Chakhawat Hossain |
Published:
January 25, 2022 9:18:01 PM
Open economies can only transact with other countries, either by highway or by road. Transactions include the exchange of goods and services and investment financing in the form of loans, borrowings and participation in capital and money markets. Money functions as a medium of exchange, among other things. There are two types of currency: the national currency and the currency commonly used in international transactions.
The national currency can function to execute cross-border transactions provided it is within the scope of convertibility on current and capital transactions. The particular economy the money belongs to must have deep and broad financial markets with versatile financial products instead of just bonds, stocks. The currencies used for international transactions are not well defined. However, the money in the SDR (Special Drawing Right) basket is de facto the money used in transactions between countries. These currencies are the US dollar, euro, British pound, Japanese yen and Chinese renminbi. Also, some currencies are used around the world such as Canadian dollar, Swiss franc, Singapore dollar and some others. These, including SDR currencies, are freely convertible, which means that deposits of these currencies are transferable elsewhere without restrictions at the option of the depositors. There are weightings of the relevant currency depending on the trading volume. Despite the introduction of a common currency – the euro in the European Union (EU), the US dollar still plays a leading role. The renminbi should have played a role as a global trading currency based on Chinese economic forces, but to no avail so far.
Until today, the US dollar is a strategic currency in the sense that strategic products are exchanged by the dollar. Except for the sale of North Sea fuel, fuels are traded via the US dollar, giving it hegemony. In addition, the US economy is strengthening in financial products – treasuries and non-treasuries. As a result, the economy is being driven by service sectors phasing out manufacturing activities to other locations, especially in Asian economies.
In international finance, “cross currency” is commonly used. This means that a common currency is taken as an anchor to convert one currency into another. For example, conversion between the Bangladeshi taka and the Indian rupee is subject to the requirement that the taka is first converted into dollars. The dollar is then converted into rupee. There is no direct official exchange rate between these two currencies. It is like the English language to which one language is converted to reach another language. The dominance of the dollar in global settlement works like a financial solar system. A global messaging system known as SWIFT is a supporting service in this regard. No other encoding system is there to settle transactions executed in US dollars.
Export is one of the main pillars of Bangladesh’s economy. Among total exports, ready-to-wear clothing is the main export product. The main market is the United States and Europe. The change in business model does not support the execution of transactions between exporters and importers – the role of third parties is essential. There are different malls like Singapore, Hong Kong, Dubai, Luxembourg, etc. These hubs facilitate exporting. More and more untapped markets are being added for export through these trading hubs. The dollar is even found as a currency of exchange even for export to Europe. Dollar export orders are useful for exporters. The export of garments depends on inputs purchased from other countries. Export payments in dollars allow import payments to be settled in the same currency without loss of conversion between currencies. On the other hand, importing inputs in other currencies is rarely possible. Inside information indicates that imports from China must also be paid for in dollars, although the central bank allows payments in Chinese currency.
Exporters trade with different destinations not limited to the United States and Europe. Commercial banks in Bangladesh facilitate transactions through the repatriation of export payments and the settlement of import payments. In practice, banks maintain relationships with different banks around the world but do not maintain accounts with all of them, but rather maintain bank accounts with banks in a few financial centers like London City, New York, Frankfurt, Singapore, Hong Kong and Dubai. Incoming receipts such as export payments are deposited in these accounts and outgoings such as import payments are settled from the balances held in these accounts. The surplus funds available on the accounts are used to be invested abroad in financial instruments that generate short-term income.
Transactions from accounts operated by Bangladeshi banks abroad must meet specific standards such as anti-money laundering/countering terrorist financing regulations, sanctions screening and many more. others. Without being fully satisfied, transactions cannot be executed, for which sufficient time is required. Regarding sanctions, satisfaction is required for the SWIFT system upon completion of the sanctions review. The system will not allow transactions to and from persons or countries subject to sanctions by world powers, including the United Nations (UN). These sanctions led Bangladesh to stop the export of jute products to Iran due to problems in making export payments. The ACU (Asian Cleaning Union) is known to have stopped settling payments for transactions with Iran due to the sanctions. Transactions that do not meet the standards required for sanctions will have negative effects on countries that violate the established rules. As such, it is not easy to promote trade with countries having sanctions or with countries having relations with sanctioned countries. The fundamental problem is that of the settlement of payments.
Circumvention is an alternative way to achieve the objectives. To avoid sanctions, there are alternative payment solutions bypassing SWIFT, such as CHIPS, SPFS, INSTEX. These can work provided that all transactions are executed in this messaging system. But some by these systems, and some by SWIFT, will not give a complete solution; rather, there is everything that can be caught up with by the gazing eyes. On these same bases, alternative messaging operations are theoretically operational, none wants to go there to get bogged down in problems.
Once upon a time, Bangladesh was in crisis for needing payment currency like British Pound and US Dollar. Back then, trade settlement was executed through loans and grants. Another alternative was the commodity exchange framework. It is an alternative to the barter system or equivalent to the barter protocol. Specified goods were traded with countries with which there were existing frameworks. Banks have recorded transactions to be reconciled for transactions. No information flow was required for transactions. Today, banks play an essential role in the execution of cross-border commercial transactions for the settlement of payments. Without settlement by banks, whether commercial transactions are possible or not is a debatable question. But it is possible in practice. Without letters of credit (L/C), the trade can be executed. Goods are exchanged and documents are routed between traders without touching banks. The involvement of banks will be required when the parties concerned make or receive payments.
Let banks execute transactions through the SWIFT channel in the traditional way. Whether it is possible to execute non-SWIFT transactions by merchants themselves remains a question. This is certainly possible with specific policy tools in place. As stated earlier, our exports are dependent on orders routed through trade hubs. In the same way, merchant traders can facilitate the country’s exports with counter-arrangements of imports. In this case, banks must work as archivists for clearing transactions. It can be as good as barter trade but there are some differences that exporters will receive payments from traders traders who will receive these payments from importers against importing goods. As such, it can be called “merchant trade management,” which is nothing but a modified version of barter trade. Various sanctions imposed by world powers jeopardize the settlement of trade payments. To continue the trade despite the difficulties, the management of the trading trade can be a remedy.
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