The world is going through a rapid transition in recent times. Many countries in the world, even some US allies, are considering moving toward a new exchange system instead of the dollar. This is being called the de-dollarization process. The US-centric unipolar world’s transition into a multipolar world, with the rise of new economic powers such as China, India, and Brazil, has played a significant role in the de-dollarization trend.
Now Bangladesh has officially stepped on the path of de-dollarization to protect the macroeconomy from the dollar-dominated world. Bangladesh and India are set to start using the Indian Rupee to carry out bilateral trade transactions. The central banks of the two countries have reached an agreement regarding this, under which now Indian currency rupees can be used for exporting goods from Bangladesh to India and importing goods from India to Bangladesh instead of dollars.
This is a breakthrough for Bangladesh as the country is seeking to cut US dollar dependency as its foreign exchange reserve is fast falling due to various global factors. The importance of Bangladesh’s efforts to join such initiatives is undeniable in restoring the management of the macroeconomics weakened by the US monetary policy and the recent increase in the import costs of import-dependent Bangladesh. Despite austerity measures and import restrictions to deal with the dollar crisis, creating alternatives to dollars and saving dollars has become crucial for Bangladesh.
It is worth to mention that the entire import-export trade between Bangladesh and India was done in US dollars. But the new limited monetary arrangement between Bangladesh and India carries special significance for several reasons. Those concerned believe that some relief can be brought back to the acute reserve crisis of Bangladesh through this initiative. However, analysts say that if other currencies are used in foreign transactions along with the dollar, the pressure on Bangladesh’s reserves will decrease somewhat, but there is still a long way to go to bring the macro economy back on track.
In this new currency program with India, imports can be traded in rupees only. Though no bank in Bangladesh can buy rupees separately for this transaction. The import liability can be paid only with the rupees earned by Bangladesh Bank through the export of goods. The remaining amount will be imported in dollars as before. According to the data of Bangladesh Bank, in the last financial year 2021-22, the import liability of 1 thousand 3.69 billion dollars was paid from India, which is 18.10 percent of the total import expenditure. Against this, 199 million dollars’ worth of products have been exported. According to the new rules, India will pay the price of exports worth 2 billion dollars in rupees, which Bangladesh will use to buy goods from India.
The taka has depreciated by more than 30 percent against the US dollar over the last couple of years. The diversification of reserves will ease the pressure on the greenbacks’ reserve. In the time of shrinking the greenbacks due to global factors, every single dollar is important to keep the wheels of Bangladesh’s economy moving. Trade in rupees is expected to save around $2 billion in reserve. Also, a convenient and cost-effective mechanism would ease the trade process which will contribute to strengthening the economic ties between the two neighbors. Also, Bangladeshis traveling to India for various purposes are seeing it as a positive move. Most importantly, traders would save significant losses as they could open LCs directly in rupees. Traders have welcomed this as it allows them to open LCs in rupees for a significant portion of import-export trade with India without using the dollar.
The business community of Bangladesh believes that direct transactions between the two countries in rupees will save at least 6 percent in India-centric trade. Trading with India, there is a difference of 6 percent when converting from rupees to dollars and again from rupees to dollars. That is like 6 dollars for 100 dollars. However, the economic analysts of Bangladesh have warned the policymakers and businessmen that they should remember that only the banks and businessmen of Bangladesh can save themselves from the losses created during the currency exchange by diversifying the products, increasing the number of exports and trading in the two countries’ respective currencies. There is very little chance of saving millions by limiting exports and excluding rupees by importing and exporting only in rupees.
Ignoring the silent threats and pressure of the United States, various countries of the world are leaning towards using convenient currency as an alternative to the dollar in foreign transactions. The dollar’s global dominance has dropped from 80 to 60 percent due to the Ukraine war. India is using the rupee to some extent in foreign trade transactions. Brazil and China are now trading with each other in yuan, helping to establish the Chinese renminbi as an international currency and dollar challenger. Countries willing to continue to trade with Russia, like India and China, have started doing so in rupees and yuan instead, triggering talk of the de-dollarization of the international trading order.
But in the case of Bangladesh, a major problem in foreign transactions other than the dollar is its supply. For example, Bangladesh’s foreign exchange comes from exports and remittances, which are dollar and euro dependent. The United States and Europe have a trade surplus with Bangladesh. And deficit with India and China. As a result, large amounts of rupees and yuan are required to trade with India and China in rupees and yuan’s, which are difficult for Bangladesh to procure. In this situation, only unilaterally dealing in certain commodities in Indian rupees will not be very similar to the dollar crisis of Bangladesh. India’s overall profit margin has been heavy under this system. Because, for a long time now, India has been trying to strengthen its currency, the rupee, in the international arena.
In this era of de-dollarization, our main aim should be to increase exports and enrich the value of foreign currencies including rupee, yuan, ruble, and riyal. The rapidly changing geopolitical context can be used to pressure the country concerned to import more products from Bangladesh. It will not be easy for a growing economy like Bangladesh to maintain a diversified forex currency instead of the dollar, which has dominated the world for a long time. As a result, careful consideration of long-term benefits and sustainability is a must before any new move. Since currency swaps are a complex issue, it is important to form a special task force and take advice from knowledgeable people. Above all, concerted efforts must be taken at the diplomatic and business levels.
[Image by rupixen / Pixabay]
Arafat Islam Joy is a freelance columnist and author. He has completed his graduation in International Relations from the University of Dhaka. The views and opinions expressed in this article are those of the author.
