The Bangladesh Bank has advised commercial banks to limit forward dollar bookings, aiming to prevent distortions in the spot foreign exchange market and contain potential upward pressure on the exchange rate.
According to senior officials, the guidance followed a noticeable rise in forward booking activity among several banks after tensions escalated in the Middle East. Market participants grew concerned that the US dollar could appreciate in the near term, prompting increased demand for hedging instruments.
Forward foreign exchange transactions involve an agreement to sell a fixed amount of foreign currency at a predetermined rate on a future date. These instruments are widely used by businesses and financial institutions to manage exposure to exchange rate fluctuations. Under current regulations, authorised dealer banks in Bangladesh are permitted to conduct forward sales only against genuine underlying transactions and must ensure that such contracts serve to mitigate, rather than create, currency risk.
Banks may enter into forward purchase agreements with exporters, foreign currency account holders, exchange houses and other counterparties. However, they are required to cover any resulting exposure without delay. The forward rate is typically determined by adding a premium to the prevailing spot rate.
Officials at the central bank said banks had been instructed not to rely on dollars obtained from the spot market to meet forward commitments. Instead, forward sales should be supported by corresponding forward purchases. A senior official noted that a limited number of banks had been increasing forward positions aggressively, raising concerns about potential spillover effects on the spot market.
He explained that excessive forward selling could create artificial demand for dollars in the spot market if banks later struggle to meet their contractual obligations, thereby contributing to exchange rate volatility. The official also observed that some of the banks involved had previously contributed to instability in May 2022 through large-scale dollar purchases. He added that the situation had been brought under control before intensifying.
Changes in demand patterns
Industry sources reported a sharp increase in demand for forward contracts from mid-March to early April, followed by a partial easing by mid-April. Nevertheless, demand remains elevated due to continued geopolitical uncertainty.
| Timeframe | Demand Trend | Contributing Factors |
|---|---|---|
| Mid-March–Early April | Significant rise | Middle East tensions, exchange rate concerns |
| Mid-April | Moderate decline | Improved short-term liquidity |
| Near-term outlook | Uncertain | Ongoing geopolitical risks |
Bankers indicated that demand could strengthen again if external conditions worsen, particularly in the event of disruptions to key trade routes such as the Strait of Hormuz. At the same time, many banks face practical constraints, as they lack sufficient forward purchase positions to support additional forward sales in line with regulatory expectations.
Several large corporate groups have reportedly been unable to secure forward contracts in recent days, as banks adhere to the central bank’s guidance. In addition, the regulator has sought detailed information from banks regarding the methodology used to determine forward rates following the recent increase in demand.
Despite the surge in forward booking interest, bankers said the supply of foreign currency remains relatively comfortable. The exchange rate has shown signs of easing after a temporary increase, supported in part by central bank operations, including dollar purchases from commercial banks at Tk122.75 through auctions.
A senior corporate official noted that an import letter of credit was settled at Tk122.98 per dollar last Wednesday, compared with Tk123.10 the previous day, indicating a modest decline.
Differing assessments
Zahid Hussain, former lead economist at the World Bank’s Dhaka office, questioned the view that forward booking alone could drive exchange rate increases. He stated that movements in Bangladesh’s exchange rate largely reflect global trends, particularly shifts in the international dollar index.
He also pointed to a potential inconsistency between the central bank’s stated commitment to a market-based exchange rate and its interventions during periods of volatility, suggesting that restrictions on forward transactions may limit normal market functioning.
Arfan Ali, former managing director of Bank Asia, described forward contracts as an established risk management tool. He observed that although the volume of foreign exchange transactions in Bangladesh remains comparatively low, demand for hedging instruments has increased as businesses seek to manage uncertainty arising from global developments.