Exchange Rate Policies of Bangladesh.pptx

Exchange Rate Policies of Bangladesh

1. Exchange Rate Policies of Bangladesh Abdul Latif- 25080 Nusrat Jahan- 38008 Delara Afroz- 42048 Rakeeb Ashraf- 43041 Jannatul Ferdous- 43047 Tanin Ibne Sahaz Dipto - 44050

2. Introduction The Exchange Rate Policy of Bangladesh is guided by the Bangladesh Bank (BB) Order-1972, which was amended in 2003 to allow Bangladesh Bank to intervene in the Foreign Exchange Market. Maintaining stability and ensure exchange rate stability, the BB follows a range of policies, including: Using Foreign Exchange Reserves to buy and sell currencies when needed. Setting Exchange Rate based on the market forces of Supply and Demand. Monitoring the External Sector & intervening in the Currency Market when deemed necessary. The BB also uses other instruments such as capital controls, foreign exchange auctions and open market operations to maintain the exchange rate. The Exchange Rate Policy Framework which aims to promote macroeconomic stability, maintain adequate international reserves and support export competitiveness.

3. Exchange Rate Systems Fixed Exchange Rate System Freely Floating Exchange Rate System Managed Float Exchange Rate System Pegged Exchange Rate System

4. Fixed Exchange Rate System Exchange rate between two currencies is fixed and set by the government or an international organization. This rate is typically set at a predetermined level and does not change in response to market forces. The most common type of fixed exchange rate system is the gold standard, which was used in the 19th and early 20th centuries. Pros: Work becomes easier for MNCs. Cons: Govt. may revalue their currencies. Each country may become more vulnerable to the economic conditions to other country.

5. Freely Floating Exchange Rate System In this system, Exchange rate between the two currencies is determined by the supply and demand of each currency in the market. Exchange rates are determined solely by market forces. Pros: Each country may become more insulated against the economic problems in other countries. Central Bank intervention may affect the economy unfavorably no longer needed. Cons: MNCs may need to devote substantial resources to manage exposure to exchange rate fluctuations. The country initially experienced economic problems may have its problems compounded.

6. Managed Float Exchange Rate System In this system, Exchange rates are allowed to move freely on a daily basis and no official boundaries exists. This type of exchange rate system is also known as a “ Dirty Float ”. A country's currency is allowed to fluctuate within a certain range against other currencies, but is still subject to Central Bank intervention to limit Extreme Movements. Govt. may manipulate Exchange Rates such that own country benefits at the expense of others. For example , the Bank of England may decide to set an exchange rate of 1 British pound for every 1.30 US dollars. The Bank of England will then buy and sell British pounds in the foreign exchange market in order to maintain this rate.

7. Pegged Exchange Rate System The pegged exchange rate system, the home currency’s value is pegged to a foreign currency or to some unit of account and moves in line with that currency or unit against other currencies. Designed to stabilize the value of the currency and control inflation. Central Bank of the country may also intervene in the currency market to buy or sell its currency in order to keep the rate stable. For example , the Chinese yuan is pegged to the U.S. dollar at a rate of 6.7 yuan to 1 dollar. This means that if a Chinese citizen wants to purchase 1 dollar, they will have to pay 6.7 yuan for it.

8. Nusrat Jahan ID-38008

9. Factors affecting exchange rate system

10. Inflation: Inflation rates can affect international trade activities. It influences the demand and supply of currencies. It influences exchange rate movement. There is a moderately strong correlation between inflation and exchange rate of Bangladesh. In other words, BDT is depreciated when the inflation rate increases in Bangladesh. Interest Rate: I nterest rates affect investment in foreign securities also. It also influences the demand and supply of currencies and therefore influences exchange rates. Relationship between lending rate and exchange rate has found to be moderately negative in the case of Bangladesh. It represents that BDT is appreciated if lending rate increases in Bangladesh. Relationship between deposit rate and exchange rate has found to be strongly positive in the case of Bangladesh. It means that BDT is depreciated whenever the deposit rate increases in Bangladesh.

11. Income level: Income level is the third factor that affects exchange rates. Because of high income, unnecessary and luxurious foreign goods will be imported. Relationship between gross national income and exchange rate has found to be very strongly positive in the case of Bangladesh. It represents that BDT is depreciated if GNI increases. Government controls: Govt. controls is the fourth factor such as- Imposing foreign exchange barriers. Imposing foreign trade barriers. Intervening (buying and selling currencies) in the foreign exchange market. The economic and political conditions: The economic and political conditions of a country can also cause a negative effect on a currency's value. Investors enjoy high interest rates. They also value the predictability of an investment. Politically stable and economically strong countries generally have higher demand, which leads to higher exchange rates. Relationship between political & economical and exchange rate has found to be very negative in case of Bangladesh.

12. Government debt: Government debt is public debt or national debt. A country with government debt leading to inflation. A very strongly positive relationship has been found between Government debt and the exchange rate of Bangladesh. It therefore states that when Public debt stock increases, BDT is devalued in terms of US dollar. Balance of trade: Balance of trade and earnings on foreign investment reflected a country’s current account. The Relationship between current account balance and exchange rate has been found to be very strongly positive in the case of Bangladesh. Overall, the result indicates that if current account balance increases, BDT is depreciated. Recession: A country’s interest rates are likely to fall, when a country experiences a recession, lowering its chances to acquire foreign capital. As a result, its currency weakens the currency, therefore lowering the exchange rate. Relationship between recession and exchange rate has been found to be very strongly positive in the case of Bangladesh. It indicates that if there is a recession in Bangladesh, BDT is depreciated in relation to the US dollar.

13. Bangladesh Exchange Rate History

14. Increase Exports Economic growth in short run Weak currency can lead to higher earnings from export Inflation International reserves Excess volatility in the Exchange market

15. DELARA AFROZ ID 42048

16. Government Intervention in Foreign Exchange Rate Policies in Bangladesh Foreign Exchange Laws: Foreign Exchange Regulation Act 1947 (“FERA”) is the basic law in this regard and provides the legal basis for regulating certain payments, dealings in foreign exchange as well as securities. Foreign Exchange Regulation Act (Amendment) 2015 – Addition to Foreign Investment Friendliness: On 9th September 2015 the Foreign Exchange Regulation Act, 1947 has again been amended. Through this recent amendment, certain unnecessary or burdensome requirements for investors and other stakeholders have been abolished.

17. Authorized Dealer and the Money Changers The authorized dealers (“AD”) are the only entities that are allowed to transact and hold foreign exchange both at home and abroad. Bangladesh Bank issues licenses of AD only to scheduled banks. Money Changers shall have no branch office. The premise to be used for money changing business shall not be used for any other business activity.

18. Bringing in Cash from Abroad by a Foreign Investor or any Person: A foreigner can bring in foreign exchange in any form including cash without limit. But for amounts in excess of US$5,000 a declaration on FMJ form is required to be made to the Customs Authorities at the time of entry. Repatriation of capital and profit: Prior approval of Bangladesh Bank is required before profits from the foreign subsidiaries can be remitted to the parent company. Foreigners employed in Bangladesh with the approval of the Government may remit 50% of salary/net income, actual savings and admissible retirement benefits through an AD.

19. Exchange rate of Taka Exchange rates of Taka for inter-bank and customer transactions are set by the dealer banks, based on demand-supply interaction and indicative rates suggested by Bangladesh Foreign Exchange Dealers' Association (BAFEDA). Bangladesh Bank (BB) is not in the market on a day-to-day basis, and undertakes USD purchase or sale transactions with dealer banks only as and when needed to maintain orderly market conditions.

20. MD. RAKEEB ASHRAF ID# 43041

21. Impacts of Different Exchange Rate Regimes in Bangladesh After the independence of Bangladesh, the exchange rate from 1972 to 1975 remained nearly fixed. Along with the political change in 1975, the exchange rate was changed and the taka was at a time 41.04% depreciated. 1 US dollar cost Tk. 15.0541. Inflation could not be brought under control and remained in average over 10% from 1976 to 1980

22. In 1983 the GDP growth rate was 10.63% but in 1987 there was a negative growth of the GDP of 0.68%. From 1996 to 2001 taka was nearly 11% depreciated. During that time the price level remained stable. The average inflation rate was 4.79%. From 2003 to 2006 the growth of GDP remained below 4%, w ith the increasing depreciation of Taka. In recent time, declining foreign exchange reserves and shortages of the USD in the open market have already created a severe cost of living crisis for the vast majority of people.

23. While Bangladesh adopted a floating exchange regime as a result, multiple exchange rates prevail now in the country, such as one for imports , another for exports and another for remittances . Size of the economy Labor mobility International Trade Flow Degree of economic and financial development

24. Under the circumstances, Bangladesh should consider introducing an exchange rate system as it would: Impose fiscal discipline and stop the real exchange rate Build international reserves Help export diversification Provide a role for monetary policy

25. Analyzing The Relationship Of Exchange Rate With GDP Growth Rate & Inflation Rate Jannatul Ferdous Ishita ID# 43047

26. Descriptive Analysis

27. Regression Analysis

28. Regression Analysis

29. Correlation Analysis

30. EFFECT OF WAR ON FOREIGN EXCHANGE TARGET: Integrated Interdependent Economy. FACT: Pandemic stress effect on Bangladesh. RESULT: Exports become cheaper Imports become more expensive.

31. Tanin Ibne Sahaz Dipto ID-44050

32. Findings The Foreign Exchange Regulation Act of 1947 controls law and provide legislative framework for controlling transaction of Foreign Exchange. Bangladesh claims to keep its currency on Floating Exchange rate, although it actually uses a Managed Floating or Pegged Floating System.

33. Findings Till May 2003, Bangladesh operated with a Fixed Currency Rate after which moved to Floating Exchange Rate system. On a theoretical level a country's exchange rate, inflation, and GDP growth rate are all interrelated. The Bangladesh Bank and FERA Guidelines should be followed for all foreign exchange transactions.

34. Recommendations A separate fund should be set up for government imports such as fuel. To increase the amount of foreign exchange flowing into the market, the banks' present Net Open Position (NOP) should be reduced. Bangladesh Bank could inject an additional USD 1 to 2 billion from its reserves.

35. Recommendations The taka should be devalued to be more realistic to the market rate and closer to the interbank rate in order to reflect the current circumstances. Import of luxury items should be restricted till the situation improves. To increase the remittance flow, effective efforts involving all stakeholders are required.

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