Forward-booking importers get over a Tk1 edge per dollar as rate jumps

Highlights:

• Dollar rebound to Tk123.50 benefits recent forward-booking importers
• Importers locked rates near Tk122, securing cheaper dollar payments
• Forward booking protects businesses against future dollar rate increases
• Banks limit forward bookings mainly to trusted importers
• Bangladesh Bank's absence from spot markets influences exchange rates
• Government dollar payments could ease pressure and push rates lower

Importers that booked dollars forward over the past two weeks are gaining as much as Tk1 per dollar after the exchange rate rebounded to Tk123.50 from Tk122 within days.

The dollar exchange rate rose to Tk123.50 on Thursday from Tk122 ten days earlier, giving businesses that hedged their future payments an advantage, according to treasury officials at several commercial banks.

Large commodity and fast-moving consumer goods (FMCG) importers typically use forward contracts to lock in exchange rates when they expect the dollar to become more expensive. Some private power producers also used to hedge their dollar exposure, but bankers said they are no longer doing so.

"Forward booking is an internationally practised mechanism. When importers believe the dollar rate is volatile or may rise, they opt for forward booking," said Tareq Refat Ullah Khan, managing director of BRAC Bank.

Infograph: TBS

An importer benefits from a forward contract if the dollar rate at the time of payment is higher than the contracted rate. However, if the dollar becomes cheaper, the importer still has to settle the payment at the agreed forward rate.

Khan said banks are currently accepting forward-booking requests mainly from importers with strong track records and long-standing relationships with commercial banks.

"Excessive forward booking can create pressure in the dollar market. But it is an international practice and importers have the right to use it. The problem is that many banks are currently unable to offer the facility," he said.

Arfan Ali, former managing director of Bank Asia, said forward booking gives businesses greater confidence and should be allowed to operate properly to ensure a well-functioning market.

"Businesses need the confidence that comes from the availability of forward booking," he said.

Several senior executives of business groups said they had booked dollars in the last two weeks for import LC payments due in about a month. They will therefore pay the contracted rate even if the dollar becomes more expensive before the payments fall due.

An official of a leading FMCG importer told TBS yesterday that the company had hedged $20 million for 30 days in August at Tk122.60 per dollar.

Cost of locking in dollars

A senior executive of an industrial company said he booked in the last two weeks when the exchange rate fell to Tk122 for a payment due in a month.

With a forward premium of Tk0.20 per dollar for 30 days, the effective rate is Tk122.60. The company will settle the payment at that rate even if the dollar rises further, but it will also have to pay the same rate if the dollar falls.

Another private bank official said an industrial company two weeks ago booked dollars at Tk122.20 for a payment due in a month. Including the forward premium, its effective cost is Tk122.80 per dollar.

Demand for forward bookings increased at several banks in the last two weeks as the dollar had been falling steadily in recent months, the official said.

Importers that booked at the beginning of last week could settle their payments at below Tk123 per dollar, compared with more than Tk124 a month earlier.

Banks hold back dollars as cenbank stays out

The recent movement in the exchange rate has also been influenced by Bangladesh Bank's absence from the spot dollar market, bankers said.

A senior private bank official said the dollar might not have fallen to Tk122 had the central bank intervened by purchasing dollars when the rate began to decline.

Bangladesh Bank's latest dollar purchase was reportedly at Tk122.80, leading bankers to assume that the central bank would intervene around that level. However, the central bank did not buy dollars from commercial banks last week

Many banks still have high net open positions, meaning they are holding more foreign currency than they need for immediate transactions. Some banks are therefore reluctant to sell dollars at lower rates because doing so could result in losses on their existing holdings.

Another banker said the dollar could fall further if Bangladesh Bank remains out of the market. Banks are consequently watching for a level at which the central bank may resume dollar purchases.

A private bank managing director said central bank intervention on the selling side when the dollar rises could also improve market efficiency.

"It would discourage banks from holding excessive dollar positions and keep the exchange rate at a more manageable level," he said.

Govt payments may ease dollar pressure

Changes in government payment obligations are also affecting the foreign exchange market.

The remittance exchange rate fell by around Tk1, from Tk123.60 to Tk122.60, within a week before slipping further to Tk122, according to bankers.

The government has more than $1 billion in payments due this month, of which roughly $500 million has already been settled in last week, bankers said.

Government payments of around $2 billion last month put significant pressure on the foreign exchange market and contributed to the rise in the dollar rate.

A senior private bank official said demand for forward bookings could increase further if businesses expect the dollar to fall.

"Many large importer groups are now assessing whether the dollar rate will decline further," he said.

Some government LC payments are due this week. Once those payments are settled, demand for dollars may ease, potentially putting further downward pressure on the exchange rate.