Taka-Rupee currency swap needs caution

Three years ago, Bangladesh and India agreed to settle part of their bilateral trade using their respective currencies. The currency swap mechanism to bypass the US dollar, however, did not progress. Instead, it was decided that only a small portion of exports and imports would be settled in Indian Rupees (INR). Nevertheless, only a few deals were settled in Indian currency, and the process stopped. After the new government assuming power in Bangladesh in February this year, there has been a renewed push to explore a Taka-Rupee swap for payments on exports and imports between the two countries. A news report in this paper mentioned that the Indian envoy in Dhaka had raised the issue of the currency swap for cross-border commercial transactions. The Bangladesh government, reportedly, is reviewing the proposal which has become more relevant especially because of the uncertainties created by the ongoing Middle East crisis.

The bilateral currency swap mechanism is an agreement between two central banks to exchange cash flows in one currency for another under predetermined terms. There is no legal barrier to two countries entering into a currency swap to ease pressure on their foreign exchange reserves, which are mostly held in US dollars. Bangladesh and India are long-time close trading partners, with bilateral trade worth around US$12 billion and a trade balance heavily tilted in India's favour. It is not unusual to consider adopting a currency swap mechanism. India already has an arrangement for settling international trade with a few countries by opening a Special Rupee Nostro Account, essentially a bank-to-bank arrangement similar to correspondent banking. Nevertheless, Bangladesh faces some risks, and the government needs to consider them before adopting a currency swap deal.

For a currency swap to be effective, at least one currency must be a reserve currency recognised by the International Monetary Fund (IMF). Neither BDT nor INR is a reserve currency, meaning no third country holds any foreign exchange reserves in either currency. When Bangladesh and India begin swapping their currencies to settle bilateral trade payments, it will open a window for de-dollarisation, no matter how small the amount. De-dollarisation is a strategic process of moving away from the world's reliance on the USD as the main reserve currency. Over the decades, advanced countries such as China, Russia, Brazil, and India have discussed de-dollarisation. Recent geopolitical conflicts have pushed these nations to adopt currency swap mechanisms among themselves. China and Russia settle their bilateral trade in their national currencies. Similarly, India and Russia conduct significant bilateral trade by swapping Rubles and INR, as Moscow is under Western economic sanctions.

For smaller countries like Bangladesh, it is a highly risky move, as any commercial bank that replaces USD settlement with a third currency may face restrictions or sanctions from the United States Treasury due to de-dollarisation. Such sanctions would put banks in serious difficulty, as other banks may reduce or stop transactions with the affected banks to avoid similar restrictions. The Indian proposal also includes integration with India's Unified Payments Interface (UPI) system to streamline cross-border transactions, for which Bangladesh is not prepared. Against the backdrop, moving towards the BDT-INR currency swap mechanism for trade settlement, as proposed by the India side, warrants a cautious review.