Tanzania, India trade in local currencies

THE Reserve Bank of India (RBI) has cleared the way for trade between India and Tanzania using local currencies.

In this historic arrangement, RBI allows the authorised banks in the South Asian country to open Special Rupee Vostro Accounts (SRVA) of correspondent banks of Tanzania.

The High Commission of India said in a statement issued in Dar es Salaam yesterday that to trade under this mechanism, Tanzanian banks will have to open Special Rupee Vostro Accounts in India by approaching authorised Indian banks that will in turn approach RBI for their approval with details of the arrangement.

According to the statement, the Bank of Baroda which has branches operating in Tanzania has received RBI’s approval for opening Special Vostro Accounts (SRVAs) for its foreign branches and subsidiaries situated in various countries including Tanzania.

Commenting on the new arrangement, Alpha Capital Head of Research and Financial Analytics, Mr Imani Muhingo, said this bilateral agreement releases the pressure of the greenback on the shilling, especially now that the US is on a tightening spree.

India was last year the largest trading partner in terms of Tanzanian exports and third in terms of imports, just behind China and UAE.

He said the settlement agreement would mean Indian banks demand to hold the shilling for their imports, hence raising the value of the shilling independent of the USD.

Potentially, the value of the shilling and the rupee relative to each other would be determined mostly by the balance of payment between the two countries.

Apart from Tanzania, other countries for which this arrangement is now applicable are Kenya, Uganda, Botswana, Fiji, Germany, Guyana, Israel, Malaysia, Mauritius, Myanmar, New Zealand, Oman, Russia, Seychelles, Singapore, Sri Lanka and the United Kingdom.

Under the new system put in place by RBI for the settlement of trade transactions with foreign trade partners’ authorised banks in India will open Special Rupee Vostro Accounts (SRVAs) of correspondent banks of the partner trading country.

Indian importers undertaking imports through this mechanism will make payment in INR which shall be credited into the Special Vostro account of the correspondent bank of the partner country, against the invoices for the supply of goods/services from the overseas seller/supplier.

Indian exporters, undertaking exports of goods and services through this mechanism, can be paid their export proceeds in INR from the balances in the designated Special Vostro account of the correspondent bank of the partner country.

The Rupee surplus balance held, if any, may be used by the partner trading country for capital and current account transactions in India, for investing in India.

On his part, Vertex International Securities, Advisory and Capital Markets Manager Mr Ahmed Nganya said there are immense benefits to Tanzania being added to the list of countries cleared by RBI to use the local currencies.

He said under the new mechanism, trade between Tanzania and India will become easy and a chance to expand the trade volume between the two countries.

“This will be an alternative exchange rate between the two countries, especially in this period of global economic shocks,” he said.

Mr Nganya added the new arrangement will reduce dependency on the US dollars as well as pressure on the shilling.

The statement from the High Commission of India said further that Tanzanian banks and businesses have the opportunity to make full use of this framework so as to enable seamless payment transactions in domestic currencies.

This is expected to not only help conserve foreign exchange but also boost bilateral trade.

An economist-cum-investment banker, Dr Hildebrand Shayo said this development between Tanzania and India is great news to both nations.

This initiative enables the opening of one account in each central bank; however, each central bank has to impose prescription regulations that will link the settlement of claims and debts under an agreement between the two nations. Given there are specific goods and services originating from Tanzania.

For the Indian market and some goods and services from India destined for Tanzania, this initiative is perfect as it will boost trade volumes that will at the end of the day benefit both the nation’s private sector involved in trading.

“In my opinion, an increase in import or export settlement dominated by agreed currency coupled with specific strategies that will help to encourage recycling would result in both nations’ large cross border currency flow,” he noted.

One important thing to note is that to expedite the settlement continued building of efficient payments and settlements together will be a key to success.

A Senior Lecturer at the Department of Finance, University of Dar es Salaam, Business School Dr Tobias Swai said the new arrangement gives a clear sign that Tanzania is a good partner of India.

The High Commission of India is organising a Stakeholders Consultation Meeting on March 24, 2023 where details about the bilateral trade mechanism using local currency and its benefits would be discussed.

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