• Tuesday, Oct 19, 2021
  • Last Update : 05:56 pm

OP-ED: Counter trade: An alternative option to explore export markets

  • Published at 11:03 pm September 19th, 2021
Chittagong port import export trade
File photo of Chittagong PortDhaka Tribune

The present policy framework requires export payments to be realized through banking channels in convertible foreign currencies

Bangladesh is trying to explore untapped export markets from Central Asia to EuroAsia, from Western Asia to Africa, from the Caribbean to South America and many more destinations.

It means that export focus will be wider without limiting to Europe and North America.

Different initiatives have been going on since long, like multilateral or bilateral free trade arrangements, initiatives for duty free market access and so on.

Export markets for Bangladesh are still Europe and North America. 

In a practical situation, competitive advantage does not work for trade transactions.

Bangladesh exports goods to upper income countries whose economies depend on service sectors.

Banking is a part of service industries.  Banking transactions in our current export destinations of Europe and North America are very strong, wide and deep.

Despite non-availability of our duty free access, the US is bearing the status of first position for our exports.

How it is possible, is a question.

The answer is that our exporters, inter alia, enjoy easy export bill encashment facilities from US banks at reasonable costs.

This facilities enable exporters to export to the US market at reasonable FOB price of goods though net margin is very thin.

But something is better than nothing. In addition to the EU market, there are around 50 countries from where Bangladesh is being benefited with easy market access.

Even so, a major share of exports belongs to few destinations as noted earlier. Is the demand from the untapped countries low?

Or we cannot do what they need? Second question may be the reality since we cannot export goods on credit terms unless export bills are encashed as per our needs before maturity.

This is due to non-availability of export bill financing facilities from banks operating therein. 

Banking

Banking is a vital part for export trade to facilitate settlement of payments.

Transactions executed by banks are through their correspondence relationship maintained with counterpart banks abroad.

But case to case correspondent relations are not possible to be maintained.

In that case, links are found to execute the transactions. Despite this, there are some political issues for which banks cannot settle payments for parties having political embargoes from powerful countries. 

In this situation, there are many options to execute export trade with untapped countries.

Currency swap is an option as followed by China.

Such an arrangement cannot help promote exports since importers want imports on credit.

But they will not arrange early payments before maturity of bills under swap lines.

Exporters need to arrange early payments from third parties.  

Best alternative? 

Counter trade may be one of the best alternatives for promotion of export.

The present policy framework requires export payments to be realized through banking channels in convertible foreign currencies.

There needs alternative framework for materializing counter trade arrangements under which authorizations need to be given to exporters, importers, traders to enter voluntarily into arrangements with counterparts abroad for settlement of value of goods imported in to Bangladesh against value of goods exported from Bangladesh.

In this case foreign counterparts will maintain escrow accounts in convertible currencies with banks in Bangladesh. Same accounts will also be maintained by Bangladesh parts abroad.

In case of imports into Bangladesh, the accounts will be credited out of import payments in equivalent convertible currencies received from importers in local currencies through local banking channels supported by documented evidence.

The balances held in the accounts will be used to make payments to exporters shipping goods under counter trade.

In this case, the escrow accounts need to be debited for export payments supported by documented evidence to exporters through local banking channels.

Bangladesh parties working as facilitators will be paid with their commission/service charges as agreed under the arrangements in equivalent Taka.

Escrow accounts are normally non-interest bearing type accounts.

However, the balance may be transferred to short term deposit accounts with rate of interest applicable for the concerned currency.

The interest income will only be usable for settlement of payments against exports from Bangladesh as per formalities stated earlier.

The escrow accounts maintained by Bangladesh parties abroad will be deposited out of proceeds against exports from Bangladesh.

Funds credited in escrow accounts need to be utilized for settlement of payments against imports into Bangladesh.

The adjustment cycle shall not exceed the statutory period for realization of export proceeds from the date of shipments.

The accounts should bear interest at rate applicable for the concerned currencies. Interest income will be used for settlement of payments against imports as noted earlier.

Payments on account of commission/service charges out of balances held in the escrow accounts can be made to counterparts abroad.

The counter trade arrangement needs to be monitored by banks maintaining escrow accounts so that periodical reconciliation can be made.

Central bank should also devise some procedures to report the transactions taking declaration formalities into consideration.

It is said that banking arrangements between countries can explore untapped markets.

It is possible but there prevail challenges.

Maintaining banking relations is a cost for which banks are found reluctant to go for bank to bank arrangements.

In addition, embargos, if any, from global powers will not support banks to maintain correspondence relations with banks abroad.

Country to country arrangements through the central bank will work in normal situations when such arrangements are irrelevant.

But political restrictions imposed by powerful countries will not give the central bank comfort to execute such arrangements because of risks associated with reserve assets management in global financial hubs or in foreign treasury assets by way of concerned central banks.

Currency swap is also not so effective for the same reason.

On the other hand, the arrangements do not support increasing exports on credit terms.

Currency swap will not be able to make Bangladeshi exporters with payments unless foreign importers utilize the central bank’s swap line.

They will arrange the line on maturity. 

Exporters need early payment before maturity.

Bangladeshi garments travel to Russia and many other countries with orders received from global brands of different countries.

But exporters are reluctant to export to importers in this country since an early payment option is not available.

Counter trade is a better option for promotion of export markets. But there is a challenge.

Challenge

In the proposition as discussed earlier, imports will be executed first, the payments of which will be utilized for settlement of export receivables. Whether Bangladesh will export first is a question. In that case, escrow accounts of Bangladesh parties will be credited with export proceeds which need to be paid to exporters in Bangladesh.

But escrow accounts maintained by counterparts are in zero balance. In this situation, overdraft facilities need to be arranged keeping balances held in escrow accounts abroad as collaterals.

Otherwise, the solution will not be a win-win position.

Central bank should consider it for the sake of export trade.

Bangladesh Government issues export policy every three years.

The policy outlines support to be extended to export trade. Export within a framework of counter trade needs to be accommodated within the framework of export policy.

Otherwise, payment procedures will be confined within the banking channel in convertible currencies.

But alternative payment mode in the form of escrow accounts is required to settle reciprocal payments obligations for exports and imports.

As such, a complete policy support in this regard is required for which the concerned ministry and central bank should work together. 

 

The author works in the development sector and can be reached at [email protected]

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