by AKM Zamir Uddin in The Daily Star, Jul 9, 2023
Bangladesh is set to join a global effort that is seeking to cut over-dependence on the US dollar when it comes to settling foreign trades as the country commences to use the rupee to carry out bilateral transactions with India from July 11.
The move may extend some respite to importers since they will be able to open letters of credits in the rupee to source a portion of the products from the neighbouring country, thus cutting the use of the US dollar to some extent.
The government has toughened import rules due to the shortage of American greenback, driven by higher import bills, with a view to stopping further depletion of the foreign currency reserve, which has fallen by nearly 30 per cent from a year ago.
Both the Bangladesh Bank and the Indian High Commission are expected to announce the move towards the Indian currency at an event at Le Méridien Hotel in Dhaka on Tuesday.
The central bank governor and the Indian high commissioner will join the event, a BB official said, wishing not to be named, as he is not authorised to speak to the media.
The BB has already given permission to three banks – Sonali Bank, Eastern Bank and State Bank of India (SBI) in Bangladesh – to open nostro accounts with their counterparts in the neighbouring country.
Private commercial bank Eastern Bank and the country office of SBI have already opened nostro accounts with Indian ICICI Bank and SBI, the BB official said, adding that state-run Sonali Bank will open the account in the quickest possible time.
Both the BB and the Reserve Bank of India (the central bank of India) have given permission to the two Indian banks to start settling the bilateral trade in the Indian rupee (INR), he said.
A nostro account is an account that a bank holds with a foreign bank in the currency of the country where the funds are held. It is used to facilitate foreign exchange and international trade transactions involving foreign currencies.
The ongoing crisis in the foreign exchange market emanating from the shortage of the US dollar has prompted the BB to settle bilateral trade by using the currency of the neighbouring country.
The new arrangement will allow Bangladesh to perform foreign trades with India to the tune of $2 billion, equivalent to its current annual export receipts from the country.
Last month, BB Governor Abdur Rouf Talukder said Bangladesh is looking to carry out trade with India in the rupee up to the level that is covered by the export earnings from the country.
Bangladesh’s imports from India far outweigh exports to the country. Its exports stand at $2 billion against imports of $18 billion through official channels.
If the trades through the unofficial channel are added, imports would go up to $27 billion, Talukder had said.
HOW RUPEE SETTLEMENT WILL WORK
As per plans, ICICI Bank and SBI will settle imports with Bangladesh in the rupee. And the amount will be deposited with the Bangladeshi banks’ nostro accounts with the two.
In the second phase, the Bangladeshi banks will settle the import payments on behalf of the local importers by using the rupee deposited with the counterparts.
The central banker, however, says that the dependency on the dollar will not reduce immediately as only $2 billion will be converted to the Indian rupee.
Bangladesh’s imports stood at $75.60 billion in 2021-22, central bank data showed.
But local businesses will be able to avoid an exchange rate loss of around 1 per cent if they trade in the INR as they would not require to convert US dollars into the rupee, the central banker said.
A high official of a commercial bank in Dhaka says that some new windows to settle import payments and other foreign exchange-related transactions in the INR will open in the future.
For instance, if Bangladesh can manage credit lines from India in the INR, such loans may be used to carry out bilateral trades, including for the payments of credits.
Besides, local banks will be able to take loans in the INR with prior approval from the BB, and the amount can be used to perform bilateral trade as well.
“Such windows will help reduce the dependency on the dollar during the difficult time like we are going through now,” he said.
India started to allow to settle its foreign trade in the INR in July last year when the Reserve Bank of India (RBI) decided to facilitate international trade in the rupee.
MOVE AWAY FROM DOLLAR
Other nations are also exploring ways to cut their reliance on the American currency, which was involved in nearly 90 per cent of global forex transactions in 2022, making it the single most traded currency in the FX market.
The move accelerated after the United States moved to hike policy rates aggressively to tame a record surge in inflation stemming from the impacts of the dragging pandemic and the Russia-Ukraine war.
Monetary tightening in the US has led to investors pulling their money out of Asian economies, triggering currency depreciation in most of the economies, according to a blog published on the website of the Asian Development Bank.
Sharp currency depreciation generally increases inflationary pressures through higher import prices of food and energy, worsens the current account balance, and may thus result in countries having difficulty with paying for their essential imports or servicing external debts.
Countries such as Bangladesh are facing exactly the situation predicted by the blog writers.
More and more countries — from Brazil to Southeast Asian nations — are calling for trade to be carried out in other currencies besides the US dollar, reported CNBC in April.
China is one of the most active players in this push given its dominant position in global trade right now and as the world’s second-largest economy.
Based on CNBC’s calculation of the International Monetary Fund’s data for 2022, China was the largest trading partner to 61 countries when combining both imports and exports. In comparison, the US was the largest trading partner to 30 countries.
In April, Brazilian President Luiz Inácio Lula da Silva made a state visit to Beijing where he reportedly called for reduced reliance on the US dollar for global trade.
India and Malaysia have already agreed to settle trade in the Indian rupees, said the Hindu newspaper.
In March, India said banks from eighteen countries were allowed by the RBI to open special rupee vostro accounts to settle payments in Indian rupees.
During a recent visit to China, Malaysia’s Prime Minister Anwar Ibrahim was said to have suggested setting up an “Asian Monetary Fund” to reduce reliance on the US dollar.
At the ASEAN finance ministers and central banks meeting in Indonesia in March, policymakers also discussed the idea of cutting their reliance on the USD, the Japanese yen and the euro and “moving to settlements in local currencies” instead.
The dominance of the dollar has gradually declined in the last few decades as the role of the US in global trade has waned.
The dollar accounted for more than 70 per cent of global reserves at the turn of the century. The share declined to 59 per cent in 2011 and 58 per cent last year, IMF data showed. https://www.thedailystar.net/business/global-economy/news/new-era-dawns-trade-india-3364336
