may be mentioned here that the BFEDA was established in year 1993, with some major objectives.
These, among others include: creating and promoting inter-bank foreign exchange dealings and developing good fellowship which are indispensable to foreign exchange dealings and to discuss matters of common interest; doing all that is necessary collectively and individually and also upholding high standards of ethics by rendering service in foreign exchange dealings.
The BAFEDA has already developed a common code of conduct to be followed by the member banks. After a series of discussions among the members of the BAFEDA and occasional sittings of major ten operators in the forex market, it has been agreed in principle to fix reasonable price for dealing in US dollar in the foreign exchange market. It has been decided in the extraordinary general body meeting of BAFEDA held on August 09, 2005 that: B.C. selling rates for U.S. dollar of banks for transactions with their customers would not exceed Tk. 66.00 per U.S. dollar. Seller banks in the inter-bank foreign exchange market would sell U.S. dollar at rates up to Tk. 65.50 per U. S. dollar and that buyer banks would load a maximum margin of Tk.0.50 per U.S. dollar to fix-up their B.C. selling rates; all the member banks would adjust the rates accordingly within the next seven days; banks would try to keep their commitments as at the agreed rate in fixing the exchange rates of other foreign currencies. Banks would avoid non-dollar currency transactions against BDT through conversion of U.S. dollar; there should be uniformity at the level of Tk.65.00 per U.S. dollar for the exchange rates of exchange houses abroad; banks would ensure to fulfil their commitments under L/Cs already opened up to August 09, 2005. Banks having funding problems would contact the seller-banks as well as the Bangladesh Bank for arrangement of funds. Banks still having funding problems would submit their position for requirement of additional funds to the central bank for assistance.
This is a mutual understanding among the members of the BFEDA and there is no legal basis behind it. But this practice has got more power than is backed by law and it has been opined that this practice is a milestone in the history of foreign exchange business in Bangladesh.
It has been alleged by some of the important personalities in banking circle that these sorts of activities by the BFEDA are beyond their jurisdiction. But the situation has demanded it one may recall the phrase -- "Necessity has no law". With the compliance of the guidelines as given by the BAFEDA and as practised by the member-banks, the situation has since been improved enormously.
In support of the BAFEDA's activities this may be recalled that the historical incident of worldwide debacle when the U.S.A. had unilaterally rescinded in August, 1971 their responsibility to maintain the par value system imposed by the IMF and agreed by U.S.A. in the Bretton Woods conference. The system was that the USA was under an obligation to purchase and sell one ounce of gold at US dollar 35 (thirty five) and all the currencies of the world were directly linked to US dollar and indirectly to gold.
The world economics were then faced with turmoil and a volatile situation in the exchange rate in different currencies was seen. So the different countries had to adapt different means to maintain the exchange rate situation. Some of the countries decided to fix up their currencies with US dollar and the UK pound sterling as the pegged rates. Other countries fixed the rate of exchange of their currencies to the Special Drawing Right (SDR). The Scandinavian countries had arranged a rate of exchange of their currencies among themselves at a fixed rate with provision for dwindling 1.0 per cent ups and downs which is famously known are "a snake in the tunnel"
In a developing economy like ours, import obligations are twice the export earnings and the gap is met up by the remittances of citizens working abroad and by loans and aid from foreign countries. In such a situation, the maintenance of "absolute" floating rate is not possible due to direct or indirect factors influencing the demand and supply. Rather, it is suggested that the managed floating rate is to be maintained for stability of the price. So the action taken by the BFEDA to help stabilise the price of dollar in relation to Taka is justified and praiseworthy.