The Financial Express

The many facets of foreign exchange market

| Updated: July 23, 2022 22:15:29

The many facets of foreign exchange market

Recent trend in exchange rate becomes talk of the town. It is well known that depreciation of local currency facilitates foreign currency earners; with costs to making remittances abroad.

Taka is reported to have been depreciated to a moderate extent. To retain value of Taka at a reasonable level, report shows that foreign currency of around US$ 7.00 billion has already been injected by central bank in the market. It is true that Taka needs to be valued at fair price whatever it costs to importers or facilitates exporters. Otherwise, external sector competitiveness will lose in the long run. In this aspect, depreciation of Taka in line with its natural price is well appreciated from all corners. But there is a gulf of gap between buying and selling rates of greenback in the market. The depreciation does not bring benefits to exporters; the same is true for beneficiaries of wage remittances. The benefits are said to be in the hands of few market players and money transfer companies facilitating wage remittances.

The latest monetary policy statement estimates that annual trade deficit would be more than US$ 33 billion with current account deficit nearing US$ 18 billion after considering wage remittances of more than US$ 21 billion in the last fiscal year (FY22). The overall balance of payments is projected to be in deficit territory of US$ 4.8 billion. The current account deficit needs to be supported by foreign investment and loan; including greenback supports by central bank as said earlier. This indicates that demand side of the market is met by supplies from exports, wage remittances, foreign investment and loans, and supports from central bank. As such, foreign exchange market is not on a illiquid trajectory. If it so happens, exchange rate of all players should, with a little variation, be the same.

Insider information shows that central bank monitors foreign exchange market through prescribed 'net open position' limit. Within this limit, market players can keep their exposure uncovered. Open position is a simple statement showing assets and liabilities in foreign currency of market players. A customers' deposit of US$ 100.00, as an example, supported by balance with banks abroad as assets indicates zero position. The position will be positive if the deposit is bought by players. On the other hand, the position will be negative in case the deposit is used for outward payments. In technical words, the positive position is known as 'long', and 'short' in case of negative position.

Banks' deposits are raw materials used for their lending activities. Banking operations are run by fractional reserve system under which deposits are not demarcated by customers. Like local currency deposits, there are many types of deposits in foreign currency such as deposits by non-resident customers, multilaterals, enterprises of special zones, branch offices of foreign companies, and admissible resident deposits. There is a special typed transaction operated in Bangladesh for export sector known as back to back letters of credit (BBLCs) as per foreign exchange regulations of the country. The payment of BBLCs is settled out of export proceeds. For this purpose, the fund is retained in foreign currency till settlement of BBLCs. Exporters executing transactions without BBLCs can retain export proceeds in foreign currency for 30 days for settlement of import payments. There is another fund retained in foreign currency known as exporters' retention quota. This fund is useable by exporters for meeting bonafide current business expenses abroad. As the funds are retained as liabilities with same figures in assets, the net position is zero in the books of market players. Adequate fund is reported to be retained in foreign currency at all times out of export proceeds for settlement of import liabilities. Considering the size of exports requiring BBLCs for inputs, the volume of fund including balance of \retention quota is expected to be billions in US dollar.

There is a question whether the fund is useable by banks or not. The fund remains unused, claimed by players. In real sense like Taka deposits, the fund is easily useable for settlement of needs within prudent treasury management. Under the foreign exchange regulations, banks can maintain non-resident foreign currency deposit accounts. The balances held therein are useable for discounting of usance export bills of exporters operating in specialised zones and payments of BBLCs opened on sight basis. The use of fund as supplies leads net open position as short since liquidity will be reduced without reduction in deposits. But the indication bears no significance since it is useable, otherwise it will remain idle. In support of 'no significance', export bill purchases can be cited as an example. It creates long position. But it will not be useable as liquidity until export proceeds are received. Hence, precise analysis is required to extract the position of liquidity from net open position statement. Balances with overseas banks and local placements including deposits with central bank reflect real liquidity. A part of purchases of export bills may be liquid if expected to be realizeable within couple of days as per ageing schedules. As usual, there are expected schedules of repayments of liabilities which do not happen at one time. Prudence in assessment can identify requirements of fund in the coming days. In the age of automation, repayment history can automatically predict requirements for next week or month. As such, encumbered liquidity held in different heads of liabilities can also be useable for transactional needs. Only prudent treasury management practices should be in place.

In view of above perspective, liquidity irrespective of the nature can be useable. Banks use it in true sense. But such uses are not easily identified. What will happen if liability fund is added for day to day transactions? It will work as supply support for which official declaration, as available for non-resident foreign currency deposit accounts, may be made for all types of foreign currency deposits including fund held for settlement of BBLCs. In addition, new liquidity measuring tools with assessment of liabilities washout projection and expected timing for realisation of export bills need to be devised. Adjustment of net result of realisable assets with payables for a shorter period by liquid fund will give true picture of liquidity useable for transactional needs. The process needs to be systemised so that results are generated on daily basis and when needed.


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