MEHDI RAHMAN |
August 21, 2022 10:40:48 PM
Recent media reports indicate that import payments are going to be settled in the currency of the supplier’s country, specifically Chinese Yuan Renminbi (CNY). This is expected to support the stabilization of exchange rates in the forex market. The argument behind this proposal is that import payments will be made in currencies other than the dollar, which will deflate the demand for US dollars. It seems that payments made by importers in taka can easily be converted into a settlement currency for which the US dollar will not be required.
Depending on applicable import regulations, payments may also be settled in the currency of the recipient’s country or the country of origin/shipment of the goods. The regulations seem flexible as they are not limited to only convertible currencies like US Dollar, Euro etc. Importers can perform the import in the vendor’s currency. One of our main import sources is China; imports from there require billions of dollars. These imports can be made in Chinese currency.
Without depending on the dollar, importers can import in other currencies. In this case, foreign suppliers must agree to export to Bangladesh in their local currency. Import payments are not settled physically, but rather through accounting entries. Our export earnings are credited to other countries, which function as the purchasing power of the country and are used to pay foreign debts.
For example, ready-to-wear garments are exported in US dollars. The proceeds are used to procure entry contents without any risk of exchange loss. If exporters start sourcing goods from China in their currency, how will payments be settled as Chinese suppliers will not accept payments in taka. In this situation, US dollar export earnings must be used to purchase Chinese currency to settle import payments. Alternatively, settlement can be executed by currency exchange under account swap agreements. This is a simple accounting tool where our central bank should maintain a Taka account in the name of the counterpart central bank. Similarly, the counterpart central bank will maintain this account in its currency on behalf of our central bank. In case of import by Bangladesh, its account will be credited with the equivalent import payments received from the importers’ banks. When Bangladesh exports, the banks of the exporters will be paid from this account by making a debit entry. What will happen if there is an imbalanced position in the trade? In the event of a payable position, the balances can be used in different authorized investment windows such as direct investment, portfolio investment, etc. The same can also be used to lend in Taka to residents with permission from the relevant authorities. If permitted, the surplus in the account can simply be used as a deposit in interest-bearing term deposits with banks in Bangladesh. Regardless, the Callable Position is subject to payments with interest or profit for the period up to the settlement date, and vice versa in the event of our Callable Position.
Currently, the ACU (Asian Clearing Union) rules of procedure state that interest on the net debit and net credit balance will be calculated on the daily outstanding balance by the proceeds method, taking a year comprising 360 days and will be debited or credited to participants. accounts at the end of each settlement period. The applicable interest rate for a settlement period shall be the closing rate on the first business day of the last week of the preceding calendar month offered by the Inter-Continental Exchange for a month with respect to deposits in United States dollars, in euros and Japanese yen. Under the ACU Swap Facility, each eligible participant is entitled to the facility of all other participants up to 20% of average gross payments over the previous three calendar years. The interest rate applicable to each drawdown is equal to two months of LIBOR in US Dollars or Euros or Japanese Yen declared by the Inter-Continental Exchange, applicable for the relevant value date.
The central bank allows accounts to be maintained with the CNY for imports from China. Massive imports cannot be supported by export proceeds and other income. The system can only work by buying import currency through export currency like the dollar. As such, the greenback will come out the same way as needed to make regular import payments.
Under the ACU, settlement is required in the currency of the ACU such as Dollar ACU, Euro ACU. Recent Indian regulations allow their exporters and importers to execute transactions in rupee. To import from India in rupees, partner countries must first export. 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 authorized capital account transactions. Thus, the model is usable for imports up to equal exports.
The currency exchange model is usable for bilateral trade. It can work effectively when balanced trade takes place. It is reported that the international reserve of Bangladesh decreases when periodic payments are settled with interest under the ACU.
But unbalanced trade with the counterpart country cannot bring fruitful results for the local currency swap deal. Another problem is, as noted earlier, that the interest cost requires deferred payments during the settlement period.
At the end of last year, the trade deficit stood at US$33.25 billion. After taking into account salary remittances and other items, current account balances are recorded at a deficit of $18.70 billion. This is the effect caused by rising world prices for the disruption of the supply chain due to the war. In the last fiscal year, exports were recorded at $49.25 billion and inward wage transfers at $21.03 billion. These two main sources of external revenue primarily support payment obligations, including imports ($82.50 billion last fiscal year). Swap agreements or transactions with importing countries in their currencies may ease payment obligations for the time being. But it is costly if the trade is not balanced.
With its departure from LDCs, the country’s import requirements will remain on the rise until import substitution industries are developed. To deal with the situation, policy support is needed to encourage domestic revenue from exports and wage income. Modest inflows can automatically stabilize the forex market, including exchange rate volatility.