Bangladesh Bank, the central bank, in mid-September said that authorised dealer banks (ADs) can carry out transactions in yuan for trade with China.
“To bring a wider scope, it has been decided that ADs may maintain accounts in yuan with their correspondents/branches abroad for settlement of cross border transactions executed in this currency,” the central bank said in a circular.
This builds on a 2018 move to allow AD banks to open foreign currency clearing accounts with Bangladesh Bank in yuan.
Reports put Bangladesh’s annual imports from China at around US$15 billion to US$16 billion, and exports in the other direction at about US$1 billion – though China’s envoy to the country was recently quoted as saying the total trade value had reached US$25 billion.
Experts say that by using yuan, Bangladesh can settle about 10% of its import bill with the currency, reducing its dependence on the dollar.
Adding the yuan as a currency for trade with China is a “very useful step which we had been demanding for a long time”, said Al Mamun Mridha, joint secretary general of the Bangladesh China Chamber of Commerce and Industry.
He said that this would cut the need for either side to pay conversion fees. And while the availability of yuan in local banks could be a problem, Mridha suggested that future Chinese loans and investments in Bangladesh could be made in yuan to expand the stock of the currency.
The Bangladeshi currency, the taka, has lost nearly 25% of its value against the dollar since Russia invaded Ukraine earlier this year, rocking global energy and commodities markets. As import costs rise, inflation in the South Asian country has surged above 7% while its forex stockpile has fallen sharply.
Reserves that stood at US$48 billion in August 2021 are now below US$37 billion – barely enough to cover import bills for five months. If the International Monetary Fund’s more stringent reserve calculation method is used, the figure does not even reach US$30 billion.
This has forced the government to discourage unnecessary imports and cut spending, including limiting foreign trips by its employees. Bangladesh is also seeking a US$4.5 billion loan from the IMF, according to reports, along with over US$1.5 billion from the World Bank and more from various bilateral and multilateral development partners.
At the same time, authorities are eyeing currency solutions, not only those involving the yuan.
One is a potential taka-ruble swap with sanctions-hit Russia, from which Dhaka is considering importing cheap fuel oil. “The issue of importing fuel oil from Russia is under discussion and yet to be finalised,” Finance minister A.H.M. Mustafa Kamal told reporters on Sept 14, the day before the yuan decision was announced.
“We have to swap our currency to make payment if Russia accepts to do so,” the minister said.
There is also growing talk about the prospect of trade with India in rupees. Bangladesh’s imports from India are estimated at approximately US$14 billion a year, while around US$2 billion worth of exports go the other way.
Bangladesh Bank spokesperson Serajul Islam told Nikkei Asia that officials “will look at the possibility”, though he said that “trade through rupee-taka transactions will take time”, noting convertibility issues.
India has also made it clear that it does not wish to take on any more exposure to Bangladesh’s forex risks.
The State Bank of India (SBI), the country’s top lender, late last month asked all its branches not to settle letters of credit in dollars or other third-country currencies, and to use trading partners’ currencies instead.
Noting that Bangladesh was categorised as “high risk” in its country risk model, the SBI said that “considering the present economic situation and shortage of foreign currency, it has been decided by the competent authority not to assume USD/other foreign currencies exposure on Bangladesh till further instructions,” according to reports on the circular. The SBI, however, said transactions in rupees and taka could continue.
“We have an approximate exposure of US$500 million to Bangladesh and have taken the decision not to grow it further aggressively, and maybe, even reduce it as needed, with the news surrounding the economy,” Reuters quoted an anonymous Indian source as saying.
Ahsan H. Mansur, executive director of the Policy Research Institute of Bangladesh, said the government needs to wield both fiscal and monetary policy weapons to get a handle on the currency risk.
“We have to lessen imports, further cut expenditure, relax the exchange rate and raise interest rates to support the taka, which the other countries are doing,” he told Nikkei Asia.
“I welcome the trade transactions through local currencies,” said Mansur, a former senior IMF official. “Even a US$100 million transaction will also help at this moment.”
But some warn that Bangladesh could end up trading one dependency for another.
Salehuddin Ahmed, a former central bank governor, said that the continuous decline of foreign currency reserves is “not a good sign” for the country. But he said bilateral currency arrangements could lead to being “influenced by others on various fronts.”