IN nine months of 2014, Pakistan’s external trade forex transactions worth $1.895bn were cleared through the Asian Clearing Union, say bankers with knowledge about the subject.

That this amount represents only a small portion of our total exports and imports is understandable because of the limited number of ACU member countries — namely Bangladesh, Bhutan, India, Iran, Maldives, Myanmar, Nepal, Sri Lanka and Pakistan. But the fact that it is less than 20pc of our trade with ACU countries means the usage of ACU for routing forex transactions is very limited.

Bilateral project investment financing and bilateral lending among member countries through ACU accounts and non-dollar currency swaps between two ACU members can also significantly enhance volumes of forex transactions cleared through the system. This, in turn, would be helpful in promoting intra-regional trade.

In nine months of this year, cumulative forex transactions of all member countries routed through the ACU rose to about $15.5bn, up 15pc from $12.8bn in the same period of last year.

Quoting this and similar data, bankers point out that the pace of clearing of forex transactions through the ACU has been growing, but the problem is still with volumes. And volumes cannot expand unless the governments of the member countries move closer to each other in trade and investment and other bilateral forex dealings.

Bankers point out that while the pace of clearing of forex transactions through the Asian Clearing Union has been growing, the problem is still with volumes

SBP officials say during the 43rd annual ACU Conference held in Iran a few months ago, central bankers of member countries discussed in detail how the union can contribute to promoting intra-regional trade and how its clearance system can be improved to facilitate handling of larger forex volumes.

The representatives of the central banks of Iran, Nepal and Bhutan were of the view that greater autonomy for central banks can help in addressing these and similar issues. Meanwhile, central bank authorities of other countries also talked about the role of governments of member countries, sources in the SBP say.

The participants also noted the need for seeking commercial banks’ input in making the ACU clearance system operationally easier and more acceptable for banks.

Some of them also pointed out that one reason why a particular member country’s trade transactions with another member country is not routed through the ACU is that either of the two runs out of their limits set for this purpose.

Since these limits are set under a formula that gives weight to their past performance record of three years, failure in using the limit set results in lowering of the limit itself. This, if not improved by better performance, can only keep going down.

“That, I think, is the core issue,” says the treasurer of one of the five leading local banks. He added that little awareness among bankers about this subject and scant interest of their top management make things worse.

He suggested that in the next annual ACU conference in Bangladesh in 2015, these and other minute but important issues should be taken up, and the central bankers participating in the conference should be briefed in advance by treasurers of commercial banks of their respective countries.

While dealing with trade partners in ACU countries, Pakistani banks generally face problems in routing forex transactions via the Asian Monetary Unit (or ACU dollar and ACU euro) for one big reason. A bank handling the trade of one side is not always able to find another correspondent bank on the other side willing to use AMU for transaction clearance, bankers say.

But a bigger issue is the volume of intra-ACU regional trade and expansion of the union’s membership. The current ACU composition is such that intra-ACU-regional trade has not been expanding fast even though the member countries’ external trade is, by and large, growing.

Expanded membership can help solve this problem.

For example, had China been a part of the ACU, the intra-ACU-regional trade would have been much larger because almost all current member countries have seen a surge in their respective bilateral trade with China in the last 10 years.

“If regional trade in the ACU region itself is small and if two members’ bilateral trade constitutes a small percentage of their respective trade with the world at large, routing forex transactions through the ACU cannot grow fast,” says the treasurer of a local bank.

So both things are interrelated. Promotion of intra-regional trade is a must for ACU to expand its membership, and extended membership is required to boost intra-regional trade. “Practicality demands that the ACU should first do more to promote intra-regional trade, but that doesn’t fall under its exclusive purview. The governments of member countries and their private sectors have a greater role to play.”

Published in Dawn, Economic & Business, October 20th, 2014