Bangladesh is moving to trade in local currencies with two of its largest trading partners – China and India – in a decision that could well prove to be a test case for the end of the U.S. dollar’s dominance in global trade.
Last week, Bangladesh allowed its banks to maintain accounts in Chinese yuan for overseas transactions to reduce dependency on the U.S. dollar as the South Asian country grapples to contain its dwindling foreign reserves.
And according to media reports on Monday, India’s top lender, State Bank of India, has asked exporters to trade with Bangladesh in rupee and taka warning against settling deals in the U.S. dollar to avoid exposure to Dhaka’s falling reserves.
The developments come amid calls from the Shanghai Cooperation Organization (SCO) – which has both China and India as its members – for increasing the use of national currencies for trade among the member countries at its leadership summit in the Uzbek city of Samarkand last week. Bangladesh is not yet an SCO member but has applied for observer status in the Eurasian organization.
The South Asian country’s $416-billion economy is facing severe stress due to rapidly increasing food and energy prices with the prolonged Russia-Ukraine conflict further widening its current account deficit. Bangladesh is facing a shortage of foreign currency due to higher import bills and a steep fall in the Bangladeshi taka’s value against the U.S. dollar in recent months.
The country’s foreign exchange reserves fell from $48 billion last year to $37 billion as of last Friday, which is sufficient for import cover for only five months, according to data from Bangladesh’s central bank.
No wonder, Bangladesh wants to lower trade dependency on the U.S. dollar and it does not see a problem in dealing in local currencies, as the country’s Commerce Minister Tipu Munshi asserted last week. Responding to a query at an event in Dhaka, Munshi said that Bangladesh’s finance ministry is studying the issue and working on ways to implement local currency trade with its key trading partners.
Last week, the Bangladesh central bank allowed local banks to carry out overseas transactions in Chinese yuan. It is important to note that China-Bangladesh bilateral currency cooperation dates back to 2018 when Dhaka had authorized dealers to maintain a foreign currency clearing account with the central bank in the Chinese yuan.
The Bangladesh Bank’s latest decision followed demands from major business chambers such as the Metropolitan Chamber of Commerce and Industries (MCCI) of introducing a second currency besides the U.S. dollar for international trading amid the surging taka-dollar exchange rate.
The MCCI proposed the Chinese yuan as Beijing happens to be Dhaka’s largest trade partner and also the largest source of imports. The fact that China already has a Cross-Border Inter-Bank Payments System (CIPS) with the Chinese yuan as the trading currency was also a factor in Bangladesh’s decision.
If Bangladesh creates a mechanism for bilateral trade in local currency with India – its second largest trade partner – as well, as recent reports indicate, it will go a long way in reducing the country’s dependence on the U.S. dollar for international trade.
A signboard of the SCO Samarkand Summit is seen in Samarkand, Uzbekistan. /Foreign Ministry of Uzbekistan
If Bangladesh successfully negotiates its ongoing financial distress and overcomes its dollar dependence by trading in local currencies with two of its largest trading partners and perhaps even beyond, it will encourage many other countries to do the same. That could very well be the beginning of the end of dollar dominance in global trade.
