Home ›› 24 May 2023 ›› Opinion
Bangladesh and India, two neighboring countries are set to start trading in their local currencies Taka and Rupee soon. Trade between the two countries may start in September, the Bangladesh Bank indicated in a statement. According to the central bank, this transaction is supposed to be launched as a pilot program through Bangladesh’s Sonali Bank and Eastern Bank and India’s ICICI and State Bank of India. More banks of the two countries will gradually join the process.
Since the beginning of the Russia-Ukraine war, like other developing countries, Bangladesh’s foreign exchange reserves have been decreasing. Higher import cost caused by the war leads to an inflationary crisis and increases pressure on forex reserves. This in turn left the nation in energy and food shortages for a while. Amidst the global crisis, the US dollar gets stronger than at any other time. Since then, to deal with the crisis relaxing pressure on the USD, the discussion of trading in local currencies come to light.
This initiative of trading in own currencies of Bangladesh and India was taken a decade ago. At that time, the proposal remained in the shadows considering potential risk factors. After a long interval, amid the dollar crunch in forex reserves, the issue comes to the forefront again. During the ministerial meeting of the two countries in December last year, a proposal was made to conduct commercial transactions in rupees. The matter was then raised in the meeting of the National Economic Council of Bangladesh in March.
Later, a delegation from India visited Bangladesh last month and discussed the mode of commercial transactions between the two countries in taka and rupee. Transactions can be carried out without converting the local currency into dollars. Banks from both countries will open accounts – known as vostro and nostro accounts in global accounting – in the banks of other countries to facilitate cross-country transactions. The exchange rate will be calculated from Taka to Rupee or Rupee to Taka. People traveling to India from Bangladesh or importing goods from India would be able to add Indian rupees to their accounts. Similarly, Indians can also add Taka for transactions in Bangladesh.
Since 2022, being the world’s fifth biggest economy, India emerged as one of the fastest-growing economies in the world. It will move forward to third place behind the US and China by 2030. The Indian economy continues to remain robust and stable despite instability in the global macro economy and rising risks to financial systems. The annual Export and import volume crossed $400 billion and $560 billion in 2021. With robust economic success and geopolitical advancement, India emerged as an influential regional leader in South Asia. Hence, India’s economic strength and geopolitical ambitions are fueling to promote trade in rupees. The trend of using local currencies in foreign trade has increased all over the world, as the Russia-Ukraine war begins. India’s rupee also has an increasing trend of trade. Recently, 18 countries, including the UK, Germany, Russia, and even the United Arab Emirates, have been given permission to trade in Indian rupees. Bangladesh is the latest addition to this list as the 19th country.
This decision of Bangladesh is based on the economic experience of the last one and a half years, which is still prevailing. This implies Bangladesh’s intention to reduce its dependence on USD. The central bank had to sell more than $20 billion dollars of its net forex reserves over the last two financial years due to an imbalance in the forex market. The taka has depreciated by more than 30 percent against the US dollar over the last couple of years. Particularly, In the last one and a half years it has gradually depreciated and still the market is fluctuating. Therefore, Bangladesh, like many other countries, is thrived to diversifying its reserve currency and doing trade in local currency.
The Bangladesh Bank has been building up the share of yuan in its foreign exchange reserve, cutting down the share of the dollar as the Chinese currency is gaining acceptance faster in global markets for international payments. Last month, Bangladesh and Russia agreed to make the transaction of the first installment of the Rooppur nuclear power plant, equivalent to about $320 million, in Chinese currency Yuan. Countries trading with Russia, like India and China, have started trading in rupees and yuan instead, triggering talk of the de-dollarization of the international trading order, as Russia has been excluded from the SWIFT gateway.
The process started as a number of countries, specifically, the BRICS nations, are playing a leading role to establish an alternative exchange currency based on a basket of currencies, to limit their dependence on the dollar. The BRICS basket currency as reserves is attracting many other countries in South Asia and the Middle East. According to the latest report, 25 countries including Bangladesh are now ready to join BRICS and accept the new currency for international trade.
There are some positive implications as well as backdrops of trading in Taka and Rupee. The diversification of reserves will increase the pressure on Bangladesh Bank. The central bank may face significant exchange losses whenever either of the currencies devalued against the dollar.
On the contrary, traders have welcomed this as it allows them to open LCs in taka or rupees for import and export from India without the use of any third currency like the Dollar. Also, Bangladeshis travel to India for various purposes are also seeing it as a boon. While Bangladesh’s import from India in the last fiscal year was about $16.19 billion, exports to India were around $2 billion. Experts suspect the functionality of the process as supply and demand for both currencies are wildly unequal. Considering the deficit, only transactions worth about $2 billion will be settled in rupees and takas. If we perceive this as a part of the process of reducing dependence on the dollar, the consequences are not widely visible now but will prevail in the future.
The writer is a researcher on South Asia’s political economy and international politics
