The Bangladesh Bank has advised commercial banks to refrain from excessive forward dollar bookings in an effort to maintain stability in the foreign exchange market and prevent undue upward pressure on the exchange rate.
Senior officials at the central bank stated that several banks had significantly increased forward booking activities following the escalation of conflict in the Middle East, amid concerns that the US dollar might appreciate in the coming months. Forward foreign currency transactions involve an agreement to sell a specified amount of foreign currency at a predetermined exchange rate on a future date, primarily used as a hedge against exchange rate volatility.
Under existing guidelines, authorised dealer banks are permitted to conduct forward sales strictly against genuine customer requirements and must ensure that such contracts are intended to offset exchange rate risks rather than for speculative purposes. Banks may undertake forward purchases from exporters, foreign currency account holders, exchange houses, and other counterparties; however, they are required to promptly cover their own exposure.
Central bank officials indicated that banks have been verbally instructed not to depend on dollars sourced from the spot market to fulfil forward commitments. Instead, forward sales should be backed by corresponding forward purchases. According to one official, a limited number of banks had been aggressively expanding their forward positions, prompting regulatory concern.
He noted that excessive forward selling can create pressure in the spot market, potentially leading to a rise in the dollar’s value. If banks are unable to secure sufficient foreign currency in the spot market to meet obligations, the exchange rate may increase further. The official also observed that some institutions involved in heightened forward activity had previously contributed to market volatility during May 2022 through substantial dollar purchases.
Trend in forward booking demand
Industry sources reported that demand for forward bookings rose sharply from mid-March and remained elevated until early April. Although demand moderated somewhat by mid-April, businesses continue to seek forward contracts due to uncertainty linked to geopolitical developments.
| Period | Forward Booking Demand Trend | Key Drivers |
|---|---|---|
| Mid-March–Early April | Sharp increase | Middle East conflict, exchange rate concerns |
| Mid-April | Slight easing | Temporary market stabilisation |
| Ongoing outlook | Potential rise | Continued conflict, global market uncertainty |
Bankers suggested that demand could intensify if geopolitical tensions persist or if disruptions occur in key global shipping routes such as the Strait of Hormuz. However, many banks face constraints, as they lack sufficient forward purchases to support additional forward sales in compliance with central bank guidance.
Several large corporate groups have reportedly encountered difficulties in securing forward contracts, as banks adhere to the regulatory stance. Meanwhile, the central bank has sought detailed explanations from banks regarding their forward pricing mechanisms following the recent surge in demand.
Despite the increase in forward booking interest, bankers indicated that overall dollar liquidity remains relatively stable. The exchange rate has shown signs of easing after a brief uptick, supported by the central bank’s intervention through dollar purchases from commercial banks at Tk122.75 in recent auctions.
Diverging views on policy stance
Zahid Hussain, former lead economist at the World Bank’s Dhaka office, questioned the rationale that forward booking itself would drive up the exchange rate. He argued that pressure on the dollar largely reflects international market dynamics, noting that movements in Bangladesh’s exchange rate broadly align with trends in the global dollar index.
He also highlighted a perceived inconsistency between the central bank’s stated commitment to a market-based exchange rate and its periodic interventions. According to him, restricting forward transactions may limit the natural functioning of the market.
Similarly, Arfan Ali, former managing director of Bank Asia, described forward booking as a legitimate risk management instrument. He observed that while foreign exchange transaction volumes in Bangladesh remain relatively low compared with many economies, demand for hedging tools has increased in response to current geopolitical uncertainties.