Recent media reports indicate that import payments are going to be settled in the currency of a supplier’s country, Chinese yuan renminbi (CNY) in particular. It is expected that this will support stabilisation of exchange rates in foreign exchange market. The argument behind the proposition is that import payments will be made in currencies other than dollar, which will deflate the demand for US dollar. It seems that payments by importers in Taka can easily be converted into settlement currency for which US dollar will not be required.
According to prevailing regulations on import, payments can also be settled in the currency of the country of the beneficiary or of the country of origin/shipment of goods. The regulations seem to be flexible since these are not confined to only convertible currencies like US dollar, Euro etc. Importers can execute import in supplier’s currency. One of our major import sources is China; imports there from require billions of dollars. These imports can be made in Chinese currency.
Without dependence on dollar, importers can import in other currencies. In this case, foreign suppliers need to agree to export to Bangladesh in their local currency. Payments of imports are not settled physically, rather through accounting entries. Our export proceeds are credited in other countries, which works as purchasing power of the country and used in paying external liabilities.
For an example, readymade garments are exported in US dollar. The proceeds are used to procure input contents without any risk in exchange loss. If exporters start procuring goods from China in their currency, how the payments will be settled as Chinese suppliers will not accept payments in Taka. In that situation, export proceeds in US dollar need to be used for buying Chinese currency for settlement of import payments. Alternatively, settlement can be executed through currency swap under account trade arrangements. It is a simple accounting tool under which our central bank needs maintaining a Taka account in the name of counterpart central bank. In the same manner, counterpart central bank will maintain such account in their currency in the name of our central bank. In case of import by Bangladesh, their account will be credited with equivalent import payments received from importers’ banks. When Bangladesh exports, exporters’ banks will be paid from this account by making a debit entry. What will happen in case of disequilibrium position in trade? In case of payable position, the balances can be used in different permissible investment windows such as direct investment, portfolio investment, etc. The same can also be used for lending in Taka to residents having permission from competent authorities. If allowed, the surplus in the account can simply be used as deposits in interest bearing term deposits with banks in Bangladesh. Whatever the situation, payable position is subject to payments with interest or profit for the period up to settlement date, and vice versa in case of our receivable position.
Currently, the ACU (Asian Clearing Union) procedure rules state that interest on the net debit and net credit balance will be calculated on the daily outstanding by the product method, taking a year comprising 360 days and shall be debited or credited to the participants’ accounts at the end of each settlement period. The rate of interest applicable for a settlement period will be the closing rate on the first working day of the last week of the previous calendar month offered by the Inter-Continental Exchange for one month in respect of US Dollar, Euro and Japanese Yen deposits. Under swap facility of ACU, every eligible participant is entitled to the facility from every other participant up to 20 per cent of the average gross payments during the three previous calendar years. The rate of interest chargeable on each draw is equal to two months’ US Dollar or Euro or Japanese Yen LIBOR declared by the Inter-Continental Exchange, applicable for the concerned value date.
The central bank allows to maintain accounts with CNY for imports from China. Huge imports cannot be supported by the proceeds against exports and other income. The system can function only by purchasing currency of imports through export currency like dollar. As such, greenback will go out in the same way as required for making usual import payments.
Within ACU framework, settlement is required in ACU currency like ACU dollar, ACU euro. Recent Indian regulations allow their exporters and importers to execute transactions in Rupee. To import from India in Rupee, partner countries need to export first. The proceeds of which will be used to import goods from India. Double coincidences are necessary; otherwise payments from export to India will be used there in permissible capital account transactions. So, the model is useable for imports up to equal exports.
Currency swap model is useable for bilateral trade. It can work effectively when balanced trade takes place. It is reported that international reserve of Bangladesh becomes reduced when periodical payments are settled with interest under ACU framework.
But imbalanced trade with counterpart country cannot bring fruitful results for local currency swap arrangement. Another problem is, as noted earlier, that interest cost needs deferral payments during settlement period.
The immediate past year-end had trade deficit of US$33.25 billion. After considering wage remittances and other items, current account balances are recorded at $18.70 billion deficit. This is the effect caused by global price hike for supply chain disruption due to war. In the last fiscal year, export was recorded at $49.25 billion and inward wage remittances at $21.03 billion. These two main sources of external incomes support mostly payment obligations including imports ($82.50 billion last fiscal year). Swap arrangement or transactions with importing countries in their currencies may ease payment obligations for the time being. But it is costly unless trade is balanced.
With its move up from LDC, the country’s import needs will remain at upward trend until import substitution industries are developed. To cater to the situation, policy support is needed to encourage inward receipts on account of exports and wage earnings. Modest inflows can automatically stabilise foreign exchange market including exchange rate volatility.