A number of news items and views recently appeared in the media underscoring the importance of introducing a system of settlement of Indo-Bangla trade in Indian rupee (INR).
The main themes of the optimism are based on the premise that it will ease the pressure on our foreign exchange reserve, reduce dependence on US dollars, and contribute to lowering the cost of Bangladesh imports from India.
The idea, in my view, is only a sweet dream that can hardly take off the ground without artificial props, not beneficial to either country.
The idea of using local currency for settlement of trade among the countries in the south Asian region under the banner of Asian clearing union had been explored and debated for nearly half a century but the participating countries couldn't put their acts together to reach a consensus, and ended up getting back to the old ways of settlement of payments through US dollars, euros and Japanese yen.
The optimism regarding the likely benefits expressed by some bankers and the trade bodies for settlement of Indo-Bangla trade using the INR is not based on solid grounds. It may even turn counter-productive.
In essence, settlement of import payments in INR isn't different from settling the obligations against imports into Bangladesh using any other foreign currency, including US dollar, euro and a whole range of other convertible currencies.
Indian rupee is as much a foreign currency from Bangladesh's perspective as are US dollar, euro, pound sterling and other major currencies of the world. Geographical proximity doesn't confer any special attribute to INR to distinguish it from other currencies.
Regardless of the currency used, we will have to draw down our reserves to make payments for goods and services. Because, Indian rupee cannot be collected from a void. It will be acquired by commercial banks in exchange for a convertible currencies like dollar, euro, pound sterling-most likely the dollar.
The Idea of reducing dependence on the US dollar is also too ambitious, amounting to running against the wind. Like it or not, no country can fancy getting away from the grip of the US dollar as a currency of settlement of debts, investment of funds, arbitrage, hedging and swap operations.
According to the latest triénnal survey done by the Bank for International Settlement in 2022, the US dollar continues to remain the world's dominant vehicle currency. It was on one side of 88 per cent of all trades in April 2022, unchanged from the previous survey in 2019. The euro held the second spot, a distant second at 30.5 per cent followed by Japanese yen (17 per cent) and pound sterling (13 per cent).
Despite the recent moves to dislodge the US dollar from its pedestal, the dollar doesn't look like ceding its preeminence in the global forex and money markets.
Being a very minor player, Bangladesh cannot avoid the inescapable reality of conducting its exports and imports in one or other international currencies, chiefly dollar, euro and pound sterling. In a typical buyer's market, would the buyers of Europe and America, the principal destinations of our apparel products, agree to make or receive payments other than dollar, euro, sterling or their own currencies? Let's refrain from entertaining wishful thoughts of challenging the leading roles of those currencies, especially US dollar which, besides being the major transaction currency, is also the most popular outlet for investment of reserves by the central banks. Even China, who are not on the best of terms with the US, invested a bulk of their foreign exchange reserve in US dollars. The exact number is classified but in July 2019, China's state administration of foreign exchange announced that at the end of 2014, US dollar assets accounted for 58 per cent of China's total reserves.
No other country is willing, nor do they have as strong an appetite as the USA to absorb an avalanche of US money held by foreigners.
How the use of INR for settlement of import payments would ease the pressure on FX reserves is beyond my comprehension.
Where would the banks in Bangladesh get Indian currency other than buying it in the international market or an Indian bank using a convertible currency like US dollar, euro and pound sterling? It will inevitably deplete the stock of foreign currency balances held abroad either by Bangladesh Bank or the commercial banks.
Equally intriguing is the thought of easing the pressure on the foreign exchange reserve by using the INR for trade payments. There is absolutely no difference between Indian currency and other convertible currencies for settlement of our external trade and payments.
In short, regardless of whichever currency is involved for payment of obligations, we will have to draw down our external resources.
Bangladesh runs a heavy trade deficit with India. According to the export and import payments record of the Bangladesh Bank, Bangladesh paid $13,690 billion to India against receipt of only $1,504 in FY 2022-22, denoting a deficit of $12,186-a virtual one-way traffic. There is no alternative to cushioning the gap without using our foreign exchange resources.
Theoretically, we can offset our export receivables in INR against our payment liabilities. However, it would offset only a minute fraction of our obligations of less than $2 billion against the overall obligations of over $13 billion which is projected to reach a higher plateau in FY 2023 and beyond.
Setting off of export receipts against a part of our obligations against imports is easier said than done. Based on our experience under the Asian Clearing Union, we can say, it will create complexities leading to repetition of the fiasco witnessed under the so-called payment Union.
The post-war Western European nations experimented with the use of regional currencies to settle mutual debts under the banner of the European payment Union (EPU) but suffered frequent hiccups. Eventually, 20 countries out of 27 ended up creating a new common currency, the euro.
There are suggestions from responsible quarters that settlement in Indian rupees will save Tk 1 per dollar. On the contrary, it is likely to cost more to the importers to buy goods from India with provision for payment in rupees. For, Indian suppliers prefer to make contracts in a convertible currency like US dollar or euro on the expectation of selling the export proceeds to the bank at the higher price in view of continuous depreciation of the Indian rupees against major currencies-from an average exchange rate of 78.6043 INR in 2022 to around 82.38 on the date of this writing. Besides, they also have an option to sell their receivables forward to their bankers with a premium over the spot rate.
Inevitably, the suppliers will hike the prices of the merchandise if they are asked to quote the prices in INR. In the meantime, Bangladeshi importers will buy INR from the LC opening/negotiating bank at the latter's selling rate determined via US dollars loading its own profit margin. How it will save costs for the importer is a mystery difficult to fathom.
Additionally, Bangladesh too will expose itself to the risk of losing money held with the Indian banks in the so-called Nostro accounts. At the same time, the importers will be thrown into the vagaries of fluctuating exchange rates between Bangladesh taka and Indian rupee. Most of the banks do not provide any forward cover for import payments, especially payments in a minor currency.
The only sensible arrangement is leaving the options to the banks in the two countries to receive payments and settle import payments either in rupee or Bangladesh taka without introducing an element of compulsion.
Settlement of trade is not the big problem. The problems are tariff and non-tariff barriers, and most of all, Bangladesh's inability to avail of the opportunity to penetrate into the Indian markets due to factors that hardly need repetitions.
Syed Ashraf Ali is a retired Executive Director of Bangladesh Bank & Managing Director of a commercial bank, and author of books on banking and foreign exchange.
saali.dhaka@gmail.com