Currency swap gets underway as cure for forex crunch

BB-banks both-way exchanges at spot dollar rate

FE REPORT
| Published: February 15, 2024 23:46:24

Bangladesh espouses maiden currency-swap mechanism as a cure for forex crunch under which commercial banks and central bank will transact the US dollars as per guidelines unveiled Thursday.
The Foreign Exchange Policy Department (FEPD) of Bangladesh Bank (BB) issued Thursday a circular spelling out terms and conditions of the currency-swap arrangement.
Signed by FEPD director Md Sarwar Hossain, the circular says considering the local foreign-exchange-market dynamics, it has been decided to introduce currency swap between BB and commercial banks.
The currency trading has two stages: near leg and far leg. Near leg means the deal date of selling forex to the BB while the far leg is to swap the same currencies back again on a future date, according to BB sources.
On the near leg, the circular says, local currency will be sold in exchange for approved foreign currencies to the commercial banks at the spot rate. The spot rate is now Tk 110 a dollar.
On the far leg, the deal “shall be settled applying the same exchange rate with swap point based on the interest rate differential considering prevailing benchmark rate of foreign currency (3-month term of SOFR rate) and the BB’s policy rate”.
For example, currently the 90-day SOFR rate is 5.30 per cent and the policy or repo rate is 8.0 per cent. So the differential is 2.7 per cent, which will be charged to banks to get the currency back.
For Shariah-based commercial banks, in the near-leg swap, the taka will be sold in exchange for approved foreign currencies at the spot rate. On the far leg, the deal shall be settled by applying the same exchange rate. The unconventional banks do not need to count the deferential of the rates.
“A swap deal shall be executed within the counterparty limit to be set by the Forex Reserves and Treasury Management Department (FRTMD) of the BB,” says the circular in detailing the modality of currency swap-broached as a bail-in mechanism for riding out foreign-exchange crises.
Each deal shall be multiples of one million of the foreign currency, starting from a minimum value of five million and equivalent taka with the tenure of seven to 90 days.
Talking to The Financial Express, managing director and chief executive officer of Mutual Trust Bank (MTB) Syed Mahbubur Rahman said this is a good opportunity for banks having comparatively better liquidity situation because they can get local currency at lower costs and generate better return from short term existing market opportunities under the currency market scenario.
Bankers welcome the arrangement as a good option for weathering the volatility on the money market, which passes through liquidity stress.
Talking to The Financial Express, managing director and chief executive officer of Mutual Trust Bank (MTB) Syed Mahbubur Rahman termed this a good opportunity for banks having comparatively better liquidity situation because they can get local currency at lower costs and generate better returns from short-term existing market opportunities under the currency-market scenario.
The leading banker, however, has some reservations on the to-do list attached to the swap. “Banks having tight liquidity situation will have to go through too many iterations before availing the facility because they might have other payment obligations,” he says.
A win-win situation: banks to get cheaper funds, BB can boost forex reserves with dollars deposited by banks, says Dhaka Bank’s Emranul Hug
Top executive of Dhaka Bank Emranul Hug thinks commercial banks having over-bought forex stock will benefit largely from the move as they can avail local currency at much lower rate of 2.7 per cent against the repo rate of 8.0 per cent through depositing their additional foreign currencies with the central bank.
On the other hand, the BB can boost the forex reserves with the dollars deposited by the banks. “So, it’s a win-win situation to both parties,” he says.