Intra-regional trade among the member-countries of South Asian Association for Regional Cooperation (SAARC) is still negligible or minimal compared to their total trade volume. Trading between these countries account for only about 5 per cent of their total foreign trade. However, according to a recent report titled “Trading in Local Currencies: Problems and Prospects for the SAARC Countries” published by Bangladesh Bank, intra-regional trade could be boosted if it was done by utilising local currencies instead of US dollars. However, for optimal outcome, some reform measures will have to be undertaken before this initiative can be implemented properly.
The exchange rate of US dollar has increased gradually since the start of the Russia-Ukraine war. The import-dependent countries are facing problems as a consequence. Besides, Bangladesh had to limit its imports owing to rapid depletion of its foreign currency reserve since 2022. In this backdrop, the idea of conducting foreign trade by using local currencies has gained mileage among the policy makers. Bangladesh has even signed agreement with India for the purpose, although the initiative has not yet been operationalised.
According to the Bangladesh Bank report, despite the geographical proximity of SAARC countries, their diverse trade policies and other related factors have been acting as impediments in carrying out foreign trade through local currencies. However, discussions have been started for exploring its potential within this economically slack grouping, the main rationale being to shelve the current over-dependence on US dollars. In the backdrop of volatility observed in the exchange rates of these countries against US dollar, such an initiative can bring about win-win outcomes for all.
The total population in the South Asia region is about 1.90 billion, and total GDP in the region is estimated to be about 4.5 trillion US dollar. Of this, being by far the largest country, the share of India is the highest. Bangladesh, Pakistan and Sri Lanka come next. However, the rates of inflation in these countries are not uniform. Although Bangladesh and Pakistan have two-digit rates of inflation, the situation is much better in Bhutan, Maldives, India, and Sri Lanka. This difference in inflation rate is quite noticeable, as all the countries face somewhat similar economic challenges due to global factors.
There are many advantages of undertaking trade by using local currencies. Such a move could help mitigate the exchange rate volatility that has been plaguing the SAARC countries over many years. However, some factors including credibility or acceptability of local currencies may act as impediments to this. It is claimed that limited convertibility of local currency, tight rules and regulations, regulatory restrictions, and lack of market adaptability may hinder such effort. Trading in local currency may also become risky due to existing foreign exchange regulations and trade financing restrictions. Another problem can be the limited acceptability of the local currency, as the trading partners are usually interested in using a currency that is more acceptable like the US dollar. Moreover, the countries usually prefer to fill their foreign currency reserves with such currencies that can be easily used, and consider it inappropriate to keep uncommon currencies.
In the above backdrop, Bangladesh Bank has highlighted some steps for facilitating the use of local currencies in intra-regional trade. Firstly, the concerned countries should liberalise the methodology for determination of exchange rates and reduce restrictions on currency conversion in order to ensure seamless exchange of local currencies in trade transactions. Secondly, a strong financial infrastructure should be built up based on reciprocity and compatibility. For this, the payment method, clearing process, and transaction settlement procedure should be strengthened. Trading will be facilitated if the partner countries have similar rules and regulations on these matters. Thirdly, appropriate monetary cum fiscal policies should be formulated to maintain currency stability and minimise exchange rate risks. Besides, steps should be taken to build trust and confidence among the businessmen and investors of partner countries. Fourthly, the regulatory frameworks in partner countries should be conducive and supportive to trading in local currency. The governments should implement policies that facilitate currency convertibility, remove barriers to trade settlements in local currencies, and extend legal guarantees for businesses engaged in such transactions.
The recommendations put forward by Bangladesh Bank include: changing the attitude of traders through educational and capacity building initiatives; relaxing the capital flows gradually to establish a secure trade settlement system; initiating agreements to reduce tariff and non-tariff barriers among member-states; encouraging bilateral and regional trade cum investment agreements; adopting foreign exchange regulation policies that promote the use of regional currencies in trade; and introducing new trade settlement/payment system.
The US dollar has dominated world trade and financial transactions for a long time – currently accounting for about 90 per cent of OTC foreign exchange turnover and 80 per cent of export invoicing. Although its usage dipped from 89.9 per cent in 2001 to 84.9 per cent in 2010, it rebounded to 87.6 per cent in 2016. On the other hand, other major currencies like the Euro, Yen, and the Australian dollar underwent declines in market share. However, the Chinese Renminbi made gains, as its share doubled to 4 per cent in 2016 from 2.2 per cent in 2013. The Indian Rupee also expanded its market share to 1 per cent in 2016.
Many countries are now trying to come out of the current tradition of sole dependency on US dollar in international trade. This trend has been gradually getting a foothold especially since the jump in US dollar exchange rate following the start of Russia-Ukraine war. Bangladesh has not remained outside this global trend, and has already taken initiative to launch trading with India and China in Rupee and Renminbi.
Many analysts feel that the door to regional cooperation will open up further if more trade is undertaken in local currencies in the South Asia region. However, adjustments should be made in the areas of economic and trade policies by these countries in order to bring congruity for such exchanges. A new horizon can be opened up in regional trade of South Asia through strengthening of such cooperation among the member-states of SAARC, which is essential for the common good of the region.
