Currency Swap To Ease Dollar Demand

To Reduce dollar dependency, Countries ink deal to swap currency.

In the wake of dollar crisis, government is mulling to trade in currencies like Yuan and Rupee. A huge debt obligation in the years down the line has made the prospect of such idea even stronger. Undoubtedly pressure on dollar will be huge. This year alone we have to make interest payment of Taka 1 trillion. However, Bangladesh is looking for alleys to settle some trade deals and debt obligations in other currencies.

So far Yuan and Rupee have emerged out as the would-be currencies for future limited trade. But there is a growing debate about sustainability of trading in such currencies.

Central banks in this region are not unfamiliar with currency swap. Back in 2018,I wrote a piece titled “Lessons From India-Japan Currency Swap Deal"¹. Sharing parts of it again:

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Last week I took a lot of interest in two news. First one is about a $75 billion currency swap deal between Japan and India. Second, Taka is getting stronger against the Indian Rupee as the latter continues to depreciate against US dollar.

India and Japan inked a $75 billion currency swap deal. According to reports, the deal will help both countries to do trade in Rupee and Yen, without depending on dollar. The deal came amid volatile nature of Rupee against the US dollar. Economists and experts say that though India, whose foreign exchange reserve is more than $340 billion, is in better position in terms of stocking forex and in financing trade deficit , the currency swap deal with Japan will offer it a psychological comfort in any kind of worst case scenario in the wake of trade war by lessening its dependence on Dollar.

In brief, a currency swap deal between two parties is a currency agreement that will take place at a future date at an exchange rate that prevailed in the past. The parties will negotiate the exchange rate. This kind of deal helps parties get rid of brokerage fees, costs and uncertainties in volatile currency market.

For instance, an Indian exporter may export some goods to Japan. He gets the exports receipts in dollar at his bank account. Then he has to convert the dollar again to Rupee to meet his expenditure at home.

Meanwhile, another Indian importer imports some Japanese goods and markets it at home. He buys dollars and sends it to Japanese exporter’s bank account.Japanese exporter converts it to Yen to meet his local expenditures. This Yen-Dollar-Rupee and Rupee-Dollar-Yen conversion process takes lots of fees and costs. In any kind of uncertainty in the foreign exchange market, the costs also climb up. Central banks of the two countries make a deal that the two will swap their currencies at an agreed exchange rate in the future. So the central bank of India deposits rupees at the account of Indian exporter and central bank of Japan subtracts yen as import payment from the account of Japanese importer. Processing the whole transaction requires less time and cost and at the same time the swap deal works as a cushion for exporter and importer in a volatile currency market.

This kind of deal needs prior agreement between governments.

Bangladesh needs more of this kind of currency deal than India. Bangladesh’s forex reserve is not enough to meet the looming uncertainties in the volatile currency market. In 2016-2017, our Forex reserve was $33.49 billion. At the end of September 2018, it stood at $31.95 billion. Trade deficit is on the rise .In 2017-2018, our overall balance was negative. Current account deficit grew by 7.35 times (Source: Bangladesh Bank). Need for backing up the forex reserve has never been felt so dearly before.

If one takes a look at Bangladesh’s top trading partners, he will understand the point I am making here. India and China are two key trading partners. Moreover, the two are offering credits to finance many projects here. Add another influential country to this list: Russia, which is also financing major energy projects. Trade is also growing with Russia.

Every year we are repaying interest plus part of the debt in foreign currency.In addition, imports from these countries are higher than our exports.

In recent years, our exports to these countries are also growing. But trade balance is always against us as exports never catch up the imports.

According to Bangladesh Bank, we imported $ 4.72 billion worth of goods from India in the first two quarters of this year(2018).Meanwhile, we exported only $402 million worth of goods in the same period.

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In 2021-2022,export to India reached $1.5 billion. However, trade deficits with both India and China have widened.

But another thing is that the number of Indian tourists to Bangladesh is increasing. Every month, Bangladesh issues 15000/20000 Visas to Indians. Meanwhile, a far more greater number of Bangladeshis travel to India every month. In addition, Indian workers remit around $4 billion every year. If both the countries agree, then the two can use Rupee and Taka in these cases, easing demand on dollar in both the countries.

But Bangladesh is willing to trade in these currencies in limited amount. With India, $5 billion worth of trade could take place in Rupee. However,unlike Yuan,Rupee is not an IMF SDR and is susceptible to volatility. Both Bangladesh and India may reach a currency swap deal by June,addressing the challenges of doing business in Rupee. An IMF SDR like Yen /Euro could be a better alternative as they are less prone to market volatility.

Bangladesh already lent $200 million at LIBOR + 2.0 percent interest rate to Sri Lanka under currency swap deal². Bangladesh extended the repayment period till September, 2023 at the request of Sri Lanka. Currency swap between India-Bangladesh is anticipated to be attractive. Otherwise, it will not take off. Nitty-gritty of the deal is still unknown. Such deal may pave the path for greater market access to India and augment Indian investment in Bangladesh. But the market volatility casts shadow over Rupee-Taka deal.

Notes And References

1. ”Lessons From India-Japan Currency Swap Deal”,Rezaul Hoque,https://rezaulhoque.wordpress.com,November 03,2018.For more read at https://rezaulhoque.wordpress.com/2018/11/03/lessons-from-india-japan-currency-swap-deal/
2. ”Sri Lanka Set To Get Another $100 million From Bangladesh Under Swap Arrangement “,Siddique Islam,The Financial Express,August 30,2021. For more read at https://thefinancialexpress.com.bd/economy/bangladesh/sri-lanka-set-to-get-another-100m-from-bangladesh-under-swap-arrangement-1630290778