Should Bangladesh opt for alternative currencies?

The US dollar is currently one of the most talked about issues.

Indeed, the US greenback, which had been stable against the Bangladeshi taka for several years, became more expensive in the first months of 2022.

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Demand for US dollars has surged to offset rising import bills, which are far higher than the country’s combined income from exports and remittances.

This sent the currency to breach the psychological threshold of 100 Tk for importers last month, from 90 Tk earlier this year.

The rally has continued even though the Bangladesh Bank has taken a number of measures including pumping $7.6 billion in FY 2021-22 to cool the foreign exchange market and more than a billion since July, and tightened imports of non-essential goods.

Yesterday, importers had to settle their payments by buying a dollar as high as Tk 111.

As volatility in the foreign exchange market persists, leading chambers such as the Metropolitan Chamber of Commerce and Industry have urged the central bank to allow multiple currencies, including the Chinese renminbi, for international trade settlements to reduce Bangladesh’s overreliance on the US dollar.

The suggestion sparked debate.

Bankers and economists called the idea good in principle, but added that the use of other currencies for global trade can only be done on a limited scale, but not in this difficult time when the market world currency is volatile.

As per Bangladesh Bank rules, banks are allowed to maintain foreign currency clearing accounts with the central bank in US Dollar, British Pound, Euro, Japanese Yen, Canadian Dollar and Chinese Renminbi.

This means that businesses can already conduct international business transactions using currencies with the US dollar. But the majority of local exporters are reluctant to settle their global trade using currencies other than the US dollar.

Of Bangladesh’s total trade of over $130 billion, up to 99% is conducted through the US greenback.

In Bangladesh, local exporters have to import raw materials to manufacture items for export. Import payments are settled with the US dollar from their export earnings.

“If they use two separate currencies to settle international trade transactions, companies may incur losses in some cases due to exchange rate risk,” said a central banker.

He explains that it would be difficult for companies to transact in the Chinese currency because the trade gap with the world’s second-largest economy is large, with the balance tilting towards Beijing.

Also, says the central banker, Chinese exporters generally do not show a willingness to receive payments in their own currency.

“That’s because a lot of them have businesses in a number of countries where the US dollar is critical to the smooth running of their operations.”

In principle, the idea of ​​using multiple foreign currencies for international transactions and reducing dependence on a single currency is good, said Atiur Rahman, former governor of Bangladesh Bank.

There are difficulties, especially in setting up the payment system, he said.

“Regulatory challenges will also be huge. It will be difficult to trade between countries with large trade imbalances,” he said, adding that many payments and settlement agreements are needed involving banks and central banks. .

Rahman thinks Bangladesh shouldn’t jump on it just because there’s pressure on the reserve.

“At best, we can experiment using one or two banks to see how the system works. Our situation is not so bad that we will have to withdraw from the existing system which has proven itself.”

“And it will take time to replace the US dollar because the greenback is still very friendly.”

Syed Mahbubur Rahman, managing director of Mutual Trust Bank, believes that since Bangladesh is an import-dependent nation, there are few options for the country to reduce its dependence on the US dollar.

Even, a currency exchange might not be a profitable method for the country, he said.

“If we follow the swap with countries like China and India, Bangladesh will hardly benefit. We will face a high amount of interest to repay the loans under the swap.”

In the past, efforts have been made to popularize the Euro and the Renminbi to counter the dominance of the USD.

Multiple currencies reduce the risk of sanctions. But there must be inflows and outflows to reap the benefits of trading in multiple currencies, said Treasury and economics analyst Mamun Rashid.

Currencies must be convertible against each other. This means that the taka could be exchanged directly for the Indian rupee or the renminbi. When this happens, Bangladeshi exporters could receive the currencies and also settle imports against them.

“Otherwise reducing dependence on the dollar is difficult,” said Rashid, who led the treasury section of Standard Chartered and ANZ Grindlays Bank in Bangladesh.

Selim Raihan, an economics professor at the University of Dhaka, backs the idea of ​​a currency swap, saying a number of countries are already doing it.

“But all currency trading is not a good idea in this volatile time in the global market.”

According to Professor Raihan, Bangladesh can consider trading with countries and regions with their own currencies.

For example, the country can export goods to India in Rupees and pay the same amount of import bills using the currency as well.

A similar process can be followed in the case of China, Bangladesh’s largest import source.

Bangladesh exported $1 billion worth of goods to India and imported $8.5 billion from the neighboring country in the 2020-21 financial year, according to BB data.

The nation exported $566 million worth of goods to China and imported $12.9 billion worth of items from the world’s second-largest economy in the same year.

“We can also do the same for trade with the European Union. We need to explore the opportunity,” said Professor Raihan, adding that such agreements could allow Bangladesh to reduce the demand for US dollars by almost 2 billions of dollars.

Ahsan H Mansur, executive director of the Bangladesh Policy Research Institute, says using Chinese currency in trade instead of the US dollar won’t do much to save the greenback.

“This is because the final convertibility will be in US dollars. So the idea of ​​using RMB instead of dollars is not feasible at this time.”

Likewise, full currency exchange is also not possible with China and India, he said.

Zahid Hussain, a former senior economist at the World Bank’s Dhaka office, said the choice of the US dollar for price invoicing and payment settlements is an international convention.

“It could have been any other currency as long as it is generally accepted by all parties.”

“What is important is that everyone uses the same currency as a unit of account. Using multiple currencies would be a regression to unnecessarily higher transaction cost like the barter system.”

Hussain says the Chinese renminbi is becoming a currency for settling international payments, but it is not used as a unit of account by third parties or seen as a safe haven.

Mustafizur Rahman, a senior fellow at the Center for Policy Dialogue, said the BB does not have large reserves of Indian or Chinese currency to conduct transactions.

“The availability of currencies is a major challenge.”

Bangladesh has a higher trade deficit with India and China so it is not easy to trade in their currencies, he said.

“At most, we can only trade in the currency up to the amount we export to those countries.”

BB spokesman Md Serajul Islam says the central bank is watching the global situation and will decide according to the situation.

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