Local Foreign Exchange Market:
Looking through the rear view mirror, the year 2002 was undoubtedly eventful for the local foreign exchange market. Increased volatility, policy changes and talk of floating exchange rate system characterised the local foreign exchange market this year.
The talk of possible shift to floating exchange rate regime from the current managed float sparked a lot of enthusiasm among forex dealers. The initial plan was to introduce the floating exchange rate system by mid November with a target forex reserve of UsD 2 billion. However, it was deferred as the regulators feel that market needs more time to prepare for the floating exchange rate system.
Downfall in both import and export was another trend in FY 02. Lower input requirements, containment impact of regulatory duties and mandatory margins are cited as the major reasons for drop in import. Decline in export was experienced mainly due to the global slowdown following terrorist attacks in UsA on 9/11. Current account balance swung to UsD 0.24 billion surplus in FY 02 from a deficit in FY 01 signifying the relentless effort to facilitate remittances from abroad and speeding up delivery to beneficiaries. Rise in worker remittance was able to slightly offset the dip in foreign aid.
Us Dollar retained the crown of the "most traded currency" for cross border transactions; while euro gained momentum among importers for payment of capital machinery and as denomination of export proceed for some RMG manufacturers.
In the beginning of the year, central bank readjusted taka by 90 paisa or 1.58% and raised the band of BDT 57.40-58.40 from BDT 56.50-57.50 with an aim to boost the country's export. During 2002 Indian and Pak rupee appreciated by 0.3% and 2.4% respectively while Lankan rupee depreciated by 4.12%. To give further impetus to exporters, authorised dealers increased the UsD buying rate by 40 paisa in mid-July.
Volatility was the undertone in interbank dollar-taka trading throughout the year. Dollar-taka traded in the range of 58.05 to 58.80 till October. Dollar crisis in early November pushed the rate to 61.25 taka per Dollar. The UsD rate subsequently eased to BDT 58.95 by the year end through central bank initiatives.
Bangladesh Bank initiated a significant change in forward cover contracts through f.e. circular no. 26. The circular instructed the authorised dealers to match forward sale with corresponding forward purchases from exporters and other inward remittances. However, forward purchase from exporters was very limited due to the nature of the export bills and its settlement. As a result, authorised dealers were also unable to meet the importers' demand for forward cover to hedge exchange risk.
Local Money Market:
Introduction of Repo, upward shifts in the t-bill yield curve and volatility in overnight interest rate were the major events in the money market.
In the first quarter, overnight interest rate of taka shot up to a record high of 30-35% temporarily due to change in the Cash Reserve Requirements (CRR) policy and pre-Eid withdrawal pressure. However the average overnight rate for the year settled at around 9%.
On July 1, 02, Bangladesh Bank introduced Repurchase Agreement, commonly known as Repo, an effective money market instrument for collateralised short-term borrowing and lending through sale/purchase of securities. Initially Repo has been allowed only for 28-D t-bill with the central bank. standard Chartered Bank was the pioneer in striking the first Repo deal with Bangladesh Bank.
The term money market experienced activity mainly in the 3-month tenor, where the rate ranged between 7.50-11.00%.
Weekly auctions of 28 D, 91 D, 182 D, 364 D, 2 Y & 5 Y government treasury bills continued to be a major instrument in money market. Demand for 28 D t-bill was highest followed by the 5 Y t-bill.
The t-bill yield curve observed an upward shift in the later half of the year. From July 02-Dec 02, where weighted average yield increased by around 23% for the t-bills of different tenor. -- Standard Chartered Bank