Amid a dollar crunch following the Coronavirus pandemic and the Russia-Ukraine war, New Delhi and Dhaka are considering trading in the Indian Rupee.
The Russia-Ukraine conflict came as the sword of Damocles as the conflict in Eastern Europe has caused an unprecedented rise in fuel prices worldwide.
For the same reason, the US dollar – the most common international currency – is also rising. It has also been weaponized to some extent by the US to isolate Russian President Vladimir Putin over his war on Ukraine.
Owing to a rise in imports and the slow inflow of foreign remittances by expatriates, Bangladesh has been dented by dollar crisis affecting imports of fuel and export-oriented factories, dependent on imports of raw materials.
Bangladesh’s $416-billion economy is battling rising prices of energy and food as the Russia-Ukraine conflict widens its current account deficit, and dwindling foreign exchange forces sought $4.5 billion loan from the International Monetary Fund (IMF).
In Bangladesh, the cash US dollar rate climbed to an all-time high of Bangladesh Taka (BDT) 112 on 26 July last year and in February 2023 was BDT 108.35. Inflation Rate in Bangladesh averaged 0.53 per cent from 2011 until 2023, reaching an all time high of 3.47 per cent in August of 2022.
Bangladesh’s neighbour and major trade partner India is also being affected by the rising dollar. The Indian Rupee (INR) – declined to a record low of more than 80 to the dollar, adding to worries of imported inflation as well as an external deficit blowout, according to Bloomberg.
Well, Bangladesh is contemplating trading with India using the INR, instead of the US dollar, reports a private news agency United News of Bangladesh (UNB).
Quoting government officials, the agency said, the commerce ministry placed a written recommendation at Prime Minister Sheikh Hasina’s cabinet meeting for the possibility of using INR instead of the dollar.
Bangladesh wants to cut dependency on the dollar, commerce minister Tipu Munshi said recently, and it does not see a problem in dealing with INR.
Meanwhile, the Bangladesh Bank has explored the pros and cons of using Indian currency in trade and commerce.
A central bank’s top official who is privy to the bilateral decision told UNB that an agreement has to be reached between neighbouring countries after Dhaka and New Delhi signed an agreement on using Rupee.
India proposed Bangladesh introduce the Rupee as a medium of bilateral trade at the Bangladesh-India ministerial meeting on trade, held in New Delhi last December.
Then, on the sidelines of the meeting of G20 Finance Ministers and Central Bank Governors held in Bengaluru, India on 24-25 February, the Bangladesh Bank governor Abdur Rauf Talukder and Reserve Bank of India governor Shaktikanta Das discussed switching to ‘de-dollarised’ payment system.
“I am not sure how useful it might be for us, because of the trade deficit. We import goods worth around $10 billion from India but export goods worth around just $2 billion. Where will we find the excess rupee, questioned Dr Khondaker Golam Moazzem, research director, Centre for Policy Dialogue.
Accordingly, the trade deficit of Bangladesh with India has increased from 19 per cent to 33 per cent in the fiscal year 20-21.
Meanwhile, India is trading in Rupees with Russia, Mauritius, Iran and Sri Lanka and recently with Malaysia.
On the other hand, top lender State Bank of India has asked exporters to avoid settling deals with Bangladesh in the dollar and other major currencies as it looks to curb exposure to Dhaka’s falling reserves.
“The country is facing a shortage of foreign currency due to higher import bills and weaknesses of Bangladeshi taka against the dollar in recent times,” the SBI said in an August 24 letter sent to its branches and seen by the Reuters news agency.
India is one of the largest trading partners of Bangladesh. The existence of different tariffs, non-tariff and anti-dumping barriers in India, however, mean that our exports to India are comparatively low in comparison to our imports, says Salim Ahmed, a banker and analyst.
The Indian government has amended its Foreign Trade Policy to allow international trade invoicing, payment and settlement in the Indian rupee, activating the mechanism announced by the Reserve Bank of India to facilitate trade in the domestic currency.
Salim Ahmed explains, under this mechanism banks in Bangladesh will open a ‘Rupee Vostro’ account in India with any Indian bank to settle our trade transactions in INR. From an Indian perspective, it is a special INR Vostro account to them. Similarly, India will open an INR Vostro account in Bangladesh with any bank for settling their trade transactions with us.
First published in the India Initiative @india_narrative on 3 April 2023
Saleem Samad is an award-winning independent journalist and is based in Bangladesh