Bangladesh and India have agreed to conduct trade settlements in their respective national currencies, moving away from the dominance of the US dollar. The decision was made due to issues regarding liquidity in foreign currency that Bangladesh has been facing, which have disrupted the flow of imports to the country. Currently, Bangladesh imports almost $14 billion worth of goods from India and exports only around $2 billion. The decision to switch payment to Indian rupees and Bangladeshi takas is seen as an opportunity to reduce the cost of business, speed up transactions and boost regional trading.
Implementation and Effects
The Reserve Bank of India introduced this type of settlement in its latest foreign trade policy guidance, established on April 1st, which allows countries experiencing a squeeze on dollars to pay for imports in Indian rupees. Banks in Bangladesh and India are already opening transacting accounts with their respective counterparts to facilitate the settlements, and it is estimated that the process will start in June.
Although the agreement is mainly seen as benefitting Bangladesh, the country can only pay for Indian imports in the rupee in the same quantity as it exports to India. However, Mezbaul Haque, the executive director of the Bangladesh Bank, stressed the importance of the agreement, stating “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 from which we import. So, the decision will help in the long-term for both countries.”
Part of the cost-cutting benefits come from avoiding the currency conversions that are usually done multiple times in traditional settlements. Other countries have similarly abandoned using the US dollar to settle bilateral trade transactions. Argentina, for instance, decided to pay for Chinese imports using the yuan to protect its dwindling dollar reserves. Brazil has already completed its first yuan-based settlement with China, and BRICS nations will discuss the issuance of a bloc-wide currency to replace the US dollar.
Notably, the decision to switch to national currencies is occurring as the US dollar supremacy is being challenged globally. The dollar has been the world’s dominant currency for decades, but some countries have become wary of its volatility and want a more stable alternative. The move also helps these countries reduce their dependence on the United States in the trading arena.
Conclusion
Overall, the decision taken by Bangladesh and India to conduct their bilateral trade settlements in their respective national currencies could set a precedent for other countries to follow to reduce their dependence on the US dollar in international trade. While critics argue that this move can contribute to exchange rate volatility, proponents believe that it can foster greater economic independence, boost regional trade, and enable developing countries reliant on dollar liquidity to overcome their challenges. Only time will tell whether other countries will follow in India’s and Bangladesh’s footsteps.
