Early last month, Bangladesh and India rolled out bilateral trade in Indian rupees, which was billed by the two countries’ governments as a “landmark” settlement. The two countries said that the move would boost trade between them and also allow them to avoid the dominance of US dollars in the world.
With a bilateral trade volume worth $16bn, India is Bangladesh’s second-largest trading partner after China. Through this deal, Bangladesh will be able to perform rupee transactions to the tune of $2bn — the amount it gets from its exports to India each year. The country imports goods worth $14bn from its larger South Asian neighbor each year.
Some Bangladeshi financial analysts and economists have voiced their concerns about trading in rupees, citing the huge trade imbalance. This arrangement would benefit India, and would give it a boost to its long-cherished desire to make the rupee an international currency for trade. However, Bangladesh would not gain any significant advantages.
This trade in rupees will not ease any pressure on the declining foreign reserves of Bangladesh – which, according to the latest calculations from the International Monetary Fund (IMF), now stand at $23.56bn, equal to four months of the country’s import bills – down from over $42bn a year ago, these experts said.
In a bid to halt further depletion of those reserves, Bangladesh has already toughened import rules, but that hasn’t provided much respite as the greenback comprises 75 percent of the country’s foreign reserves and the value of its currency, the taka, has depreciated against the US dollar by more than 25 percent in the last one year.
To avert excessive dependence on the United States dollar, Bangladesh Bank (BB), the country’s central bank, last year allowed businesses to settle payments for international trade through the Chinese yuan, whose stockpile is now 1.32 percent, up from 1 percent in 2017.
BB spokesperson Mezbaul Haque said the recent rupee trade provision is “another way of reducing dollar dependency”.
Experts believe otherwise.
“The calculation is simple,” said Zahid Hussain, former lead economist of the World Bank’s Dhaka office. “Bangladesh will need to settle its $12bn-plus trade deficit [with India] in dollars. Unless Indian exporters accept taka as a means of settlement, I don’t see how rupee trading will help cushion the foreign exchange reserve crisis.”
But there is no “obvious loss” from this arrangement for Bangladesh since the use of rupees in imports and exports is voluntary, Hussain added. “India wants to internationalise its currency, and it is taking a step in that direction. Bangladesh, being a friendly neighbour, is probably trying to help out,” he said.
Some businesses believe the rupee trading arrangement will benefit them. Mohammad Hatem is the owner of MB Knit Fashion in Bangladesh, which is one of the biggest garment factories. He told Al Jazeera he would be able save 6 percent on his costs by using rupees.
Hatem said that he imports a large chunk of his raw materials from India, and now he doesn’t need to bear the loss in conversion costs. “Earlier, we needed to convert taka to dollars and then rupees to dollars for trade. Previously, this cost us $6 for every $100 we converted. Now we can have direct transactions in rupees,” he said.
As of now, Bangladesh’s state-owned Sonali Bank, private Eastern Bank Limited (EBL), and the Bangladesh operation of India’s State Bank of India (SBI) have opened special nostro accounts in rupees with two Indian banks: SBI’s international services branch in Mumbai and ICICI Bank. A nostro account is an account opened by a bank in one country for foreign currency transactions at another country’s bank.
These accounts allow exporters from Bangladesh to receive their earnings in rupees and use the remaining balance to pay imports from India. This means that the mechanism can only be used to settle bills of import equal to the export earnings. The exchange rate would be determined by the market.
Unilever Bangladesh officials confirmed that they had already opened a letter credit (LC) for rupees. The multinational giant controls half of Bangladesh’s $4bn market for fast moving consumer goods and imports 40 per cent of its raw material needs from India.
Hussain, a economist, says he cannot figure out how rupee transactions save him money. “Imports from India used to be invoiced and paid in dollars, and now you can invoice and settle in rupees,” he said. “There was a single conversation then, and there is a single conversion now. Only the currency is different, so it is not clear to me where the transaction cost savings will come from.”
Zia Hassan is a financial analyst who told Al Jazeera he knows one thing for sure: The rupee settlement will not result in any relief to the reserves, since the dollar savings on imports using the rupee are offset by non-receipts of export earnings.
Hassan argues that the current rupee trading arrangement exposes Bangladeshi banks and central bankers who hold large rupee reserves at risk of arbitrage losses. “This is because, as an export-oriented nation, India obviously tends to favour rupee devaluation,” he said.
Hassan noted that a weak domestic currency makes a country’s exports cheaper and more competitive. So if the value of the rupee –which usually fluctuates way more than the US dollar – is reduced, the banks in Bangladesh will have to bear the losses, he said.
“Besides,” he noted, “many of the Indian exporters may resist receiving their export proceeds in rupees, preferring to earn dollars instead of rupees through exports.”
Over the last three years, Bangladesh’s exports to India have continuously exceeded the $1bn mark, and they surpassed $2bn for the first time in the previous fiscal year. While launching the rupee trade arrangement last month, BB Governor Abdur Rouf Talukder said it will enable Bangladesh “to increase exports to India manifold” as Indian customers will see that they are purchasing the products in their own currency and may consider Bangladeshi products as their own. “So,” he said, “I think it will open a new way for us to boost exports to India.”
Even so, Rashed Al Mahmud Titumir, professor of economics at Dhaka University, told Al Jazeera that this rupee trade arrangement is very unlikely to “foster any new trade creation between these two countries”.
India still imposes anti-dumping duty on many Bangladeshi items, which prevents Bangladesh to create a sustainable network system for its goods with India. “Without new trade creation, I don’t see how this massive trade deficit will be reduced and help Bangladesh reap the benefit of rupee trade,” Titumir said.
Secretary General of the India-Bangladesh Chamber of Commerce and Industry SM Abul Kalam Azad said that the rupee exchange rate agreement will benefit millions of Bangladeshis traveling to India every year for medical, educational, or tourism purposes.
BB announced that by September, it will launch a dual currency card named “Taka Pay”, with which a person visiting India will be able to spend money in rupees worth $12,000 per year. “Trade aside, this will obviously help a huge number of common people in Bangladesh,” Azad said.