Dwarfing dependence on dollar

As an outcome of Ukraine-Russia war the world is facing serious dollar crisis. In Bangladesh price of dollar has increased up to 20 per cent. Under such situation, Dhaka-Delhi is thinking of trading directly through taka and rupee to reduce pressure on dollar. Already China and Russia are trading with many countries in their own currencies. The Economic Times has informed that from now on India will be able to trade with Malaysia in rupees. Kuala Lumpur-based India International Bank of Malaysia has opened a rupee-based Vastro Account with Union Bank of India for this purpose.

Bangladesh is discussing transaction in bilateral currency with other countries to reduce pressure on dollar in international transactions. Bangladesh Bank has already proposed to open LC in Chinese currency Yuan. Bangladesh and Russia have agreed to repay the Rooppur Nuclear Power Plant loan in Yuan. Bangladeshi nationals spend a lot of money for medical, tourism and shopping purpose in India. Statistics shows that 40 per cent of Bangladesh’s total imports are from China (26 per cent) and India (14 per cent).

A policy decision has been taken between Bangladesh and India regarding transaction in taka-rupee. India issued a circular last year regarding India-Bangladesh mutual transactions. After scrutiny Bangladesh Bank found no obstacle in the matter.

This transaction will be launched initially through 4 banks as a pilot program. Gradually more banks will join the process. Bangladesh and India have recently discussed a system where converting the local currency into dollars will not be required, media reports say.

To reduce pressure on dollar the two countries will exchange import and export prices directly through taka and rupee without the involvement of any third currency. Sonali Bank and Eastern Bank of Bangladesh will open transaction accounts with State Bank of India and ICICI Bank. As expected, if this method of ex-changing rupee to taka and vice-versa is followed for business with India, traders will also be able to trans-act in the fastest time.

A delegation from Reserve Bank of India and State Bank of India held a meeting with Managing Directors of Sonali Bank and Eastern Bank Limited on 11th April to discuss the payment procedure of commercial transactions. However, the value of currencies of the two countries will be determined on the basis of fluc-tuation of dollar. According to information of Bangladesh Bank, this transaction is supposed to be launched initially through four banks as a pilot program. Those are - Sonali Bank and Eastern Bank of Bang-ladesh and State Bank of India and ICICI Bank of India. The banks of the two countries will also have to agree on how this system will work. As the process is lengthy, trading in rupees will not begin very soon. At least six months will be required to finalise everything.

An initiative of trading in own currency was taken a decade ago but it could not be materialised due to dif-ferent reasons. However, in a ministerial meeting of the two countries in last December, a proposal was placed to conduct commercial transactions in rupees. The point was raised in the meeting of the National Economic Council of Bangladesh last March.

According to statistics of Bangladesh Bank, export amount from Bangladesh to India is about $ 2 billion whereas import from India in financial year 2021-22 was about $ 1,669 crore., amount of deficit is $ 1,469 crore.

Question arises - who will be benefitted from trading in rupees instead of dollars - India or Bangladesh? Traders and regular travellers claim that it will benefit both the countries. According to Abdul Matlub Ah-mad, President of India Bangladesh Chamber of Commerce and Industry, – “It will benefit both the coun-tries, there will be no risk of restricting trade to 200 crores. Businessmen can open LC in any currency, taka or rupee. As India is the main exporter, opening LCs in rupees will reduce exchange rate fluctuations. Transaction in rupees instead of dollars will save export cost to some extent.”

But according to analysts, due to large trade deficit Bangladesh may be at risk. Economist Khandkar Golam Moazzem, director of research of the Centre for Policy Dialogue, thinks, “As rupee is not recognised as an international currency, the Indian currency will fluctuate frequently against dollar which will affect trade with Bangladesh.” Due to huge trade deficit and Bangladesh not having enough rupees, commercial trans-action between the two countries will be possible for a maximum of $ 200 crore worth of rupees. More goods cannot be purchased in rupees because there is no way to get rupees without export. As a result, Bangladesh will have to pay the rest of import cost of $ 14 billion in US dollars as before.

India has many products whose raw materials are imported from other countries in dollars. Indian export-ers can charge higher price to Bangladesh for such products. Transaction will become risky for the busi-nessmen of Bangladesh. In total, he does not find much opportunity for these two countries to trade in local currency at a large scale. He apprehends that once rupee-taka transaction starts it will not remain confined to trade of local goods only but will also extend to services like travel, treatment, education, etc. which will put Bangladesh at risk, he added.

As a result, due to dollar crisis, the question remains whether the initiative of trading in taka and rupee will be profitable for Bangladesh. Moreover, once transaction in rupee begins, there may be pressure on Bang-ladesh to use Indian currency at a higher rate. “If there is a trade deficit, the dependence on India may in-crease. As Bangladesh holds only 12 per cent to 13 per cent of its total demand for rupees there will be a tendency to continue that trade by borrowing from India or by reducing trade with other countries or by converting dollars into rupees. Then there will be pressure of interest on loans from India and loss will oc-cur if dollar is converted.” As the matter is complex, it is expected that the authorities concerned will take decision considering all sides, keeping interest of Bangladesh at first.

The writer is a former Commissioner of Taxes. He can be contacted at [email protected]