The Financial Express

Market exploration - export by nonconvertible currencies

Market exploration - export by nonconvertible currencies

Bangladeshi exporters receive export payments from local banks in Taka. Banks receive from importers' banks payment in such foreign currencies which have value of store and can be used as a vehicle to settle external liabilities. Foreign currencies received by banks are retained in bank accounts abroad. These are also placed abroad in short term risk-free investment instruments. Normally, few currencies like the US Dollar, UK Pound, EU Euro and Japanese Yen are used for settlement of international transactions. In Bangladesh, major transactions are executed in US Dollar.

Bangladesh exports are destined basically to North America and Europe. Few markets like Japan and Australia have opened up recently with easy access. There are many potential non-traditional markets for our exports in many parts of the globe. In recent times, trade faces setbacks with some countries due to problems in payment settlements. This happens for reasons like non-availability of acceptable currencies in counterpart trading countries, sanctions imposed by powerful nations to execute transactions in such currencies and so on. As a result, it is not easy to conduct trade transactions with those countries despite of availability.

Such situations impede expansion of trade for emerging economies like Bangladesh. It is not easy for us to import basic contents from some of these countries without the support of third country due to problems in settlement of payment by convertible currencies acceptable to our banks. This situation may open options for alternative settlement process - like barter system. In modern times, this can be termed as 'goods to goods' settlement. To avoid primitive barter arrangement, however, different strategies are applied to execute trade transactions and settlement thereon. They are commonly known as account trade, swap arrangement between central banks, entrepot trade etc.

Let us assume that country 'Byna' is a potential trade partner for country 'Ayna'. But 'Ayna' cannot trade with 'Byna' since it cannot use convertible currencies in trade payment settlement. This results in no trade between them. Competitive advantages in trade cannot stop them to execute trade. As such, they can sit together to innovate ways for trade payment settlements.

In the prevailing practice, our banks maintain accounts (known as nostro) with their counterpart banks abroad. Banks abroad in the same way can maintain accounts (known as vostro) with banks in Bangladesh. We do not need to maintain nostro accounts with all trading partners. Rather, arrangement for correspondent relations can help to settle payment through nostro accounts maintained in other countries. In this case, we can refer to one of our trading partners - Thailand.

Our banks maintain correspondent relations with banks in that country; settlement of transactions with them is done through nostro accounts

maintained in USA or in UK. In the case of trade with 'Byna', country 'Ayna' can maintain nostro account with banks in country 'Byna' in their home currency BYM. In the same way, banks in country 'Ayna' can maintain vostro accounts in their currency AYM in the name of banks of country `Byna'.  There is no direct exchange rate between AYM and BYM. Hence, exporters and importers of these countries decide to invoice each other in convertible currency like US Dollar. This helps to determine value of trade in AYM and BYM for adjustment of payment in these currencies. Exporters of country 'Ayna' export goods to importers of country 'Byna' under contracts. In this case, exporters submit invoices to their banks in US Dollar, banks accept the invoices as per terms of the contracts and make payment in equivalent AYM by debit to vostro accounts of banks of country 'Byna'. Nostro accounts of banks of country 'Ayna' are credited with equivalent BYM by banks of country 'Byna'.  In the reversed way, imports by countries 'Ayna' are settled through debit and credit in the respective accounts.

At equilibrium level, both accounts are balanced; no further settlement

is required. But the real situation shows that country 'Ayna' is in a payable position since its imports are higher compared to its exports. As such, bank of country 'Ayna' seeks help from central bank to resolve the situation. The central bank comes up with a solution under which it makes a swap arrangement with its counterpart central bank of country 'Byna'. Under the arrangement central bank of country 'Ayna' makes fund available to respective bank for settlement of export payment by debit to the account of counterpart central bank. On the other hand, it receives payment from local banks against import of their customers and credits to the account of the counterpart central bank of country 'Byna'. At the agreed settlement cycle, central bank of country 'Ayna' arranges its payable to its counterpart central bank through third currency acceptable to them. This process eases banks to execute transactions smoothly. Central bank of country 'Ayna' also devises a tool to minimise the settlement amount at minimum level by allowing  traders to conduct entrepot export to country 'Byna' through imports from third country. In this case, central bank of country 'Ayna' makes fund in AYM to entreport traders by debit to counterpart central bank account of country 'Byna'. Banks of entrepot traders arrange payment to third country from which import is executed for country 'Byna'. As a result, payables become offset; net settlement amount remaining becomes minimal.

Due to lack of arrangement for payment settlement, many export destinations remain untapped. Exploration of these destinations can boost our export trade. Moreover, imports from these countries at competitive price are possible. In this context, initiatives at both public and private levels are needed. The government can make bilateral trade arrangements with these countries taking such relevant issues into consideration without limiting to (a) trading in acceptable convertible currency with settlement in local currency, (b) account settlement between nostro and vostro, (c) swap line through central banks, (d) entrepot transactions for reducing settlement burden, (e) communication process for the underlying transactions, (f) contracts enforceability mechanism, (g) dispute settlement procedures etc. Without involvement of the government, relevant parties including banks may be allowed to execute settlement against bilateral trade within specified guide lines from concerned authority for handling worse case situations/arbitration procedures, secure platform to use for communication and uploading trade documents, offsetting procedures between export and import, settlement ways by entrepot, complying anti-money laundering norms etc. Guiding notes should include option to support from central bank in case of grave disequilibrium in transactions. In addition, alternative settlement procedures may be incorporated in trade related policies/ regulations.

Bangladesh's export trade is overwhelmingly dependent on readymade garment, a sizeable portion of which travel to untapped destinations as noted earlier. It has been learnt that our RMG products travel to these countries against the sales orders received from global buyers from Europe and America. Export of RMG products to buyers of these destinations needs additional care through refinancing facility in convertible currencies for back-to-back import settlements to different countries.

It is unmiversally recognised that trade is the engine of economic growth since it creates employment. We are in a country of huge manpower for which sufficient purchasing power is required to run the engine of domestic trade. Export brings incremental flows from external sources, which is of help to boost domestic trading activities. As such, dependence with few trading partners will not bring desired result. We need to explore untapped trading destinations through removal of settlement setbacks. The untapped countries will also help to support our imports for basic contents

like cotton, minerals etc., at reasonable price. New markets for exports and easy sourcing of input contents definitely bring positive result for trade to grow. It is reported that many central banks of East Asian and south Asian countries have reciprocal swap arrangements to settle trade payments without depending on convertible currencies. Such alternative ways may be explored for development of our global trade, for which we need to devise an appropriate framework.

Mehdi Rahman works at a

development organisation.

[email protected]


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