Global payments aggregator: inevitable medium of global transactions

| Updated: March 12, 2022 21:49:18

Officials are seen at a bank in Dhaka. Banks are entirely dependent on SWIFT to settle any international transactions. 	 —FE Photo Officials are seen at a bank in Dhaka. Banks are entirely dependent on SWIFT to settle any international transactions. —FE Photo

My income is your expenditure and vice versa-- this is a bilateral transaction. For a state, if total income is equal to total expenses, there is no problem. But how surplus and deficit are created come as a question. The simple answer is that surplus is created when income is greater than expenses and the opposite is deficit. At individual level, surplus is nothing but saving which is lent out direct to deficit group or through intermediaries like banks, finance companies etc. In case of a government at a deficit position, a part of the economy mops up surplus from the people at a cost. The fund is used to purchase goods and services. As a result, this deficit at government's end is a supportive tool for savings at individual level. Expenses of 90 units are made out of income from 100 units, leaving 10 units as savings which are basically consumed by others including the government. The economy's output used by external sectors generates income from external sources. Output of external sectors used by us makes outflows from our country in monetary form. The balance between inflows and outflows against trading of goods and services constitutes current account balance. We need to depend on foreign goods and services for which our current position is deficit. This position is supported by foreign investment, loan, grants etc. The volume of transactions with external sectors is around US$200 billion. As a result, Bangladesh is becoming a trade dependent nation. We cannot avoid external sectors.

Transactions with external sectors are primarily conducted by banks as facilitators. There are some norms needed to be followed by banks for the transactions. For transactions with external sectors, different currencies are needed; Taka is rarely workable in this case. In international transactions, US dollar is still in a dominating role. There are different concepts and propositions behind the dominance, including power politics. In practice, it is observed that export orders from Europe are received in US dollar. Procurement of raw materials against the orders are arranged from China which does not sell the items in their own currency other than US dollar though it is said that they are trying to use their currency in international trade.

As stated earlier, banks play facilitating roles in international transactions. In this case, they need to maintain relation with their counterparts abroad, including maintenance of accounts. It is not viable to maintain accounts with millions of banks operating worldwide; our banks maintain accounts with banks operating in global financial hubs like the City of London, New York, Frankfurt, Singapore, Dubai, Hong Kong. Transactions are executed through messaging system. The global dominating messaging system is SWIFT (Society for Worldwide Interbank Financial Telecommunication) which works as an aggregator. With the role of aggregator including messaging system, SWIFT supports its subscribers to establish links with non-accounts maintaining banks through relationships management arrangements. It is said that unique support by SWIFT in international payment settlement makes US dollar dominant in global transactions. BIC (bank identifier code) is the lifeline for payment settlement through SWIFT.

Sanctions by global powers lead to develop some payment systems like SPFS, CIPS, INSTEX. But these are all bilateral or regional platforms facilitating transactions in currency other than US dollar under so called currency swap or banking arrangements. The system cannot solve problems of mismatch between inflows and outflows. The gap in practice needs to be settled in traditional ways or in kind from or through third country. In the long run, such arrangements cannot sustain and maintain growth path to upper level.

Bilateral settlement arrangements support transactions between participating countries. But third counties are needed to complete transactions. Just for an example, country X makes bilateral payment arrangements with country Y. Exporters export goods to country Y but they need to import raw materials from country B under traditional arrangement. As such, bypassing traditional arrangement cannot totally bypass prevailing SWIFT arrangement.

Hong Kong is a trading nation in papers. It executes exports and imports on behalf of others. On the other hand, Bangladesh is a real trading nation of goods and services. Its trade volume is more than 100 million which exceeds 50 per cent of total volume of external transactions. It is said trade is a growth engine of an economy. This is applicable for Bangladesh also. It is frequently said that we depend on export of readymade garment supported by sewing sisters, among others like expatriates working abroad and indigenous agro-sector. Export earnings, and wage income sent by expatriates working abroad facilitate to meet the payments of imports, including consumer goods. As such, it is inevitable to maintain relations with external world for trading needs.

Inflows provide support towards executing outflows. Our inflows are in US dollar. It means that export is conducted in US dollar. If our export is in other currencies like Euro, Yen, or Renminbi, our import moves to that currency indeed. China is one of the largest origins for our imports. Central bank allows trade with China in their currency but the reality is different. Exporters will not go for input imports in Chinese currency where export payments are in US dollar. They will avoid mismatch in import payment currency. As a result, most of imports from China are in US dollar. Insiders say that Chinese suppliers avoid to execute exports in their own currency also. Therefore, global monetary system with US dollar as the anchor currency under Bretton Woods system established in 1944 is still in operation. The system is being supported by global payments aggregator like SWIFT linking all global banks in a single window. Another unique advantage US dollar enjoys is that it is invoicing currency for trading of strategic goods like fuel.

Disadvantage of the present system is that it is not easy to execute trade with non-dollar/non-useable currency through SWIFT. It also does not allow transactions for countries having sanctions from global powers. As such, direct trading with these countries including settlement thereof is quite difficult by SWIFT system. For this reason, ACU (Asian Clearing Union) mechanism is not working for trade with Iran. Such problems are with different countries under sanctions. As per global banking norms, sanction screening is a must for execution of transactions. A little deviation by banks results in fierce consequences. So, apparently it is impossible to execute transactions through SWIFT system for trade with sanctioned countries.

It is touted that the said countries have potential for promotion of exports. In this case, different banking arrangements like currency swap, direct exchange of local currency with counterpart's currency etc. are set to be implemented. It may be true in the sense that it will increase export trade. Whether it is really possible is a question. Mode of export trade has been changed from cash to credit. Exporters need to receive early payments against credit sales. Such early payments are arranged by global banks operating in different financial centres. But the facilities are not be available for special arrangements avoiding SWIFT payment network as noted earlier. Moreover, special arrangements need net settlement through another currency. How this is possible in bypassing SWIFT network is another question. The easy solution is to receive supports from traders operating in global trade hubs for promotion of exports to untapped countries. In this case, trade operators may work as countertrade arrangers. There will be no need to bypass global payment system, rather net settlement will be arranged by traders, and there will be no chance of facing problems of default in payments.

[email protected]

Share if you like