All is set for the launch of much-hyped cross-border trade between Bangladesh and India in their local currencies today (Tuesday) to skip the overheated US dollar amid reserves depletion.
Bangladesh Bank Governor Abdur Rouf Talukder and High Commissioner of India in Bangladesh Pranay Verma are likely to join the launching programme to be held at a city hotel.
The bilateral move has a precedent as China has long before mooted cross-border interbank payment system (CIPS) in what is coined as 'de-dollarization' in economic parlance in the wake of the global trading-currency crunch.
This matter of Indian rupee (INR) and Chinese RMB in terms of cross-border transactions came into the limelight after Bangladesh's current-account deficit started widening and the foreign-exchange reserves depleting fast from the first quarter of the last fiscal year (2022-23).
However, there is little possibility of trade transactions on the day of launch of the alternative system.
"Actually on Tuesday legally and formally it will be launched-traders may open LCs soon after deals with their Indian counterparts," said EBL managing director and CEO Ali Reza Iftikhar.
Under such an arrangement, the banker says, local exporters will get local- currency taka and the Indian exporters get rupee or INR.
People familiar with the development told the FE that the exchange rate would be determined by the market taking the dollar as reference rate.
One state-owned bank and one private bank from each country have been selected for initial trade transactions under the new arrangement.
The state-owned Sonali Bank and the private Eastern Bank from Bangladesh side have been chosen for the transactions.
In India, the State Bank of India (SBI) and ICICI Bank (ICBK) will facilitate the two-nation export-import dealings sans the overheated US currency.
Bracing for the new innovation in trade financing through currency swap, the duo of Sonali and Eastern banks have opened "nostro" accounts in rupee, sources said.
A nostro account refers to an account a bank holds abroad at another bank in the currency of that jurisdiction. Such accounts are used for international trade and to settle other foreign-exchange transactions.
Md. Afzal Karim, CEO and Managing Director of Sonali Bank PLC, told the FE that this is limited to only two banks two begin with and that the scope will widen later on.
"The INR supply side will be strengthened soon after the beginning of the transactions," the MD said in reply when asked about supply of the Indian currency.
The state-sector banker thinks the new arrangements would ease pressure on the foreign reserves which in Bangladesh have been on a decline amid costly import payments in dollar among other reasons.
India is Bangladesh's second-largest trade partner, with Dhaka's exports standing at $2.0 billion in the year to June 2022 while imports costing $13.69 billion in a gaping trade gap.
Bangladesh is struggling to pay for imported goods because of dollar shortages. There have been delays in payment in the international banks for the same reason, people familiar with the developments told the FE.
The country's foreign-exchange reserves now hover around $30 billion in a fall from more than $41 billion just a year back. The reserves have shrunk and the forex market has shown volatility since Russia's February 2022 invasion of Ukraine.
Value of Bangladesh's taka has depreciated by around 13 per cent in a year due to the forex-market volatility, Bangladesh Bank statistics show.
The government has tightened imports due to the shortage of the greenback, driven by higher import bills, with a view to stopping further depletion of the foreign-currency reserves.
Bangladesh's imports from India far outweigh exports to that country. Its exports stand at $2 billion against imports of nearly $14 billion through official channels. Informal trade between the two next-door neighbours is deemed huge.
Following the plans, ICICI Bank and SBI will settle imports with Bangladesh in the rupee. And the amount will be deposited with 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.
But local businesses can avoid an exchange-rate loss of around 1.0 per cent if they trade in the INR as they won't be required to convert the US dollar to the rupee, says a central banker.
For instance, if Bangladesh can manage credit lines from India in the INR, such loans may be used to carry out bilateral trade, including for the payment of credits.
Besides, local banks can take loans in INR with prior approval from the BB, and the amount can be used for bilateral trade as well.
"Such windows will help reduce the dependency on the dollar during a difficult time like we are going through now," he says.
India started allowing foreign-trade settlement in INR in July last year when the Reserve Bank of India (RBI) decided to facilitate international trade in the rupee.
Economists and trade experts view that there are some problems in settling trade in INR as many prefer dollar instead of their own local currencies.
Monzur Ahmed, a trade expert, presumes that Bangladesh would lose out as it will not get nearly $2.0 billion worth of dollars through its exports to India as they will get the proceeds in the local currency (taka).
"We' will lose nearly $2.0 billion a year which is very much required for us," he told the FE in what appears a dilemma.
Mr. Ahmed also notes that Bangladesh does not have adequate INR to settle the trade liabilities.
"If we purchase INR through dollar, there will be another financial loss."
Dr M Masrur Reaz, chairman of the Policy Exchange of Bangladesh, welcomes this as a good move in the sense that there will be some relief for dollar coffers.
But there are many challenges associated with it as the exporters of India may not accept the INR against their shipments to Bangladesh, he told the FE.
"Dollar is a global currency and traders prefer it. So there is the issue of choices -- whether they accept the INR or not," says the economic-policy researcher.
He notes that the global trading system is largely dependent on the dollar and this is a natural system that traders prefer even more than their own local currencies.
jasimharoon@yahoo.com