Can the Bangladesh economy afford trade in local currencies?
The Business Standard recently talked to Bangladesh Bank’s Former Governor Salehuddin Ahmed and Policy Research Institute of Bangladesh’s Executive Director Ahsan H Mansur to understand the implications of the increased stress on settling international payments in currencies other than the US dollar
Amid the surging value of the US dollar, national leaders of the China-led Shanghai Cooperation Organisation (SCO) member states have recently stressed on increasing the use of local currencies for trade among member countries.
SCO consists of China, India, Russia, Pakistan, Kazakhstan, Kyrgyzstan, Tajikistan and Uzbekistan, with some other dialogue partners and observer countries.
Big economies under this group have been searching for alternatives to reduce their reliance on the US dollar and other western currencies for trade, following the imposition of sweeping Western sanctions on Russia in response to their invasion of Ukraine.
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What will be the implications of SCO's new move if Bangladesh's close neighbours can somehow reduce their dependence on the US dollar – a globally accepted convertible currency?
For the last couple of years, Bangladesh, alongside some other countries, has been looking forward to joining the group, which mostly covers regional cooperation, security and mutual trade. Given the changing political and economic situation, does it still benefit Bangladesh to join such a bloc?
Following requests from local trade groups, Bangladesh Bank, on 15 September, instructed commercial banks to settle payments for international trade through Yuan to reduce the excessive dependency on US dollar.
The Business Standard recently talked to Bangladesh Bank's Former Governor Salehuddin Ahmed and Policy Research Institute of Bangladesh's Executive Director Ahsan H Mansur to understand the implications of these developments.
'A reserve full of less acceptable currencies will not benefit us'
Salehuddin Ahmed
The SCO leaders want to increase the share of their national currencies in mutual settlement, as the US dollar has gotten stronger due to the sanctions against Russia and China. European countries, Australia and Canada are however not against using the US dollar.
Using alternative currencies is justifiable when the US dollar turns expensive unnecessarily. However, local currencies in this context have a big challenge: acceptability. If trade happens in bilateral form, it is okay. This form of transaction eases back-to-back LC.
However, in the case of Bangladesh, most of the country's back-to-back LCs are on exports and imports to and from the US and European destinations. Bangladesh also imports from many countries, including China and India.
Bangladesh's trade with central Asian countries under the SCO is negligible. Before joining such blocs, we should consider this context.
Bangladesh cannot reduce its reliance on the US dollar, pound sterling and euro overnight. Mutual settlement is a complex process. There has to be agreements between two countries in terms of sharing local currencies.
At present, any decision to quickly join a bloc will not be wise. In Bangladesh, we tend to make decisions impulsively, without any in-depth analysis. Often, the decisions are motivated politically without considering their long-term impacts.
Bangladesh should assess the potential of export growth, affordable imports and remittance flow before joining hands with the SCO.
With India, Bangladesh's import is much higher than export. If India accepts taka, it will leave them with a dilemma over a huge reserve of taka. India cannot pay with taka to other countries.
Trade can be carried out through exchange of local currencies, provided there is specific agreement with the other party. However, joining a bloc will make the transaction system more complex. In that, only a few strong economies will be benefited.
In 2014, the Bangladesh government recognised the Chinese Yuan as a convertible currency. Then why were the banks reluctant to facilitate trade between the two countries through local currencies? Because the banks need to think about the reserve. A reserve of Yuan will be only limited to China-Bangladesh trade, it cannot be used for trade with other countries.
On the other hand, convertible currencies like the US dollar, sterling pound, euro, and even the Canadian and Australian dollars have acceptability in global trade.
In the context of SCO, we know that China is one of the biggest economies and the IMF has recognised Yuan. But considering trade in the other currencies [of SCO member states] will be unwise. They have no acceptability.
Before joining such an alliance, the Bangladesh government needs to understand its impacts on our economy. Will it sharpen the country's competitiveness, will it reduce the import cost? We need to think deeply.
Bangladesh's development index will be measured based on the reserve of US dollar. If the private sector wants to expand, they will surely choose the US dollar, not the Indian Rupee or other local currencies. A reserve full of less acceptable currencies will not benefit us.
'Bangladesh can settle only 10% of its trade with China and India with local currency'
Ahsan H Mansur
The Shanghai Cooperation Organisation comprises three big economies: China, Russia and India, along with comparatively smaller ones like Pakistan, Iran and four central Asian countries.
Combined, the SCO member states make up an $85 trillion economy, almost equal to that of the United States.
The important issue that needs to be considered is the volume of bilateral trade these three big economies have among themselves.
China and Russia maintain a significant amount of bilateral trade, which is relatively good. Russia exports petroleum products, industrial raw materials and military equipment to China. On the other hand, China has a big market for almost every one of its commodities in Russia.
The trade volume between China and India is also significant, although there is a big trade deficit in favour of China.
Overall, the market size of the countries under SCO is big. And the volume of trade is respectable.
If these states start exchanging national currencies in mutual settlement, they will reduce dependency on the US dollar for sure.
If there is regular bilateral trade among the SCO members and if there are export earnings using local currencies, some portion of the trade can be done through settlement accounts, and the rest would be with the US dollar and other Western currencies.
Bangladesh has large volumes of trade with China and India, no doubt. But Bangladesh's exports to these three SCO countries are not as big. If Bangladesh joins SCO, I do not see any extraordinary benefit that will come from it.
Bangladesh imports products worth $16 billion from China and $14 billion from India while Bangladesh's export to China amounts to $1 billion and $2 billion to India.
If Bangladesh joins SCO or a similar bloc, it could settle payments in national currencies only equivalent to $3 billion, while the rest would have to be paid in the US dollar. That means, Bangladesh can settle only 10% of its trade with China and India with local currency.
The Bangladesh government has made the Chinese Yuan a convertible currency. But the banks are not interested in opening settlement accounts with the Yuan.
The government should motivate the banks to use Yuan. However, there is no need to make it binding for all the banks to do so. A few good performing banks can facilitate mutual settlements with local currencies.
The banks are not interested because the volume of Bangladesh's export to China is not very big. Given the low volume of transactions [during export], the government can instruct one or two banks to handle this.
Bangladesh's small export market size is a big problem. That is why most of the traders use the US dollar instead of local currencies.
The government should first widen its market in China. The more the export volume, the stronger our position
