Export trade model and currency swap

Currency swap is reported to be executed by the country's central bank with its counterpart in Russia to facilitate payment settlement for bilateral trade transactions. If it is not possible to execute transactions through acceptable currency, barter type transactions need to be implemented for trade. Currency swap to a great extent is as good as a barter system.

Record shows that Bangladesh exported goods to Russia around 665 million US dollar in the last fiscal year, while import was recorded at around 800 million US dollar (FY20). Export Policy of the country states that banking system will be strengthened with Russia, CIS countries, Myanmar and North East Indian region. If banking relation is not active, how trade is executed with Russia is indeed a question.

Banking transactions with external sectors of Bangladesh depend on nostro accounts maintained by Bangladeshi banks with correspondent banks operating in global financial hubs like New York, the city of London, few financial cities in Europe, east Asia and Middle East. In addition to nostro accounts, Bangladeshi banks have numerous relationship arrangements with many banks in different countries. Bangladesh is exporting to many countries of destinations and importing from many countries. But destinations and origins for settlement of payments from and to are very few against trade with numerous countries. Most of the settlements are executed through financial hubs where Bangladeshi banks maintain nostro accounts with their correspondents as said earlier and different commitments like letters of credit (LCs), guarantees etc., are passed through these banks. Bilateral settlement based on destinations and origins of goods are very few, only regional arrangements like ACU (Asian Clearing Union) mechanism facilitates trade settlements on origin and destination basis against relative imports and exports.

Regarding currency swap in local currency, it can be said that central banks of exporting countries extend credit facilities in their own currencies to central banks of importing countries and make local currency funds to exporters' banks for payments to exporters. At importers' sides, their banks make local currency available to their central banks as settlement of import payments. The fund received by central banks from importers' banks is nothing but the loan proceeds payable to counterpart central banks. The transactions are squired with applicable interest amount periodically by exports from swap borrower countries or by payments in acceptable currencies. Bilateral settlements between banks are not executed, rather central banks make necessary arrangements in this context. This is the system under which currency swap works for settlement of trade payments.

The exporters' central bank makes export payments to exporters' banks out of the credit extended to counterpart central bank. The importers' central bank receives local currency from importers' banks against the swap loans from counterpart central banks. The transactions will be reversed when the swap loan recipient-country exports goods to its counterpart country. Accordingly, the exporters will receive payments in local currency from their banks as export proceeds are channeled through central bank extending swap loan to its counterpart. At the same time counterpart central bank will receive payment from importers' banks in their countryagainst credit

Bangladesh needs promotion of exports through exploration of new countries and diversification of export items. In the last century, exporters would procure inputs on credit, and export goods on cash. But global financial crisis in first decade of the current century changed the situation. Bangladesh became obligated to export goods on credit under sales contracts without LCs. No good option is available before exporters except this. However, exporters can make their export payments protected by arranging payment commitments from external sources, including early payment by way of supply chain finance. For both issues, exporters need to incur costs.

With regard to input imports, credit facilities from suppliers abroad are very rare, rather exporters need import through refinance facilities from central bank under EDF (export development fund). In its absence, they need to arrange buyer's credit against LCs for settlement of input cost on cash basis. In the last century, Bangladesh invented back to back LCs. In the current century, Bangladesh developed another financial instrument known as UPAS (usance payment at sight) LCs which work as buyer's credit. In case of UPAS LCs, goods are imported from under unsace terms with condition to make payment at sight or cash. Usance import bills accepted by banks in Bangladesh are settled by other foreign banks or offshore banking services in Bangladesh under USPAS model. In the process of input procurements, exporters need to incur interest costs.

Major export item of Bangladesh is ready made garments (RMG). Exports of RMG are dependent on input contents either from local sources under back to back LCs or from external sources. Basic ingredients of local sources are also procured from external sources. As an example, local fabrics are produced from yarn for which cotton needs to be imported. For this reason, multilateral trading system would take the seat of barter trading system. Bilateral swap will support trading between two parties, with cost for settlement of imbalanced position in alternative ways.

As stated earlier, export is executed on credit terms for which supply chain finance is arranged to realise payment before maturity. Under swap arrangement, what is to be the trade model is not clear. In practice, foreign buyers would like to buy goods on credit. On the other hand, Bangladesh needs to import inputs on cash by way of UPAS/buyer's credit finance or refinance from EDF. Proceeds against export on credit needs to be realised before maturity for settlements of input payments. On the other side, export destinations and import sourcing stations are not the same in most cases. As such, swap arrangement cannot provide complete solution unless cash flows between export-leg and import-leg are reasonably matched.

Swap arrangement with Russia, as reported by central bank, is going to be introduced. In the process of arrangements, there are some issues that need to be addressed. The issues are basically related to trade models. First of all, bilateral trade needs to be executed on cash or sight basis so that both parties can bear interest cost at each end.

Normally, exporters receive export proceeds or proceeds realised under supply chain finance in foreign currency which is used to settle import payments. But payment from central bank as repatriation of export proceeds in local currency under the swap arrangement will lead exporters to face exchange loss. Hence, the arrangement for import-based export needs to be finetuned, under which central bank should make fund in equivalent foreign currency available to exporters' banks as export payments, against their swap loans to counterpart central bank. The issue is vital for exports like RMG which needs foreign currency for settlement of input contents.

Global export is equal to global import but such match is not possible for bilateral trade. Swap arrangement is a cost to central bank whose export payment is lower than import payment, a benefit for opposite case. Under ACU arrangement participating central banks in payable position need to pay interest at the rate of 2-month LIBOR in concerned currency.

Swap arrangement in case of payable position needs to pay interest based on cost applicable for concerned local currency which may be higher than benchmark rate of international currencies. Hence, attention needs to be focused for trade volume and interest cost. In this case, there needs to have a bilateral trade arrangement with trade volume so that trade gap should be at sustainable level. This will help to offset interest costs by interest income. Last but not least, interest cost should be the benchmark rate of concerned currency to be used for settlement of imbalanced portion.

hossain.shakhawat45@yahoo.com