Asian Clearing Union
Useful For Payments Settlement

By Purushottam B. Shrestha

THE Asian Clearing Union (ACU) functions as a clearing agency for the payments arrangements for current International transactions among the participating countries on a multilateral basis. The establishment of ACU was agreed at ESCAP (Economic and Social Commission for Asia and the Pacific) Bangkok, in February 1973, but came into existent only after Iran, India, Sri Lanka, Pakistan, Bangladesh and Nepal signed the agreement in December 1974. Subsequently Myanmar and Bhutan joined the ACU in 1977 and 1999 respectively the total number of membership now is eight.

Objectives

The ACU as the first experiment in monetary cooperation in Asia and the pacific region started its operations in November 1975. The major objectives of the ACU are to reduce the use of extra-regional currencies to settle such transactions by promoting the use of participant’s currencies; to effect thereby economies in the use of the participant’s foreign exchange reserve and a reduction in the cost of making payments for such transactions; to contribute to expansion of trade and promotion of monetary cooperation among the countries of the area and; and to provide short term credit facilities (SWAP) by the system to the debtor participants for a period of two calendar months.

The most important point to be noted in the case of export’s payment settlement routed through ACU mechanism is that the exporter receives his payment immediately in time but the central bank’s reimbursement against their payment is actually received only after a gap of two month’s ACU settlement period or the actual settlement of the foreign currencies between the central banks is completed only at the end of two month’s ACU settlement period. Similarly in case of an import by Nepal from other ACU member countries the central bank (importing country) does not actually need to pay the amount instantly to the exporting central bank or in other words, it will be entertaining the credit facility for an average period of two months (actual settlement period). But for this particular days or period it has to pay some interest on the balances of the amount of the import recorded by the ACU calculated on the basis of BIS rate. Likely the exporting central bank also does not receive the payment from the importing central bank immediately but receives the actual amount only at two months ACU settlement period and will be paid its interest on the balance.

The old procedural rules existing in the ACU before 1996 gave rise to many distortions or problems. Especially the exporters of the region got loss in conversion of the amount of their exported goods. This was due to the exchange rate (received from IMF) applied in the conversion of the local currencies into AMU or in other words the rates could become operative only on the third day following the day to which they are applied. So many more amendments were needed. As a result the following changes in the ACU settlement procedures came into effect from 1st January 1996.

The value of Asian Monetary Unit (AMU) which was hitherto equivalent to international monetary fund’s (IMF) special drawing rights (SDR) will be equal to U.S. Dollar and it will be denominated as "ACU Dollar" from 1st January, 1996.

The accounts opened in local currencies by the authorized commercial banks with their correspondent banks in ACU member countries for the purpose of settlements through the ACU should be closed down before 31st December, 1995 and the same should from 1.1.1996 be maintained in ACU Dollar.

The prevailing practice of fixing the exchange rate for AMU as well as of the currencies of other ACU countries by this bank would henceforth be discontinued from 1.1.1996.

Following the implementation of the revised system, all the L/C’s for import/Export between the ACU member countries would have to be opened in ACU Dollar only and L/C’s opened before 1.1.1996 but not transacted would also have to be settled in ACU.

All trade transactions between Nepal and other ACU member countries (excepting India) would have to be channeled through the ACU mechanism as usual. Although most of the trade between Nepal and India is settled in Indian Rupees and as the Indian Rupees is not convertible currency the transactions traded in IC could not be channeled through ACU mechanism. However, certain items (mainly industrial raw material) which is the convertible trade between these two countries could be routed through this mechanism.

The article VI provides for settlement of balances among participants at the end of each two monthly period of settlement. Under article VII A, the board of Directors may provide for a currency swap arrangement among the central banks subject to the necessary terms and conditions in times of their foreign exchange reserves deficit. Under this facility in the 2001 Bangladesh availed of the "ACU scheme for currency swap arrangement amounting USD 150,000,000.00. For this we shared our contribution of one per cent to Bangladesh which comes as USD 1,500,000.00. This successful usage of the currency swap arrangement shows that the facility provided by the ACU is also another incentive for attracting new members to join the ACU in the future. The activities of the ACU have expanded greatly over a period of time. While initially only a restricted list of merchandise goods could be channelled through the system except capital transactions and oil imports, later on it was made compulsory for all transactions to be routed through the ACU.

The issued data shows that in the year from 1999 to 2001 end Nepal has become the importer of the total amount of US Dollar 20,612,294.41.

In accordance with the decision of the board of directors of the ACU at the 28th meeting in Kathmandu, Nepal on April 5-6, 1999 the permanent technical committee composed of representatives of participant central banks met in Dhaka on 16th January 2000 which specially recommended that trade in services can be included in the clearing mechanism. Payments for tourism, travel and transportation can also be routed through the ACU. Also to reduce systemic delays, efforts to be made to have uniform weekends and the facility of funding of ACU accounts may be introduced. And creation of fund to provide the union with adequate financial resources in order to motivate new members as well as the expansion of the role of ACU.

Success

The ACU has been serving a very useful purpose and has, since its establishment, steadily increased the volume of trade cleared through it. Among the developing countries, the ACU stands out as the most successful and impressive one in terms of clearing trade transactions. In the years over 26 year of its operation, ACU has not experienced any default whereas other developing country’s payment unions have faced many problems. The reason is that the ACU functions with strict but simple rules of operation, which finally guarantee in the prompt settlement of the payments. ACU attracts the traders to look forward with confidence towards increasing their business with the neighbouring markets. Colombo, Sri Lanka has been chosen as the venue for the 31st Annual Board Meeting of the Directors of the Asian Clearing Union on May 30-31, 2002, let us hope that the meeting will focus its attention on welcoming more and more countries like Maldives, China, Turkmenistan, Uzbekistan and Malaysia etc as members, on enhancing trade and economic growth in the Asia and the pacific region and endeavour to strengthen the role of the ACU.

Other Stories

• RNAC’s Ordeal Continues
• Tobacco Taxes Still Not High