South Asia not ready for common currency

South Asia is not yet ready for a common currency, said economists from countries in the region at the opening of a two-day 14th South Asia Economic Summit in Sheraton Dhaka yesterday.

However, integration in trade and investment, increased mobility and people-to-people connectivity will provide the incentive for monetary cooperation in the region, they told a session on macroeconomic cooperation and the possibility of a common currency.

South Asia accounts for nearly one fourth of the global population and it has the market and ability to grow together, said the economists at the event being hosted by the Centre for Policy Dialogue.

Yet it is the least integrated in terms of trade, said Zahid Hussain, former lead economist at The World Bank, Bangladesh.

Intra-regional trade accounts for 5 percent of South Asia's total trade whereas the share of intra-regional trade in the Association of Southeast Asian Nations (Asean) region is 25 percent, he said.

South Asia is diverse in land area, gross domestic product or economic output, and population but the region's countries have similar levels of human and economic development which calls for increased integration, he said.

However, there is a lot of barriers to mobility, he said, citing non-tariff barriers, complicated visa policies and rigid bureaucracies.

"There is high sensitivity to national sovereignty. National currencies evoke strong attachment and emotion," said Hussain at the event.

Political will to give up fiscal and monetary autonomy is also necessarily to go for a common currency, he said.

Complementarity in trade and free flow of labour and capital among the members can make cooperation over a currency more likely, he said.

Several countries have taken steps to reduce dependence on the US dollar and Bangladesh also took bilateral initiatives to settle trade in Chinese yuan and Indian rupee in 2022 and 2023, said Hussain.

However, the response with regard to trade in rupee is muted while exporters in China prefer receiving payments in dollars, euro and pound sterling, he said.

There is persistent and growing trade deficit among Bangladesh, China and India, which makes trade in rupee and yuan limited here, he said.

Bangladesh's average monthly trade deficit is $1.13 billion with China and $644 million with India.

Comparability of economies is needed for a common currency, said Md Habibur Rahman, chief economist at Bangladesh Bank. "We are not right there…We can search for an appropriate time and opportunity for this," he said.

A mechanism enabling independence is needed to avoid sanctions, said Abid Qaiyum Suleri, executive director at Sustainable Development Policy Institute, Pakistan.

Pakistan is relying on barter trade with countries such as Afghanistan, China and Russia, he said.

"Instead of losing hope on a common currency, we can explore so that we reduce dollar dependence," said Suleri.

Posh Raj Pandey, senior economic advisor of the finance ministry of Nepal, proposed for establishing a regional financial market in this regard.

Use of the US dollar for international transaction settlement is declining, said Professor Sachin Chaturvedi, director general of the Research and Information System for Developing Countries, India.

International transactions other than that of the US dollar accounted for 9 percent of total global trade in July 2022 and it rose to 14 percent in December the same year, he added.

"This is an indication of rising arrangement of settlement in non-dollar," he said, adding that 38 countries have shown interest to trade with India in rupee.

However, to make trade in the rupee popular between Bangladesh and India, a large line of credit in rupee is needed, said Ahsan H Mansur, executive director of the Policy Research Institute of Bangladesh.

"Otherwise, the performance we have seen is dismal…We also should think of currency swap to protect against external shock," he said.

Countries should start with trade facilitation for economic integration and go for common documentation for customs, encourage firms to invest regionally and foster people to people connectivity, said Mansur.

Visa issuance and border control is quite pervasive and old fashioned, he said.

The economist also suggested harmonisation of tax and trade policies among members of the South Asian Association for Regional Cooperation.

"We also need monetary policy harmonisation. We need to think about bringing inflation close to each other and currency stability. Cooperation at the institutional level is critical," he said.