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Trade settlement in local currencies with India is a good option

23 September 2022

Businesses in Bangladesh will not be able to use the Indian rupee in conducting trade with entities abroad as Bangladesh Bank has not enlisted the currency as a means of settling letters of credit (LCs). However, entrepreneurs said if trade between Bangladesh and India takes place in the local currencies, pressure from falling US dollar reserves and associated ongoing forex market volatility would be reduced to some extent. Bangladesh, which boasted of having $48 billion in reserves in August 2021, saw it go down to $37.13 billion as import bills surpassed exports and remittances.
India is the second largest source of imports for Bangladesh. Industrial raw materials, capital machinery, cotton, yarn, fabrics, and chemicals worth $16.19 billion were imported in fiscal year 2021-22. On the other hand, Bangladesh exported goods worth $2 billion to the neighbouring country. The issue of using local currencies came to the fore after the State Bank of India (SBI) issued a notice on August 24, saying it would allow LCs making use of the taka and rupee instead of the US dollar and other foreign currencies.
Bangladesh is categorised under high risk and under caution risk category as per our country risk model. The country is facing a shortage of foreign currency due to higher import bills and weakness of the taka against the US dollar in recent times. Under such a situation, the SBI has decided not to use the US dollar and other foreign currencies till further instructions.
Even if all the bilateral trade cannot be conducted in the taka and rupee, at least $2 billion worth of trade, which is equivalent to what Bangladesh exports, can be in local currencies. Experts of both countries can sit together to find a solution so that the whole of the bilateral trade can be transacted in the taka and rupee. Enabling a vibrant trade in the rupee and taka would require years but the BB can start the process from now.

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