Small and medium enterprises (SMEs), as well as the rest of the economy, will benefit from banks’ increased capacity to support imports thanks to the newly launched currency swap, said Ashraf Ahmed, president of the Dhaka Chamber of Commerce and Industry (DCCI).
“At the same time, an increase in liquidity in the banking sector will allow banks to lend more to the private sector. All in all, this is a very positive move by the central bank,” he told The Daily Star during an interview yesterday.
The Bangladesh Bank (BB) has introduced currency swaps with banks recently, a move that will enable the country to meet the net reserve condition set by the International Monetary Fund with its $4.7 billion loan programme.
Usually, the central bank has to buy the greenback if it needs to raise the reserve to meet the condition. Now, it may get foreign currencies from banks for a certain period in exchange for only interest.
Under the currency swap deal, commercial banks can take the local currency from the central bank in exchange for the US dollar for a tenure ranging from seven days to 90 days.
The deal is expected to reduce the liquidity pressure on banks and allow them to get back their US dollars when needed.
Ahmed said in recent times, the BB has told banks to manage their own forex liquidity. But in the absence of a vibrant interbank market, this was becoming increasingly difficult.
Many banks have long been struggling to supply adequate US dollars to importers to facilitate their purchases from external sources. They are also struggling to make loans to local businesses amid the persisting local currency liquidity crunch.
“The new measure will allow banks to use their forex liquidity to support their local currency books. This is good news,” Ahmed said.
“The currency swap should indirectly help local borrowers by improving the banking system liquidity.”
A forex swap has two legs or stages: a near-leg date and a far-leg date.
On the near-leg date, one swaps one currency for another at an agreed spot foreign exchange rate and agrees to swap the same currencies back again on a future date (far leg date) at a forward foreign exchange rate.
For conventional commercial banks, the taka will be sold in exchange for approved foreign currencies at the spot rate at the near-leg.
At the far-leg, the deal will be settled by applying the same exchange rate with a swap point based on the interest rate differential considering the prevailing benchmark rate of foreign currencies. Here, the three-month term SOFR for US dollars and the policy rate of the BB for the taka will be applicable.
The secured overnight financing rate (SOFR) is a benchmark interest rate for dollar-denominated derivatives and loans that replaced the Libor (London Interbank Offered Rate). The SOFR rate presently stands at 5.38 percent while the policy rate in Bangladesh is 8 percent, figures from the Federal Reserve of the US and the BB showed.
The DCCI chief said given a 2.6 percentage points swap point difference, this should lead to a profitable proposition for the banks sitting on a higher volume of foreign currencies, especially given current call money rates.
The new mechanism was unlikely to help banks without the forex liquidity, he said.
For Shariah-based commercial banks, at the near-leg, the taka will be sold in exchange for approved foreign currencies at the spot rate. At the far-leg, the deal shall be settled by applying the same exchange rate.
Ahmed said it appears that Shariah-based banks will be able to conclude transactions without any swap point differences between the near-leg and the far-leg, which could be a source of disparity.