by Abdolazim Mola'ee*
The riskless use of national currencies in payments, related to bilateral trade and investment, would lead to cheaper and faster transfer of money between two countries without involving a third country's currency (USD). This new concept could be implemented by using a type of Banking and Payment Agreement (BPA) between central banks.
In BPA, there is no risk of devaluation because the mean of calculation is a hard currency. In BPA, most of the cross-border banking services would be serving the traders.
BPA is a type of arrangement between two financial institutions, at least, among two counties (mainly central banks), which can also be used for payments linked to bilateral trade without involving a third country’s currency. Based on such arrangements, the two financial institutions establish a virtual account, called Especial Account, for each other. Especial Account is a key factor in riskless usage of national currencies. In finance, it is emphasized that money has three functions: mean of payment, mean of calculation and mean of value storage. The main idea here is that mean of payment would be separated from mean of calculation and value storage. In other words, mean of payment would be based on national currencies, and mean of calculation and value storage would be based on a stable asset.
BPA would start by establishing and maintaining two accounts. Each financial institution would establish a home-currency account in the home-country and an Especial Account (based on a hard currency) in the foreign country. After establishing the two Especial Accounts, BOK’s (Bank of Korea’s) money in Iran is calculated based on EUR and not by Iranian currency (IRR), and Central Bank of Iran’s (CBI) money in Korea is calculated based EUR and not Korean currency (KRW). Therefore, there is no risk of Rial devaluation for BOK, and there is no risk of Won (Currency of South Korea) devaluation for CBI.
The two institutions would credit the Especial Accounts, virtually up to the agreed level, and each financial institution would credit the home-currency account equal to the amount predicted in the Especial Account. As mentioned, in the model, each financial institution would nominate branches for providing cross-border banking services based on the new platform, and traders within the two countries would have a new option for payment on their cross-border activities.
As an example, it is supposed that CBI and BOK have signed a BPA. They nominate a commercial bank in South Korea and a commercial bank in Iran for performing banking operations: mean of payment is national currencies and mean of calculation is EUR. An exporter in South Korea would like to export 1,000 EUR of manufacturing products to Iran. S(he) asked the Iranian importer to go to the Iranian commercial bank and open a letter of credit amounted for 1000 EUR. At the maturity of L/C, Iranian commercial bank will debit the Iranian importers’ account (Rial Account) equal to 1,000 EUR (i.e. 1 Euro=4,100 IRR, therefore, Iranian importer shall pay Iranian commercial bank 4,100,000 IRR). The Iranian commercial bank will transfer the money to the Rial account established in CBI. Then, CBI shall, virtually, credit BOK’s Especial Account 1,000 EUR and systematically send a financial message to BOK. Then, BOK shall debit CBI’s Especial Account 1,000 EUR and debit the home-currency account (Won Account) equal to 1,000 EUR (i.e. 1 EUR = 1,200 KRW, therefore, BOK will transfer 1,200,000 KRW to Korean commercial bank). Finally, the Korean commercial bank will transfer the money to the Korean exporters’ account. For exporting Iranian products, the operation would be done vice-versa up to the ceiling.
BPA has a ceiling determined by the bilateral trade. Least amount in bilateral trade between Iran and South Korea is 3.7 (South Korea’s export to Iran was 3.7 billion USD, and Iran’s export to South Korea was 4.5 billion USD). It is proposed that the ceiling in the first year of a BPA, between the two countries, would be 500 million USD. It means that the BPA will be balanced, and there is no need of cash settlement at the end of the agreement.
*Abdolazim Mola'ee has a PhD is economics.
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