KARACHI: The State Bank of Pakistan (SBP) on Thursday suspended euro transactions through the Asian Clearing Union (ACU) with immediate effect but did not give a reason for the move.

The SBP followed the decision taken by the Reserve Bank of India (RBI). On July 1, the RBI temporally suspended all euro transactions through the ACU mechanism and said all such trade will now have to be settled outside the system. Similarly, on Thursday, Bangladesh’s central bank also suspended the ACU mechanism.

Members of the ACU include central banks of Bangladesh, Bhutan, Iran, India, Maldives, Nepal, Pakistan, Sri Lanka and Myanmar.

“As the payment channel for processing euro transactions is under review, the SBP is temporarily suspending operations in ‘ACU euro’ with immediate effect. Accordingly, all eligible transactions in euro are permitted to be settled outside the ACU mechanism until further notice,” said the central bank through a circular issued to all banks.

The instructions related to settlement of ACU dollar transactions will remain unchanged, it added.

Bankers were not aware about the reason for sudden suspension of euro transactions through the ACU mechanism. They said many payments were stopped from Thursday. However, it was reported in the international media that concerns raised by Germany’s Bundesbank led India to suspend trade in euro through the ACU.

The German central bank was reportedly reluctant to clear all ACU transactions on a net basis and instead wanted to clear on an every transaction basis.

Bankers said ACU members could find another bank to clear their ACU euro transactions. However, they ruled out any reason related to the decision taken by Britain to leave the European Union which weakened euro against all major currencies including the dollar.

In December 2008 it was decided to include euro as the second ACU currency along with dollar with effect from January 1, 2009.

It was said the ACU euro would be equivalent in value to one euro. Accordingly, transactions under the ACU mechanism, in addition to ACU dollar, may also be denominated and settled in ACU euro effective January 1, 2009.

Authorised dealers were asked to establish ACU euro accounts with their correspondents in ACU member countries and vice versa.

The transactions in ACU euro were reported by the banks to SBP and settled by the central bank separately, independent of ACU dollar transactions. In short, two separate accounting and settlement systems were maintained for euro and dollar transactions.

To encourage the banks to maintain reasonable and sufficient balances in their accounts to ensure timely payments, the authorised dealers were permitted to pay or receive interest, at their discretion, on ACU dollar and ACU euro accounts as per mutually agreed terms and conditions.

Published in Dawn, July 29th, 2016