Bangladesh, India to trade in local currencies to cut dollar dominance

Bangladesh, India to trade in local currencies to cut dollar dominance

Dhaka approves New Delhi's proposal, huge trade deficit with India big challenge to reap immediate benefit, says Bangladesh Bank official

By SM Najmus Sakib

DHAKA, Bangladesh (AA) - Bangladesh and India decided to trade in their currencies, taka and rupee, respectively, to bypass the rising dollar, its dominance in trading, and to promote regional businesses, a Bangladesh Bank (BB) official told Anadolu.

The two neighbors made the decision, as many countries, including in the region, face a dollar crisis due to the ongoing Russia-Ukraine war and the pressure on dollar reserves in central banks. The import process is being disrupted in Bangladesh due to the availability of dollars at commercial banks, according to media reports.

Transactions in takas and rupees, apart from the dollar, are fueling hopes of reducing pressure on dollar reserves and cutting the cost of trade, according to officials in both countries.

The two countries can directly exchange import and export prices using the taka and rupee.

- Decision to boost regional trade, reduce business cost

Many countries started moving to this payment system convergence, allowing transactions in local currencies. Countries are doing this to promote bilateral or regional trade, reduce the cost of business and increase the speed of transactions, said the executive director and spokesperson for BB, Md. Mezbaul Haque, who shared details of the decision with Anadolu.

“India is a major trade partner of Bangladesh. Bangladesh imports a huge quantity of goods from India. Thus, such a decision will cut the cost of business, speed up transactions, and boost regional trading,” he said.

Haque cited Singapore-India, Singapore-Malaysia, and Australia-South Africa as examples of conducting trade and transactions in local currencies.

“We have scrutinized the proposal of introducing payments in rupees offered by India and will allow the opening of a LC (Letter of Credit) in banks,” he added.

Haque also said that in traditional trading, the currency has to be converted several times at different stages, and that direct taka-to-rupee transactions are contemplated to minimize fluctuations.

Sonali Bank and Eastern Bank in Bangladesh have started the process of opening transaction accounts at the State Bank of India and ICICI Bank to implement the decision.

Similarly, the two Indian banks are opening accounts in the two banks in Bangladesh, according to Haque, who noted that he hopes the process will begin in June.

BB said earlier that if the banks want to open a LC in rupees, it would be allowed, and any trader in Bangladesh who wants to open a LC for import or export can do it.

Recently, a delegation from India went to Dhaka and spoke with Sonali Bank and Eastern Bank. The central banks from the two countries have taken policy decisions.

Earlier, the Reserve Bank of India issued guidelines regarding the use of rupees in international trade.

- Trade deficit, engaging trader challenge to reap big benefits

According to BB, the central bank, exports from Bangladesh to India amount to $2 billion, while Bangladesh's imported goods from India worth $13.69 billion.

Bangladesh's exports -- if the amount of trade is done in rupees -- will reduce the pressure on the dollar, said the bank. But the country will have to pay the rest of the import price in dollars as is currently the case.

Bangladesh's trade deficit with India is high. It can trade only as many rupees as it exports to India.

In terms of currency availability, Bangladesh will not be able to reap the benefits of the new system very quickly because of the lag.

With Bangladeshi exports to India increasing gradually, the possibility of trading in takas and rupees will increase, said BB.

Haque admitted that the trade deficit with India may delay an immediate benefit.

“We are always aware of how to cut the trade gap. In reality, Bangladesh is an import-based country and India is one of the major countries we import. So, the decision will help in the long-term for both countries,” he said.

Engaging traders in the process will be a major challenge. If raw materials are imported from other countries and exported to India, transaction costs will increase and would not inspire businessmen to trade in rupees, said economists.

“If we can reduce the cost of transaction and avoid dual conversion of currency, traders will normally be inspired to do business in local currency as cost is the major driving factor. Once businessmen experience benefits, they will move for it,” said Haque.

He said the decision will inspire more trade and business in South Asia.

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