- Sanjana Chowdhury
- BBC Bangla, Dhaka
5 hours ago
Bangladeshi businessmen have welcomed the directive given by India’s largest bank, State Bank of India, to trade with Bangladesh in rupees and taka instead of US dollars.
Last month, the State Bank of India directed its branch banks to conduct transactions in local currency instead of US dollars.
They say that it will be beneficial for both countries to trade in local currency to speed up the trade of the two countries due to the fluctuating value of the dollar.
However, Bangladesh Bank says that since no instructions have come from the central bank of India or the country’s government, they are not thinking about it yet.
According to experts, where Bangladesh has a deficit in the trade between the two countries, the transaction in rupees can put Bangladesh at greater risk.
Why are exporters interested?
Due to the 20 percent rise in the dollar this year, the foreign exchange reserves of the two countries have been strained.
Bangladeshi exporters believe that if part of trade with India is done in rupees, if not 100%, both countries will benefit.
“The price of the dollar is constantly fluctuating. Most of the time we face losses due to these price fluctuations,” said Matlub Ahmad, president of the India Bangladesh Chamber.
“But if part of the trade is transacted in Indian rupees, the cost calculation will be correct. As well as doing business without dollars, the pressure on the dollar in reserves will decrease. Meanwhile, both sides benefit,” he said.
Huge trade deficit
Bangladesh is highly dependent on Indian products for trade.
In the outgoing fiscal year 2021-22, Bangladeshi businessmen exported goods worth about 2 billion dollars to India. On the contrary, goods worth 1,619 million dollars have been imported from India.
That is, the trade deficit of Bangladesh with India is like 1 thousand 420 million dollars.
As Bangladesh’s exports are less in the bilateral trade of the two countries, experts say that Bangladesh will be under pressure even if India benefits from the exchange of rupees and taka.
They fear that if Bangladesh trades with India in rupees due to its large trade deficit, it may lead to a unilateral currency or rupee-based exchange structure and pressure on Bangladesh to use the Indian currency at a higher rate.
As an example, they cited the Nepal-India trade issue.
Moreover, the banks doubted whether Bangladesh has enough rupee reserves for this huge amount of commercial transactions.
Syed Mahbubur Rahman, former chairman of Association of Bankers Bangladesh (ABB) and managing director of Mutual Trust Bank, says that due to the dollar crisis, everyone is thinking of trading in alternative currencies.
“Now that Indian bank is talking about trading in rupees, we don’t have that much rupee reserve. Moreover, Bangladesh imports more and exports less. The remaining shortfall cannot be traded in rupees,” he said.
What is Bangladesh Bank saying?
Meanwhile, Bangladesh Bank says that since the decision did not come from India’s central bank – the Reserve Bank of India, but from the State Bank of India under the Reserve Bank, they have nothing to decide in this regard.
“Because it is not the matter of the Reserve Bank of India. It is the matter of only one bank,” Bangladesh Bank spokesperson Sirajul Islam said.
“The Central Bank of Bangladesh cannot take any decision based on the instructions of that bank. So we haven’t thought about that yet,” he said.
Where is the risk of Bangladesh?
Like the dollar, the international value of the rupee also fluctuates. It is also not stable.
Because of this the transaction will be risky for the bank and the bank may charge extra due to this risk.
Therefore, CPD research director Khandaker Golam Moazzem believes that there is little opportunity for these two countries to trade in local currency on a large scale.
“Both India and Bangladesh are suffering due to the high value of the dollar. Local currency transactions do not seem to play much role in this,” Mr. Moazzem said.
He fears that once rupee-taka transactions start, it will not only be limited to trade in local goods but will also spread to various service trades such as travel, medical, education, etc., which will put Bangladesh at risk.
The current account deficit of Bangladesh has increased due to the increase in the prices of various products including fuel and food in the international market due to the effect of the Russia-Ukraine war. Foreign exchange reserves also decreased.
According to Bangladesh Bank, the country’s foreign exchange reserves fell to $37 billion from $48 billion a year ago. This reserve is expected to cover five months of import expenditure.
In view of this, Bangladesh has sought a loan of 4.5 billion dollars from the International Monetary Fund (IMF).
But Khandaker Gholam Moazzem fears that transactions in the local currency may have a negative impact on it as well.
Because IMF member countries have recognized only five currencies for easy and safe transactions. They are Dollar, Euro, Yuan, Japanese Yen and Pound.
In this case, he thinks that trading in rupees will create risk for Bangladesh.
“The IMF considers the foreign exchange reserve situation seriously in granting loans. In that case, if the alternative currency creates instability in the reserves, it will also affect the loan negotiations. In this case, lending or interest rates may be negatively affected,” Mr. Moazzem said.
What can be the way
Mr. Moazzem suggested that the government should make every effort to sustain exchange through the dollar. Underutilization of Indian currency. In this case, the two countries should think about how to reduce the use of dollars.
He also said that in Bangladesh’s current situation, there could be limited trade or Bangladesh could try to trade in rupees experimentally. In that case the decision can be made according to what the result is.
However, due to fluctuations in the currency rate, how much the importers and exporters will want to trade, how much the banks will want to take this risk, is also a matter to be seen.
Bangladesh Bank has recently allowed opening of accounts in Chinese currency Yuan.
Apart from this, discussions are also going on with Russia in taka-ruble transactions. Now it remains to be seen whether there is any decision from the central bank of India or the government of the country regarding the rupee.