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by SUREKHA GALAGODA

Finance Minister K.N. Choksy last week called upon the Asian Clearing Union (ACU) to expand and play a more proactive role to fully realise its objectives for the benefit of all members.

The Minister was addressing the 31st meeting of the Board of Directors of the ACU in Colombo last week. Bangladesh, Bhutan, India, Iran, Myanmar, Nepal, Pakistan and Sri Lanka are members of ACU.

The ACU was set up in 1974 to provide a settlement facility on current international transactions among member countries on a multilateral basis, promote the use of participants' currencies in current international transactions between their respective countries which allows participants to economise the use of hard currency reserves and promote monetary cooperation among participants through the establishment of closer relations among banking systems and contribute to the expansion of trade and economic activity among the member countries.

ACU is one of the oldest functioning clearing unions in the world, but some of the objectives set out in the Articles of Agreement such as promotion of monetary cooperation and closer relations among the banking systems in the member countries have not been achieved to a satisfactory level.

"Monetary cooperation generally refers to cooperation among ACU member countries in monetary matters and promoting links among the monetary systems, policies and operations. It further involves broad approximation or harmonisation of domestic and external economic policies of member countries and convergence of broad economic aggregates, which would lead the way to a common currency. This has not reached expectations nor have definite plans for monetary cooperation among ACU member banks," the Minister said.

Intra-ACU trade expansion, considered as the ultimate objective of monetary cooperation and regional integration, has not shown a significant growth and has remained around two per cent during the period 1996-2000. "The ACU does not appear to have made a significant contribution towards the expansion of intra-regional trade in the past," the Minister said.

He said structural problems, lack of financial support and some cumbersome operational rules and practices have inhibited the growth of intra-ACU trade.

Minister Choksy added that the low degree of export diversification, the small size of the ACU and the lack of financial resources to assist weaker members may have also affected the ACU's ability to promote intra-regional trade and emerge as a strong regional economic force.

Trade in the region is also constrained by political conflicts between member countries, limited production capacity, the relative low quality of goods, consumer preference for goods manufactured in developed countries and transport and communication problems.

"The ACU has not been able to induce and enhance production in member countries to make industries inter-dependent or create industries that produce complementary goods with comparative advantage," he said. Not a single member country has emerged as a regional economic giant, pulling the other members out of the low state of growth and expand trade.

However, Minister Choksy was confident that there is substantial potential to increase intra-regional trade because the South Asian region is a large market.

He said the success of a multilateral clearing and payments arrangement such as the ACU depend a lot on factors such as developments worldwide and in the Asian region, the structure and degree of inter-dependence of member countries and the operational rules and characteristics of the ACU.

The Minister said that developing countries are vulnerable to external shocks. Therefore, there is a need to strengthen the resilience of economies to face such unavoidable external shocks. "The challenges we have to face in the global markets are considerable." He said each member country may have its own national agenda and specific plan to address these issues, but collective regional approaches based on common interest for faster economic development could make the process much easier.

He said there were little prospects for increasing the economic size of the ACU to emerge as a strong regional economic force, unless developed countries in the region with large economies joined the Union.

"In various parts of the world, especially in Europe and East Asia, regional groupings have proved an effective instrument for neighbouring states to promote their collective and individual well-being through collective efforts. We in this region can learn important lessons from the experience of Europe and the ASEAN. We should strive to build closer relations with neighbouring countries, and explore the possibilities of economic cooperation with regional groupings such as SAARC, the Indian Ocean Rim Association for Regional Cooperation and the Bangladesh-India-Myanmar-Sri Lanka-Thailand Economic Cooperation," Mr. Choksy said.

He said though the ACU had existed for over a quarter of a century, countries in the ACU have made little progress in expanding trade among themselves.

"The time has come to take some bold decisions to change the landscape of our member countries from poverty and unemployment to a virtuous cycle of higher employment, income and growth. However, the ACU has satisfactorily served the member countries during its 27 years of existence. Delayed settlements inherent to the ACU mechanism have exposed counterparts to both credit and liquidity risks.

"When the ACU was established in the mid-70s, the forex exposure of banks was less than at present. But today, a sudden failure of liquidation of a bank might lead to broader financial crises and contagion effects throughout the region. Therefore, increased emphasis needs to be paid to address delays in settlements under the present ACU system."

"India and Sri Lanka are gearing to implement Real Time Gross Settlement Systems for their domestic large value and time critical fund transfers. These payment reforms may help to increase the efficiency of one leg of the payment and may call for improving of efficiency of the ACU mechanism to reduce prospective liquidity, credit and systemic risks involved on the other leg of ACU payment settlements," the Minister said.

He said the value of transactions routed through the ACU system has increased from US$ 25.7 million in 1976 to US$ 3.6 billion in 2001.

The ACU was formed in 1974 at the initiative of the Economic Commission for Asia and the Far East when most member countries were adopting exchange controls and fixed exchange rate regimes and were faced with severe balance of payments difficulties.

In 1989, the provision of currency SWAP arrangement was added to make the Asian Monetary Units available to all debtor participants temporarily.

"The ACU Secretariat has acted successfully as a service provider for the member central banks in determining net obligations of member central banks on a multilateral basis. This netting system has helped member central banks to economise on their use of hard currency in payment settlements. The operations of the ACU have grown over the years," Minister Choksy said.

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