Important to understand the US attitude and stand
There is nothing wrong with a currency swap arrangement -- or in this case, a rupee swap arrangement -- with a country's biggest trade partner. After all, the businesspersons of both the countries are suffering with the fluctuation of the dollar value. Transactions done directly in rupees would benefit both sides. Faced with US and international sanctions, Iran rupee swaps with India in exporting fuel oil in exchange of food and medicine. While big economic and military powers have a couple of times bypassed the dollar, it is quite difficult for the smaller countries to go against US interests and do so.
It must be taken into consideration as to whether the US will see this initiative as going against its interests. It also must be kept in mind that Bangladesh's annual exports to the US are 12 to 13 times higher than to India. So in trying to save dollars, Bangladesh should make sure it doesn't create a new obstacle to its main export market or usher in anything 'bad'.
On top of that, Bangladesh exports 18 to 20 times more to the US market than it imports from the US. The dollars it earns are not spent on that market. Against an estimated 700 million dollars in imports annually, Bangladesh's exports to the US total around 14 billion to 15 billion dollars. This must be protected. Rather than just Bangladesh-India, it would be more meaningful if a free-trade region could be set up among the SAARC member countries. Unfortunately, in its move to isolate Pakistan and to exert its power in the region, it is India that has rendered SAARC inert.
Where will Bangladesh earn rupees from?
The import-export calculations with India are quite the opposite than that with the US. Bangladesh imports five to six times more than it exports to India. While the US market is a source to earn dollars, India is where we spend our dollars. Bangladesh has no source to earn extra rupees. The imports are done in dollars. Exports of around 1 billion to 1.25 billion dollars to India, Bangladesh's imports from India total around 7 billion to 8 billion dollars. So the question is, what is the source of rupees against the trade imbalance of around 6 billion dollars?
Will Bangladesh convert the dollars earned through overseas remittance to rupees and then import in rupees? If we spend the reserve currency for the sake of the currency swap designed to save dollars, how do we benefit? Another way could be to borrow rupees from the Indian banks and use that to buy Indian goods. This will increase the burden of interest. And the conditions of interest are important. There are allegations that on the question of trade and economic interests with its neighbours, India is quite merciless.
On top of that, thousands of Indian workers work in the Bangladesh labour market and take away remittance. Bangladeshis too take dollars to India to spend on medical treatment, shopping, travel and other purposes. Overall, large portion of Bangladesh's earned dollars go legally or illegally to India. So what is the legitimate way to earn rupees? In this case, Bangladesh will have to keep the standard international trade diplomacy in motion. Four issues are particularly important in this regard.
One. A few years ago India lifted duty on some Bangladesh's items. As a result, Bangladesh's export trade to India reached 1 billion dollars. It was hoped it would very rapidly reach 2 billion dollars. There are allegations that there was a negative reaction to this decision within India and so Indian banks placed certain indirect obstacles to opening LCs against certain products. So Bangladesh's exports to India are not increasing as expected. Bangladesh will have to take direct initiative to remove such indirect bottlenecks to export so that the scope of export revenue expands.
The Indian embassy in Bangladesh do not officially issue approval or work permits to Bangladeshis in any sectors, neither less skilled or skilled. So there is no scope of earning rupees from India in the form of legitimate remittance
Two. India has retained tariff barriers on a significant number of Bangladeshi goods. Meanwhile, in order to reduce trade imbalance, in July 2020 China provided tariff free facilities on 97 per cent of Bangladesh goods (from the previous 61 per cent), under the tariff line. Unless 100 per cent tariff-free facilities are granted, Bangladesh's exports to India will not increase, and foreign exchange or Indian rupees will not be earned.
Three. Bangladesh has been significantly harmed in certain sectors with India imposing anti-dumping tariff on jute, jute products, hydrogen peroxide made in Bangladesh and fishing nets. Such practices must be halted completely. If India wants the rupee swap, India must remove all item-based direct trade barriers, indirect trade barriers and anti-dumping barriers on Bangladeshi products.
Four. Opening up the labour market. As its imports are higher than its exports, Bangladesh basically builds up its foreign exchange reserves from the remittance sent in by expatriates. But Bangladesh workers have no entry to India's labour market. The Indian embassy in Bangladesh do not officially issue approval or work permits to Bangladeshis in any sectors, neither less skilled or skilled. So there is no scope of earning rupees from India in the form of legitimate remittance. If India wants currency swap arrangement in rupees, it must first of all open its labour market to Bangladeshis.
One of the most important features of any currency used in international trade is that it must be easily available. In its own interest, India must ensure easy access for Bangladesh, that is, standard economic and employment access, which will not be unilaterally controlled by India. So Bangladesh must proceed to determine how to earn rupees and how to prevent the fall of the taka against the rupee.
Maintaining the value of taka and rupee, and SWIFT connection
Before and after corona, India devalued the rupee, but Bangladesh struggled hard to keep up the value of the taka. So the important question is about the overrated taka against the corrected valued rupee. Bangladesh will face losses if trading in the falling rupee because Bangladesh is still determined to keep the taka strong. In 2016 when India scrapped the 500 and 100 rupee notes, it is said that new notes were not issued in exchange of the old rupees with Bangladesh Bank or Bangladesh's money exchange.
The objective behind bypassing the dollar to trade in Indian rupees is to strengthen the ailing rupees. As Bangladesh has a wide trade imbalance with India, the question naturally arises as to where we will get so many rupees? When the taka falls against the rupee, then import costs and inflation will steadily increase. As Bangladesh imports food products and raw materials from India, the fall of Bangladesh's taka against the India rupee can lead to an alarming disaster for Bangladesh's economy.
One of the reasons behind the extensive use of the dollar and the euro is the easy availability and the other reason is the SWIFT-connect. Indian currency has limited SWIFT-connect or connect with VISA, MasterCard, PayPal and such international payment gateways. This can be risky for the rupee swap too.
On the other hand, Bangladesh and India can take up the item swap system. In other words, Bangladesh can trade exportable items worth one billion dollars and import the same value of goods from India. In the case, the highest currency swap margin will be rupees amounting to one billion dollars in value.
If the direct path for rupees earned through legal export and remittance is opened, only then will it be feasible for Bangladesh to go for the currency swap arrangement in rupees. It would be suicidal to convert its dollars to rupees or take loans in rupees to go for the rupee swap. In no way is this commercially feasible. And then there is the risk of US sanctions.
* Faiz Ahmad Taiyeb is a writer on sustainable development. He can be reached at [email protected]
** This article, originally published in Prothom Alo print and online editions, has been rewritten for the English edition by Ayesha Kabir