Bangladesh's efforts to facilitate bilateral trade in the Chinese yuan and Indian rupee are struggling to take any pressure off its fast-depleting US dollar reserves, insiders said on Friday.
Economists and bankers primarily attribute this setback to Bangladesh's huge trade gaps with both China and India, resulting in inadequate yuan and rupee stocks for Dhaka to bypass the dollar dominance.
Over a year ago, the government allowed banks to settle cross-border transactions in Chinese yuan. Lately, in July this year, the government initiated trading in the Indian Rupee (INR) with India, anticipating a significant surge in transactions with the currency.
These moves were intended to alleviate pressure on the dwindling US dollar reserves within the central bank's currency basket. However, the policy changes have yet to yield substantial progress.
According to businessmen and banking sources, only two Bangladeshi companies have so far opened two Letters of Credit (LC) in rupees with their Indian counterparts for imports.
The LCs-opened shortly after the trading in rupees was permitted in July-amount to INR 16.48 million. Since then, no further LCs or trade transactions have been reported, individuals involved in the development told the FE.
On October 4, Bangladesh's foreign exchange reserves fell to $26.86 billion, a sharp decline from over $42 billion eighteen months prior, according to Bangladesh Bank (BB) data.
However, the foreign currency reserve stood at $21.05 billion on that date as per the International Monetary Fund's (IMF) Balance of Payments and International Investment Position Manual (BPM-6), showed BB data.
In an effort to curb further depletion of the forex reserve, Bangladesh has already tightened import regulations. However, this has provided little relief, given that the US dollar constitutes 75 per cent of the country's foreign reserves.
Meanwhile, the local currency taka has been depreciated by more than 25 per cent against the US dollar in the past year.
Asked, a general manager at the BB told the FE that facilitating transactions in rupees and yuan for cross-border trading is really challenging, as Bangladesh lacks readily available stocks of these currencies.
He said that with the assistance of the Chinese CBCZ Bank, some 25-30 Bangladeshi commercial banks have opened nostro accounts in Chinese Yuan. But, actual transactions in this currency are rare.
He said Chinese exporters to Bangladesh show a preference for receiving payments in currencies such as USD, Euro and Pound Sterling, due to their government's incentive benefits on shipments.
The huge trade imbalances with both India and China stand as crucial factors hindering the efficacy of the central bank's initiative, he added.
Some senior bankers and analysts too voiced scepticism regarding trading in rupees and yuan.
They argued that while trading in Rupee arrangement would benefit India and bolster its longstanding goal of elevating the currency to a global trade currency, it would not confer significant advantages to Bangladesh.
Dr Zahid Hussain, a former lead economist at the World Bank Dhaka office, said, "I have previously asserted that the central bank's initiative will not succeed, given the substantial trade gaps with both China and India. Achieving successful trading in yuan and rupee is difficult."
"When your bank lacks rupees or yuan stocks, how will you facilitate payments with your trading partner? In such a scenario, your bank would need to purchase rupees or yuan from the open market in exchange for USD or other available reserve currencies. Consequently, you would deplete your greenback reserves," the economist told the FE.
He suggested that the BB's arrangement will not work properly due to such a big trade gap between Bangladesh-India, and Bangladesh-China.
India, with a bilateral trade volume of $16 billion, stands as Bangladesh's second-largest trading partner, trailing only China.
The rupee deal enables Bangladesh to conduct transactions in rupees amounting to $2.0 billion, equivalent to the proceeds from its annual exports to India.
In turn, Bangladesh imports goods valued at $14 billion from its larger South Asian neighbour each year.
Similarly, official data show that Bangladesh's exports to China amounted to only about $700 million, whereas imports exceeded $15 billion in FY22. This highlights a significant trade imbalance between the two nations.
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