Tuesday, 18 June, 2024, Reg No- 06
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Currency swap to secure our foreign reserves

Published : Thursday, 18 April, 2024 at 12:00 AM  Count : 321

Currency swap to secure our foreign reserves

Currency swap to secure our foreign reserves

Amidst the challenges of rising import costs and dwindling foreign reserves, Bangladeshs recent move to adopt the Chinese currency for bilateral trade with China is a bold and strategic step. The inclusion of the Chinese Yuan in the Real-Time Gross Settlement (RTGS) system by Bangladesh Bank (BB) and the ongoing efforts to join Chinas Cross-Border Interbank Payment System (CIPS), a system that mirrors SWIFT for international transaction messaging, are clear signals of this significant development. These actions, against the backdrop of persistent volatility in Bangladeshs foreign exchange market and Chinas drive to internationalize its currency, mark a significant development in the economic ties between the two nations.

Despite efforts by Bangladesh Bank to stabilize the countrys economy through significant dollar sales from reserves, the country faced persistent volatility in its foreign exchange market in 2023. To counter market instability, Bangladesh Bank disbursed $6.7 billion from reserves and bought approximately one billion dollars from commercial banks. Concerns were voiced about conservative exchange rate policies impeding efforts to curb trade-based capital flight. Bangladesh Banks spokesperson underscored a foreign exchange crisis driven by import costs surpassing export income and below-expectation remittances. While reserves saw a temporary increase, impending bill payments threatened to deplete reserves again, highlighting the ongoing challenges in Bangladeshs foreign exchange market and the immediate need for reform and resilience.

Contrarily, despite a challenging year for Chinese assets, the yuan is gaining ground as an international payment option. Despite hurdles like Chinas capital controls, the growing trend to conduct trade in yuan could provide a buffer to Chinas economy, particularly in hypothetical conflict scenarios with the West. Swift-based global payments denominated in yuan have surged, reaching 3.6% in October 2023, up from less than 2% earlier in the year. The yuans ascendance in global trade could have profound implications, especially as global trade routes evolve and payment systems become more fragmented.

The growing inclination of Bangladesh and China, the worlds second-largest economy and a crucial trading partner of Dhaka, to conduct trade transactions using the Chinese yuan signifies a strategic convergence between the two countries, propelled by mutual economic interests. For Bangladesh, adopting the yuan as a trading currency presents opportunities to diversify currency reserves and reduce reliance on the US dollar, which is traditionally used as the primary currency for international trade. This diversification can help Bangladesh manage risks associated with fluctuations in the value of the dollar. Furthermore, using yuan for trade settlements can reduce transaction costs, as it eliminates the need for currency conversion between the taka and the dollar or other intermediary currencies. This can result in significant cost savings for businesses involved in bilateral trade between Bangladesh and China, making this option highly attractive.

Another prime objective of using Chinese currency is to make loan payments for the $12.35 billion Rooppur nuclear power plant -- a development that will break the impasse between Russia and Bangladesh over the stalled repayments following Western sanctions on Russian banks. Understandably, settling big transactions for megaprojects like the Rooppur Nuclear Power Plant would require a massive stock of foreign reserves, which will be a challenge for Bangladesh. So, opting to repay in yuan instead of dollars will lessen the burden of Bangladeshs foreign exchange reserve. Furthermore, since the interest rate on yuan-denominated Chinese loans is lower, Bangladesh might save money by withdrawing yuan from its reserves and utilizing it to settle the debt. This would also reduce the depletion of its reserves, further enhancing financial resilience.

Adopting the Chinese yuan in trade settlements can simplify trade processes by eliminating the complexities of multiple currency conversions and reducing administrative burdens for businesses engaged in cross-border transactions. This shift can lead to increased efficiency and smoother trade operations. As Bangladesh progressively transacts in yuan, it could open doors for deeper financial integration with China and the wider region. This could include opportunities for yuan-denominated loans, investments, and financial services, thereby fortifying economic linkages between the two countries. Strengthening economic ties with China will enhance Bangladeshs economic and strategic resilience.

China has become the fourth-largest source of foreign loans in Bangladesh, following Japan, the World Bank, and the Asian Development Bank (ADB). In October last year, Bangladesh Bank gave its consent to proceed with Chinese loan offers in yuan as a cost-saving alternative to dollar-denominated financing. It is estimated that if Bangladesh takes loans from China in dollars, the interest rate would be nearly 6%. In contrast, yuan-denominated loans would cost only 2.5%, offering a significant interest rate advantage.

Bangladesh is not alone in its quest to reduce dependency on the dollar, which has long dominated the global financial system as the primary reserve currency. According to the IMF, the dollars share in global foreign currency reserves has fallen from 70% in 2000 to 60% in 2020. Other currencies, such as the Euro, Yen, and Renminbi, have gained market share. Many nations have sought to diversify their reserves and trade settlement currencies in order to decrease their exposure to the volatility and hazards associated with the dollar, particularly in light of the US sanctions policy, which has been referred to as the weaponization of the dollar.

Overall, Bangladeshs efforts to facilitate the use of yuan for bilateral trade are a significant step towards diversifying the global financial system. By using the yuan for trade settlement, Bangladesh hopes to gain more benefits and opportunities from its trade and cooperation with China and enhance its economic resilience and sovereignty.

The writer is a security and strategic affairs analyst

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