The current policy framework requires export payments to be made through bank channels in convertible foreign currencies
Bangladesh tries to explore untapped export markets from Central Asia to Eurasia, West Asia to Africa, the Caribbean to South America and many other destinations.
This means that the export orientation will be broader without being limited to Europe and North America.
Various initiatives have been underway for a long time, such as multilateral or bilateral free trade agreements, duty-free market access initiatives, etc.
Bangladesh’s export markets remain Europe and North America.
In a practical situation, competitive advantage does not work for business transactions.
Bangladesh exports goods to high income countries whose economies depend on the service sectors.
Banking is one of the service industries. Banking transactions in our current export destinations of Europe and North America are very strong, broad and deep.
Despite the unavailability of our duty-free access, the United States ranks first for our exports.
How is that possible, that’s a question.
The answer is that our exporters and others benefit from export invoice collection facilities from US banks at reasonable costs.
These facilities allow exporters to export to the US market at a reasonable FOB price of the goods, although the net margin is very slim.
But something is better than nothing. In addition to the EU market, there are around 50 countries of which Bangladesh enjoys easy market access.
Even so, a significant share of exports belong to a few destinations, as noted earlier. Is demand from untapped countries low?
Or can’t we do what they need? The second question may be the reality since we cannot export goods on credit unless the export invoices are cashed as needed before the deadline.
This is due to the unavailability of facilities for financing export invoices from the banks operating there.
The bank is an essential part of the export trade to facilitate the settlement of payments.
Transactions executed by banks are carried out through their correspondence relationship maintained with counterpart banks abroad.
But it is not possible to maintain correspondence relationships on a case-by-case basis.
In this case, links are found to execute the transactions. Despite this, there are some political issues for which banks cannot settle payments for parties with political embargoes from powerful countries.
In this situation, there are many options to execute the export trade with unexploited countries.
The currency swap is an option followed by China.
Such an arrangement cannot help promote exports since importers want imports on credit.
But they will not arrange advance payments before the due date of the invoices under the swap lines.
Exporters must arrange advance payments from third parties.
Counter trade can be one of the best alternatives for export promotion.
The current policy framework requires that export payments be made through bank channels in convertible foreign currencies.
There needs to be an alternative framework to materialize counterpart trade agreements whereby authorizations must be given to exporters, importers and traders to voluntarily enter into agreements with overseas counterparts for the settlement of the value of goods imported into Bangladesh by relative to the value of goods exported from Bangladesh.
In this case, the foreign counterparties will maintain escrow accounts in convertible currencies with banks in Bangladesh. The same accounts will also be maintained by the Bangladesh parties abroad.
In the event of importation into Bangladesh, accounts will be credited against import payments in equivalent convertible currencies received from importers in local currencies through local banking channels supported by documented evidence.
Balances held in the accounts will be used to make payments to exporters shipping merchandise under counter trade.
In this case, escrow accounts should be debited for export payments supported by documented evidence to exporters through local banking channels.
Bangladeshi parties working as facilitators will be paid with their commissions / service charges as agreed under the equivalent Taka arrangements.
Escrow accounts are normally non-interest bearing type accounts.
However, the balance can be transferred to short-term deposit accounts with an applicable interest rate for the relevant currency.
Interest income shall only be used for the settlement of payments against exports from Bangladesh in accordance with the formalities set out above.
Escrow accounts maintained by Bangladeshi parties abroad will be deposited against the proceeds of Bangladesh exports.
Funds credited to escrow accounts are to be used for settling payments against imports into Bangladesh.
The adjustment cycle will not exceed the legal deadline for achieving export earnings from the date of shipments.
Accounts must bear interest at the applicable rate for the relevant currencies. Interest income will be used to settle payments against imports, as previously discussed.
Payments for commissions / service charges on balances held in escrow accounts may be made to counterparties abroad.
The counterparty trade agreement should be monitored by the banks that maintain escrow accounts so that a periodic reconciliation can be made.
The central bank should also design procedures for reporting transactions taking into account reporting formalities.
It is said that banking agreements between countries can explore untapped markets.
It is possible, but there are challenges to overcome.
Maintaining banking relationships is a cost for which banks are reluctant to resort to bank-to-bank arrangements.
In addition, embargoes, if any, from world powers will not help banks maintain correspondent relationships with banks abroad.
Country-to-country agreements through the central bank will work in normal situations where such agreements are not relevant.
But political restrictions imposed by powerful countries will not give the central bank the comfort it needs to execute such deals because of the risks associated with managing reserve holdings in global financial centers or the assets of the foreign treasury through central banks concerned.
Currency exchange is also not as efficient for the same reason.
On the other hand, the arrangements do not support increased exports on credit.
The currency swap will not be able to charge Bangladeshi exporters unless foreign importers use the central bank’s swap line.
They will fix the line at maturity.
Exporters need prepayment before the deadline.
Bangladeshi clothing travels to Russia and many other countries with orders received from global brands from different countries.
But exporters are reluctant to export to importers in this country because an advance payment option is not available.
Counter trade is a better option for promoting export markets. But there is a challenge.
In the proposal as discussed above, imports will be executed first, whose payments will be used for the settlement of export claims. The question is whether Bangladesh will export first. In this case, the escrow accounts of the Bangladeshi parties will be credited with the export earnings to be paid to the exporters in Bangladesh.
But the escrow accounts maintained by the counterparties are in zero balance. In this situation, overdraft facilities should be put in place by keeping balances held in escrow accounts abroad as collateral.
Otherwise, the solution will not be a win-win position.
The central bank should consider it for the sake of export trade.
The government of Bangladesh publishes an export policy every three years.
The policy describes the support to be extended to the export trade. Exporting under the countertrade must be integrated into the framework of the export policy.
Otherwise, payment procedures will be confined to the banking channel in convertible currencies.
But an alternative payment method in the form of escrow accounts is needed to settle reciprocal payment obligations for exports and imports.
As such, full political support in this regard is required for which the relevant ministry and the central bank should work together.
The author works in the development sector and can be reached at [email protected]