Export trade and realization of payment in local currency

People produce goods and services. In the prehistoric age of hunter and gatherer society, people hunted and gathered goods for consumption.

The process is known as work for meeting subsistence needs.

Quite difficult on the part of individuals to hunt or produce all types of goods and services they need. As a result, goods are bartered among people of the same communities.

Bartering does not work for a long time to meet multifaceted needs; the medium of exchange for meeting transactional needs have evolved.

Currently, sovereign states have sovereign currencies, known as legal tenders or fiat currencies, whatever they are in forms - in papers or in digits.

People in the economy work hard to produce goods. The harder they work, the better the production.

Hard working is a natural phenomenon, unless someone rubs Aladdin's lamp to lift them into a higher living standard.

But excess production may not be able to earn more due to inadequate demand, otherwise the market does not support clearing the goods.

As said in numerous texts, bartering does not work in all respects due to lack of cross coincidences.

With the passage of time, the bartering system was replaced by medium of exchanges like currencies, such as the Taka, for transactions.

The unique system which makes a man, without possessing, qualified for all qualities.

Like poor individuals, countries with poor status produce more to become rich.

But demands cannot support all items to be cleared from the market, external demand is needed.

Export demand from external sectors supports to clear the goods produced in an economy.

Selling goods to people residing in other political jurisdictions constitute exports. Exports bring foreign money into the country which can be used for importing goods and services.

What is to happen if goods are sold in Taka? Exporters are happy to receive payment in Taka from their banks.

They do not bother whatever the currency their banks receive and what they do with the currency.

Whatever the situation is, foreign importers do not have Taka in their countries.

So how they will make payments in Taka - is a question.

Simple answer is that they will make payments in their currencies to their banks which will buy Taka from our banks to make payments for goods imported from Bangladesh.

Banks in Bangladesh will sell Taka against currencies of foreign countries if the particular currencies are widely used or in need for settlement of payments for imports from those particular countries.

In case these criteria are not met, Taka will be sold against international currencies like US Dollar, Euro, Pound, etc.

As noted earlier, non-availability of matching demand and supply destroyed the barter system and brought a medium of exchange in place.

As a result of bilateral mismatch between exports and imports of goods and services, trade between countries is executed by a few currencies known as king currencies like US Dollar, Euro, Japanese Yen, and the British Pound.

Markets of these currencies are very deep, facilitating transactions smoothly with uncommon currencies. 

Can we avoid king currencies? It may be difficult but it is possible at some short term costs, having long term benefits.

How it is possible needs to be explored.

How it works

The economy is on run with the interaction of costs and benefits.

Banks work as a facilitator to execute cross border transactions.

When banks pay Taka to exporters, they sell depositors’ Taka to buy king currencies.

Banks sell king currencies against Taka from importers, on the other hand. Banks will not trade in currencies which are not frequently used for cross border transactions.

However, they may buy uncommon currencies against sales of Taka provided that the currencies bring sound income and bear no risk to convert into other currencies when required.

Parallel situation is also possible in opposite cases.

Foreign banks will retain the sales proceeds of their currency against Taka in our banks provided they are given adequate interest and assurance to pay in currencies at their choices when required.

Forex regulations of the country require export payments to be received either in convertible currency or in Taka from the balances held in non-resident Taka accounts (Vostro) maintained in Bangladesh by foreign banks.

On the other hand, import payment needs to be executed in freely convertible foreign currency. The regulations allow import payment settlements in the currency of the country of the beneficiary or of the country of origin/shipment of goods, or by way of credit to the Vostro account maintained in Bangladesh.

The regulations seem to be flexible in import payment settlement.

Role of banks

In global transactions, banks work as facilitators.

But they do not establish a one-to-one relation considering cost factors. As such, they maintain relations with counterpart banks in globally recognized financial hubs.

Only few relations help global transactions; no need is required for one to one relation, other than relationship management arrangement (RMA).

As an alternative to promote exports by free trade agreements, flexibility in trade currency may be an option. Sales of goods in Taka to external buyers can promote exports?

The answer is possible, if extra cost is expensed. But the same question ‘how’ needs to be answered.

In the context of settlement, exports can be executed either by international currencies or by domestic currencies.

There are many causes for which domestic currencies are used for settlements of export payments. One of the major causes is political.

Due to political red eyes of influential countries empowered with king currencies, the geopolitical ecosystem of many countries face disadvantages in international settlements with access to global financial hubs.

As a result, they need alternative ways to meet transactional needs.

Goods-to-goods bartering is an ancient way, but it needs a specified list of goods for the trade.

Otherwise, the net result will be a mismatch requiring another panacea for settlements.

Trade in domestic currencies is another way meaning that each participant country will sell goods in their domestic currency.

In theory, trade in domestic currency is considered as trade in non convertible currencies.

There is a paradox in this terminology in the context that trade is categorized as current transactions.

Currencies of the member countries of the IMF are freely convertible on current transactions.

If it is true, nothing is creating a bar to trade between domestic currencies with convertibility on current transactions.

But why does trade depend on the US Dollar, and the Euro? 

For academic discussion, it is assumed that we are exporting in Taka and importing in domestic currencies of exporting countries.

In case of exports, we are selling Taka to importers’ banks and making the funds available in exporters’ accounts.

Importers’ banks abroad are collecting money from their importers and depositing the same in our accounts maintained with them.

In case of imports, we are buying domestic currencies from exporters’ banks with importers’ Taka and depositing the same in their accounts maintained with us.

If exports and imports are matched, payable position of deposit accounts is adjusted with receivable position.

What happens if net position is payable to banks abroad. We need to make interest payments. They may be required to transfer funds to other countries.

In that situation, the concept of domestic currency may not work.

But it is possible if countertrade is arranged with counterpart countries to balance between export and import. This will be a win-win situation.

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