It is learnt from media reports that Asian Clearing Union (ACU) has recently endorsed Japanese yen (JPY) as acceptable currency for net settlement of transactions carried out by its member countries. Previously, USD and Euro were only two acceptable currencies for net settlement of intra-regional trade. However, Euro was suspended for the last few months, so USD was the only mode of settlement of ACU and there was no other alternative currency to settle trade transactions among the member countries. Inclusion of JPY as acceptable currency will come as a great help in settling transactions among ACU members.
Asian Clearing Union was established in 1974 with its initial five member countries that include India, Iran, Nepal, Pakistan and Sri-Lanka. Subsequently, Bangladesh and Myanmar joined in 1976 and 1977 respectively while Bhutan joined in 1999 and lastly Maldives joined in 2010. The primary objective of this association was to expedite payment system among its member countries for all eligible transactions. In addition, emphasis was given to strengthen trade and banking relationships among its member countries. However, there was tacit understanding that dependence on international foreign currency, particularly US dollar, in carrying out regional trade must be significantly reduced through effectiveness of this regional clearing system.
Since inception, ACU has made its journey for more than forty years but to what extent its objectives have been achieved is still debatable. It is true that intra-regional trade has significantly increased but settlement of these regional trade payments through ACU has not proportionately risen. When we were at the beginning of our banking career, payment through ACU settlement was a common phenomenon. Those who were engaged in international trade were conversant about ACU payment mechanism. bankers hardly know about ACU activity because these days payment through ACU settlement is not as popular as it was before. Dependence on dollar in cross-border transactions among the ACU member countries has not lessened at all, rather dollar denominated transaction has intensified in every area. Even small trade between two close-door neighbouring countries is also carried out in US dollar. The reason behind the predominance of dollar in intra-regional trade is its intrinsic value, standard and acceptability worldwide. Business community all over the world prefers dollar to any other currency in settling trade related transactions. Traders of ACU member countries are no exception to this global trend and they also demand their payment in US dollar. This has caused great impediment in the way of ACU's advancement. However, ACU's failure in strengthening its alternative settlement of intra-regional payment cannot be ruled out. The central banks of ACU member countries have failed to convince their business communities to accept ACU payment as an alternative mode for settlement of their trade transactions. They could not make extensive campaign in popularising ACU payment system among its member countries.
Exclusive dependence on only one currency for global trade is not a good sign at all and any country or business entity may fall victim to this. Therefore, effective presence of any alternative payment system in cross-border trade has no substitute in the present world economy. In this context, ACU could play a very significant role and as such can emerge as an exemplary mechanism in regional payment settlements. Since volume of trade within the member countries is enormously high, these payments could be settled through ACU mechanism bypassing involvement of US dollar.
Unfortunately, ACU has failed in this area. However, ACU alone has not lagged behind in maintaining effective alternative payment system; many other similar regional bodies have followed suit. During the last fifty years, attempts were made to establish and strengthen many regional trade bodies in order to reduce dependence on one particular currency, but to no avail. ERM (Exchange Rate Mechanism) have failed and EU (European Union) was established with Euro as a new alternative currency. Initially, this currency gained acceptance and maintained a good standing in terms of its intrinsic value. But now it is losing its value and acceptability. Similarly, BRICS (Brazil, Russia, India, China and South Africa) and BRICS Bank have also emerged but now moving at snail's pace.
Although ACU's success is not praiseworthy, yet its role is still active and all central banks are maintaining effective cooperation among the member countries. Now they have to strengthen and widen their role in facilitating trade and payment system among the member countries. We have to keep in mind that lion's share of the region's trade is conducted within the region's member countries. So, payment thereof settled through one particular foreign currency may tend to be risky. Needless to say, apart from the fluctuations in dollar value, there is a kind of compliance risk. Any country or any business entity may be under threat of trade restriction against mere allegation of any compliance failure. If a regional body like ACU can maintain its effective role, this kind of trade threat can easily be overcome. During the last few years, one ACU member country has remained under OFAC (Office of Foreign Assets Control, USA) sanctions and therefore, no trade in US dollar can be conducted with that country. That country has been surviving through bilateral trade settlement through the respective currencies of trading partners. If ACU could play an effective role in regional settlement, this kind of situation could have been averted. It may be noted here that the world today is going to take two different dimensions in the international trade arena. The use of commercial LCs in North American trade is quickly disappearing, whereas the business entities of North America are demanding LC prior to exporting goods to the emerging markets. LCs issued by North American banks and financial institutions are never provided with add-confirmation (confirmation added to the LC by the local bank for payment), whereas these banks never accept any LC issued by the banks of emerging markets without add-confirmation. Moreover, banks in North America are technologically moving faster as bitcoin to iCloud are taking place. On the other hand, banks in the emerging markets are not technologically so equipped to keep pace with their counterparts in North America. Besides, product diversification and product variation are also rampant in these two international trade zones. In this critical trade environment, regional bodies must have to stand strong to support their respective regional trade partners and ACU should consider its role from this point of view.
ACU should come forward as an independent body to foster regional trade and payment system. While facilitating settlement among the member countries, efforts should be underway to completely avoid involvement of any third currency. Mechanism should be developed to settle the corresponding value with the two trading countries and alternative arrangement must be introduced for settling net balance. For example, sovereign bond or sovereign guarantee may be introduced and can be used to settle the net trade balance among the member countries. At the same time, extensive measures and campaigns should be undertaken to boost trade within the region.
The writer is a banker based in Toronto, Canada.
nironjankumar_roy@yahoo.com