Published:  12:49 AM, 25 May 2022

"Bilateral Currency SWAP" Way of Tackling the US Dollar Crisis

Now a day's country is facing severe dollar crisis. To pay the import payment of previously issued LC's (Letter of Credit) and even to open new LC's, banks are facing US dollar crisis. Due to uneven supply, dollar becomes dearer, price hiking continues and it marked more than TK 100 in the kerb market (Informal market)where as in banking channel it was traded between 86-97 including reporting and non-reporting mechanism. The uneven demand against supply creates the situation miserable for us. Price of dollar denominated imported goods has increased substantially and its spill over effect on other goods and services returned by hyper-inflation in the economy. One of the ways of tackling countries ongoing dollar crisis can be Bilateral Currency SWAP arrangement.

Historically, the World Bank first introduced currency SWAP's in 1981, with a tenor up to 10 years, to obtain German marks and Swiss francs. Later on many countries around the world entered into multitude bilateral currency SWAP agreement with one another for different reasons, like, to reduce the risk of currency exchange rate fluctuations in terms of financial volatility, to lessen pressure on national reserve, as a tool to increase cross border trade, to lower borrowing interestrate,alternative safety net, access to foreign currency line, increasing alternative reserve currency (If case of Chinese RMB),to bypass USD currency and USA's OFAC sanctions. This agreement allows central bank in one country to exchange currency usually its domestic currency for a certain amount of foreign currency. The recipient bank can then lend this foreign currency on to its domestic banks, on its own terms and at its own risk to settle bilateral trade payment. For example, central bank of Bangladesh will sale a specified amount of currency (BDT) to Central bank of China in exchange for another currency (RMB- Chinese currency) at prevailing market exchange rate. Central bank of Bangladesh agrees to buy back its currency (BDT) at the same exchange rate on a specified future date. Bangladesh Bank then will use the RMB for paying Chinese currency denominated import payment through Authorized Dealer Banks inside the country. When the buy back is completed, borrowing bank (Central Bank of Bangladesh) also pays interest at a market related rate, depending on the duration for which it has drawn on the SWAP line.

According to Bangladesh Bank import data, during the year 2020-2021, countries total import was 50,987.6 million USD. Out of these China topped the list supplier which accounts for 12,925.2 million USD (or 25.3%), India ware in second position, accounts for 8,593.5 million USD (or 16.9%), Singapore becomes third with 2,468 million USD (or 4.8%), Japan becomes fifth with 2,001.2 million USD (or 3.9%) and Indonesia is the sixth largest exporter in Bangladesh with 1,845.6 million USD (or 3.6%).Chin a and India takes 42.2% of our total import whereas Singapore, Japan and Indonesia takes 12.3% market share of our total import during the period. Jointly these five countries are the major import destination of Bangladesh, represent 54.50% of our import and almost all the traded invoice of these countries are USD denominated.

If we can trade with these major importing countries in local currency (BDT-RMB-INR), under the currency SWAP facility, the demand for US Dollar automatically decreases which in turn lessenthe presser on our foreign currency reserve as well as lessen cost of doing business, payment settlement and time. It means, Bangladesh will enter into bilateral currency SWAP agreement with these countries separately for importing respective countries goodsand services.  Such as for importing Chinese goods, we will issue LC's in Chinese currency (RMB), for importing Indian good we will issue LC's in Indian currency (INR-Indian Rupee), under currency SWAP arrangement and payment will bedonethrough Nostro account that we have opened with Chinese or Indian banks in RMB or INR. The opposite country will also open Vostro Account with our Bangladeshi banks (as NRT-Non-Resident TK account) to pay us BDT against our export to them. To net off the cross-currency transaction Bangladesh Bank may use a Parking Account and issue necessary guidelines and instructions for safe guarding both parties security and interest.

There are so many successful examples of bilateral currency SWAP agreement around the world. The latest one was initiated between India and Sri Lanka on May 19, 2022 for USD 1000 million worth of goods import by the Sri Lankan importer but the payment will be settled in INR (Indian Rupees) outside the ACU (Asian Clearing Union) mechanism. China is the leader in this sector. In between January 2009 to January 2020, the PBoC (Peoples Bank of China) entered into bilateral currency SWAP agreement with 41 countries around the world. Most of these were put in place between 2009-2016 periods. Normally valid for 3 years but extendable repeatedly. Total authorised value of such arrangements has been relatively stable averaging RMB 3,333 billion in the year 2015-2019.

As per PBoC recent released data, in 2009, China entered into bilateral currency SWAP arrangement with Malaysia, Indonesia, Argentina and South Korea, in 2010, with Belarus, Iceland and Singapore, in 2011, with New Zealand, Uzbekistan, Thailand and Pakistan, in 2012, with UAE, Turkey, Australia and Ukraine, in 2013, with Brazil, UK, Hungary and Albania, in 2014, with Switzerland, Sri Lanka, Russia, Qatar and Canada, in 2015, with South Africa, Chile, Georgia, in 2016, with Morocco, Serbia, Egypt, in 2018 with Nigeria and Japan.

In ASEAN region, the Local Currency Settlement Framework (LCSF) initiative has taken by Indonesia, Malaysia and Thailand to promote the wider use of local currencies to facilitate trade and investment in these countries. In 2016, Bank of Thailand signed an understanding with Bank Negara Malaysia on direct local currency settlement between Bath and Ringgit. Bank Indonesia also joined this cooperation in December 2017. This local currency settlement framework among three ASEAN countries might bring structural changes on invoicing currency choice in Asia in future. Asian local currency uses islesser but are increasing on the back of market driven forces and government efforts. So, why should Bangladesh will be leg behind?

To lessen our overdependence on US Dollar, Bangladesh should go for such Bilateral Currency SWAP arrangement soon, at least with largest importing countries, China and then with India too. Bangladesh already facing OFACS sanctions in recent times, to bypass the New York based dollar transection and clearing system it can also help us in near future.  But it has challenges too, like - RMB has high exchange volatility in the process of buy and sale, lack of direct exchange market inside the country. For example: at present if we want to pay any RMB denominated invoice payment, firstly, bank implicitly changing from BDT to US Dollar, then changing form US Dollar to RMB. This cause time consumption, complexity, time zone differences, exchange rate risk of both the currency, high transaction cost and unnecessary transaction delay. Lack of forward market of BDT and RMB. Even if there is no spot market, then there will not be a forward rate. 

So, this is clearly a case of market failure and government intervention will be required to establish these markets. Hence, structural problem should be solved first in bilateral level. Already Bangladesh Bank provides RMB denominated Nostro account opening facilities to AD (Authorised Dealer) Banks but problem lying with RMB funding, availability and settlement makes it inoperative facility to the AD banks of the country.  To facilitate the structural change, Government should come forward with appropriate policy and guidelines. Chinese and Indian bilateral currency SWAP agreement can be analysed for developing our ones. Traders should encourage in using local currency invoicing in international trade. Finally, Bangladesh Bank needs to take measures for developing liquid foreign exchange market for RMB or INR, followed by low transection cost, stronger safeguard of our national interest. Thus, we can lessen our pressure on USD reserve in long run. The sooner, the better.  

Salim Ahmed is a Banker & Analyst.

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