Published :
Updated :
For all latest news, follow The Financial Express Google News channel.
Open economies cannot but execute transactions with other countries, through highway or byway. Transactions encompass trading in goods and services, and finance on account of investment in the form of lending, borrowings, and participation in capital and money markets. Money works as medium of exchange, among others. There are two types of money - domestic money and moneys commonly used in international transactions.
Domestic money can work to execute trans-border transactions provided it is within the character of convertibility on both current -and capital- account transactions. The particular economy to which money belongs needs to have deep and wide financial markets with versatile financial products instead of limiting to bonds, equities. Which moneys used for international transactions are not well defined. However, moneys in SDR (special drawing right) basket are de-facto moneys used in transactions among countries. These currencies are the US dollar, Euro, British pound, Japanese yen and Chinese renminbi. In addition, there are some currencies used globally such as the Canadian dollar, Swiss franc, Singapore dollar and few more. These, including SDR currencies, are freely convertible, meaning that deposits of these currencies are transferable elsewhere without restrictions at the desire of depositors. There are weights of concerned currency based on transactions volume. In spite of introduction of a common currency - Euro in the European Union (EU), the US dollar is still playing dominating role. Renminbi should have achieved a playing role as a global trading currency on the basis of Chinese economic strengths, but to no avail yet.
Till today, the US dollar is a strategic currency in the sense that strategic products are traded by the dollar. Excepting sale of fuel from North Sea, fuels are traded through the US dollar, giving it to enjoy hegemony. In addition, the US economy is in process of well strength in financial products - treasury and non-treasury. As a result, the economy is driven by service sectors by phasing out manufacturing activities to other locations, especially in Asian economies.
In international finance, 'cross currency' is commonly used. It means that a common currency is taken as an anchor to convert one currency to another. As an example, conversion between Bangladeshi Taka and Indian Rupee is subject to requirement of the Taka to be converted to dollar first. Dollar then is converted to Rupee. There is no direct official exchange rate between these two currencies. It is like English language to which one language is converted for reaching another language. Dollar dominance in the global settlement works as a financial solar system. A global messaging system known as SWIFT is a support service in this regard. No other coding system is there to settle transactions executed in the US dollar.
Export is one of the key pillars of Bangladesh economy. Of the total exports, readymade garments constitute leading export item. The major market is the US and Europe. Changing trade model does not support executing transactions between exporters and importers - role of third parties is essential. There are different trade hubs like Singapore, Hong Kong, Dubai, Luxembourg and so. These hubs facilitate export. More untapped markets are being added to export through these trading hubs. Dollar is even found as trading currency even for export to Europe. Export orders in dollar are helpful to exporters. Garment export depends on inputs procured from other countries. Export payments in dollar help to settle import payments in the same currency without cross-currency conversion loss. On the other hand, input import in other currencies is rarely possible. Inside information says that imports from China are also required payments in dollar though central bank allows payments in Chinese currency.
Exporters trade with different destinations without limiting to the US and Europe. Commercial banks in Bangladesh facilitate transactions through repatriation of export payments and settlement of import payments. In practice, banks maintain relations with different banks in the world but do not maintain accounts with them all, rather maintain bank accounts with banks in few financial hubs like the city of London, New York, Frankfurt, Singapore, Hong Kong and Dubai. Inward receipts like export payments are deposited in these accounts and outflows like import payments are settled out of balances held in these accounts. Surplus funds available in the accounts are used for placement abroad in short-term income-generating financial instruments.
Transactions from the accounts maintained by Bangladeshi banks abroad need to observe specified norms like anti-money laundering/combating of terrorist-financing regulations, the screening of sanctions and many more. Without being fully satisfied, transactions cannot be executed, for which sufficient time is needed. With regards to sanctions, satisfaction is required to SWIFT system on completion of sanction screening. System will not allow transactions to and from persons or countries having sanctions from global powers, including the United Nations (UN). Such sanctions led Bangladesh to stop jute goods export to Iran due to problems in realisation of export payments. It is known that ACU (Asian Cleaning Union) stopped settling payments for transactions with Iran because of sanctions. Transactions without compliance with norms required for sanctions will result in adverse impacts to countries violating set rules. As such, it is not easy to promote trade with countries having sanctions or with countries having relations with sanctioned countries. The basic problem is with settlement of payments.
Bypass is an alternative route to reach goals. To avoid sanctions, alternative payments solutions are found bypassing SWIFT, such as CHIPS, SPFS, INSTEX. These may work provided that all transactions are executed within this messaging system. But some by these systems, and some by SWIFT, will not give complete solution; rather there is every scope to be caught up by watching eyes. On these very grounds, operations of alternative messaging system are found operational in theory, none wants to go for being mired in problems.
Once upon a time, Bangladesh was in crisis for need of payment currency like British pound and US dollar. At the time, trade settlement was executed by loans and grants. Another alternative was framework for exchange of goods. It is an alternative to barter system or equivalent to barter protocol. Specified goods were exchanged with countries to which there were frameworks in operation. Banks recorded transactions to reconcile for the transactions. No information flows were required for the deals. Today banks play a vital role in executing cross-border trade transactions for settlement of payments. Without settlement by banks, whether trade transactions is possible or not is a moot question. But it is possible in practice. Without letters of credit (L/C), trade can be executed. Goods are exchanged and documents are channelled between traders without touching banks. Involvement of banks will be required when concerned parties make payment or receive payments.
Let banks execute transactions by SWIFT channel in traditional way. If it is possible to execute non-SWIFT transactions by traders themselves remains a question. Definitely it is possible with specific policy tools in place. As noted earlier, our exports depend on orders routed through trade hubs. In the same way, merchanting traders can facilitate country's exports with counter-arrangements of imports. In this case, banks need to work as record-keepers for set-off deals. This may be as good as barter trade but there are some differences under which exporters will receive payments from merchanting traders which will receive such payments from importers against import of goods. As such, this may be termed 'merchanting trade management' which is nothing but a modified version of barter trade. Different sanctions by global powers jeopardise settlement of trade payments. To continue trade within troubles, merchanting trade management can be a remedy.