Can Bangladesh get what it wants from trade in local currency?
A growing number of countries from Asia to Latin America and Africa are considering conducting international transactions in local currencies. Though global analysts have coined the term "de-dollarisation" to describe the recent phenomenon, for heavily import-dependent countries, like Bangladesh, it is a strategy to survive as the world's mightiest trade currency, the dollar, has almost spiralled beyond its grasp. The Russia-Ukraine war is a bane to most of the world economy, but it gave a big boost to the US dollar that rose to its historic high in 2022, making trade harder for countries.
In addition, western sanctions on Russia almost isolated the country from formal banking transactions, forcing many economies to search for alternative ways to make trade payments to one of their largest sources for food, chemical and technologies.
Bangladesh had to choose Chinese currency yuan to repay instalments of Russian loans for the multi-billion dollar Rooppur Nuclear Power Plant.
Bangladesh and India have already agreed to start settling trade transactions in their currencies, the taka and the rupee. Central banks of the two neighbours have initially selected four commercial banks to open nostro (our money in your bank) and vostro (your money in our bank) accounts to facilitate transactions in local currencies.
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Bankers and traders have welcomed the arrangement, hoping it, when put into operation, will ease pressure of about $2 billion in the annual two-way trade transactions amounting to over $15.6 billion. The currency swap arrangement will help Bangladesh adjust its export proceeds to a part of import bills.
It's now a global race
Bangladesh is not alone in the race. News of such initiatives is pouring in every other day from various corners, with more and more countries, from Malaysia to Brazil, calling for using local currencies besides the US dollar in external trade transactions.
In April, India announced that it would start trading with Malaysia in Indian rupee.
Being the world's second largest economy having trade transactions with 60 countries – double the number the US is doing trade with – China is certainly the most active player in the push for a shift towards trades in non-dollar units.
But others are not sitting quietly.
Wider use of local currencies along with projects such as gold-backed stablecoin, euro-like common currency, and a new BRICS reserve currency are in the talks for quite some time.
During their visits to Beijing in April, Brazilian President Lula da Silva and Malaysian Prime Minister Anwar Ibrahim called for reducing reliance on the US dollar for global trade, according to a CNBC report.
The Malaysian premier even floated the idea of an Asian Monetary Fund, while the country's trade minister acknowledged their concerns for Asia's heavy reliance on the American currency for global trade.
Indonesia aims to introduce local currency trading (LCT) transactions with countries such as Thailand, Malaysia, China, Japan, South Korea and India to diversify international payments. The country's President Joko Widodo asked the finance ministry to diversify trade transactions in rupiah with Asian countries.
Of late, Argentina has decided to pay for Chinese imports in yuan rather than dollars to relieve the country's dwindling dollar reserves, says a Reuters report on 27 April.
Leading oil exporter Saudi Arabia also hinted at its willingness to trade in currencies other than the US dollar.
Russia and Iran are thinking of a gold-backed stablecoin and an alternative to SWIFT as both of them are banned from the international payments system.
Brazil and Argentina are gearing up to launch a joint currency, "sur", which they hope to develop as a euro-like unit for South America.
The UAE and India agreed last year to use the rupee in non-oil trade transactions.
While smaller nations are trying to avoid dollars for a portion of their trade, China and India have their own agenda – internationalising their currencies as much as possible.
In a meeting in Indonesia in March, Asean finance ministers and central bankers bracketed Japanese yen and European common currency euro with the American dollar and discussed how to cut dependence on the three major trade currencies, if not discarding the three altogether. They talked about how to do more trade in local currencies.
The BRICS – the bloc that groups Brazil, Russia, India, China and South Africa – is studying the issuance of a common currency for trade among themselves – an idea launched in its China summit last year. A fresh announcement regarding the currency – to be backed by gold or other commodities – is expected in the bloc's next summit in South Africa in August.
As 19 countries, including Saudi Arabia and Iran, are willing to join the group, it will have a wider scope to push the new idea.
Even Europe seems to be jumping on the anti-dollar bandwagon, with French President Emmanuel Macron recently warning against the continent's dependence on the greenback, says a Business Insider report.
Analysts are weighing on how the so-called de-dollarisation may cost or benefit the economies looking for a shift away from the US dollar.
Most of them believe that local economies can benefit in a number of ways. Reducing the role of the dollar as the "middle man" in bilateral trade will help exporters and importers of two trading countries to balance business risks, create more scope for investment and earn more revenues apart from moving up the value chain.
The International Monetary Fund's prediction of Asia contributing over 70% to global growth makes analysts further upbeat about a wider push in many economies for using local currencies in trade.
Is the US dollar losing ground fast?
There are two opposing views – one group of analysts seeing a rapid loss and the other believing there is still a long way.
The dollar is losing its reserve status at a faster pace than generally accepted as many analysts have failed to account for last year's wild exchange rate moves, according to Stephen Jen of Eurizon SLJ Capital Ltd.
But economist Paul Krugman does not feel that the dollar is going to lose dominance anytime soon.
In an article in the New York Times, the Nobel laureate insists that the US dollar is not really at risk and its position "looks pretty secure". He lists big advantages of the greenback – its incumbency since everyone is already using dollars and openness of the US financial markets; anyone can move money into or out of the country.
As most commodities including oil are priced in dollars, the greenback has long been the king of currency in global trade. Intended mainly to contain domestic inflation, aggressive interest rate hikes by the US Fed made the dollar pricier further – surging 17% during the first nine months of 2022 – making trade costlier for smaller economies.
Moreover, many central banks around the world also had to hike rates or restrict trades to tame inflation, leading to a free fall of the value of weaker local currencies (taka being one of them losing at least 22% value last year) compared to the US dollar. Losing value of local currencies raised the cost of imported goods, contributing further to local market price pressure.
While all these economic dynamics were enough for smaller economies to look for alternative ways to ease the dollar pressure, Western sanctions on Russian banks and freezing of over $300 billion of the country's foreign currency reserve accelerated the so-called de-dollarisation calls further.
Russia had to switch its trade to other currencies and increase gold in its reserve. And the dollar is also losing ground in Russia's trade scenario, where the Chinese yuan is now the most traded currency.
These do not mark an end to dollar regime, though the greenback's status as a reserve currency eroded 10 times in past two decades till 2022, while its share of total global reserves fell to 47% last year, from 55% in 2021 and as much as two-thirds in 2003, according to Eurizon SLJ Asset Management.
The US dollar is still the most reliable, stable reserve and trade currency.
How Bangladesh can gain
But converting even a portion of external trade transactions into non-dollar units means a lot for Bangladesh. Currency swap arrangement may help Bangladesh save roughly $2.5 billion in export transactions with India and China – the top two import sources of Bangladesh, accounting for 25% and 18% respectively of total imports. Bangladesh imports totalled $75.6 billion, with G20 countries as a group accounting for 72% of the bills. Bangladesh also imports from many other countries grouped in Saarc, Asean, OIC, OPEC, G7, D8 etc. If a portion of the amount could be replaced with non-dollar currencies, there would be a significant relief.
A surplus of about $7.5 billion in trade with the world's number one economy USA is a blessing for Bangladesh, which has the potential to relieve foreign currency pressure greatly by promoting transactions in local currencies with major trade partners including oil exporting countries in the Gulf.
Bangladesh and India have agreed to start trading in local currencies – a move appreciated by bankers and business leaders. "Bilateral trade with India in taka and rupee will reduce pressure on the US dollar. Both countries will benefit from this," said Md Afzal Karim, CEO and managing director of Sonali Bank Limited.
"It will reduce the cost of traders. Again, the additional pressure caused by the demand for dollars will ease," said Ali Reza Iftekhar, managing director of Eastern Bank Limited.
Businesses have been in favour of such an arrangement since the dollar crisis began last year.
"We have been requesting the central banks of both countries to complete the transaction equivalent to Bangladesh's exports to India in taka and rupees for quite some time," President of Bangladesh-India Chamber of Commerce and Industry Abdul Matlub Ahmad said. Another business leader Anwar-ul Alam Chowdhury Parvez, president of Bangladesh Chamber of Industries, said the deal would help Bangladesh settle in rupees an import payment of $2 billion (equal to Bangladesh's export earnings in India).
Bangladesh is working on signing a currency swap agreement with Russia. China has also offered a currency swap with Bangladesh and the government is reviewing the Chinese proposal.
