The Bangladesh Bank has initiated currency swaps with banks for the first time to achieve the net reserve requirement established by the International Monetary Fund (IMF) for its US $ 4.7 billion loan programme.
Typically, in order to achieve the requirement and grow the reserve, the central bank must purchase US dollars. It can now receive foreign currency for a set amount of time in exchange for merely interest from banks.
A currency swap is the exchange of one currency for another in exchange for interest and, occasionally, principal. When conducting business overseas, companies frequently employ currency swaps to obtain better loan rates in the local currency than they would if they were to borrow money from a local bank.
A forex swap has two legs or stages: a near-leg date and a far-leg date.
One exchanges one currency for another at a spot foreign exchange rate on the near leg date and agrees to trade the same currency again at a forward foreign exchange rate on the far leg date.
The taka will be sold to conventional commercial banks at the near-leg spot rate in return for authorised foreign currencies, according to the central bank.
Applying the same exchange rate at the far-leg and using a swap point determined by the interest rate differential while taking into account the current foreign currency benchmark rate will settle the agreement. The policy rate of the BB for the taka and the three-month term SOFR for US dollars will apply in this case.
The London Inter-Bank Offered Rate (LIbor) was superseded by the secured overnight financing rate (SOFR), which serves as a benchmark interest rate for loans and derivatives denominated in dollars. According to data from the US Federal Reserve and the Bangladesh Bank, the SOFR rate is currently 5.38 per cent, while the policy rate in Bangladesh is 8 per cent.
The taka will be sold to Shariah-based banks at the near-leg in return for foreign currency at the spot rate. The agreement will be finalised at the far-leg using the same currency rate, based on the BB.
The central bank was required to maintain a net foreign exchange reserve of US $ 17.78 billion in December in accordance with the terms set forth by the IMF. Nevertheless, despite the central bank purchasing more than US $ 300 million from many commercial banks, there was a US $ 58 million deficit.
As part of the loan agreement, the reserve must reach US $ 19.27 billion by March of next year and US $ 20.11 billion by June. The net reserve is still less than the goals, though.