local currencies in trade | benefits of replacing the dollar

Tanzania and India have agreed to trade in local currencies weaning off the use of the US dollar.
There are advantages of using local currencies in trade versus the traditional dollar.
Tanzania and India have also agreed on military, maritime, and space technology cooperation.

India’s Ministry of Foreign Affairs Secretary Dammu Ravi has met with Tanzania’s President Samia Suluhu Hassan with reports emerging that the two leaders have among other things, agreed to trade in Rupees, the sub continent’s local currency.

The decision implies that the two countries, with long-running business ties, will effectively wean off using the king dollar as their ‘gold standard’, instead embracing the Indian Rupee as their common currency in exchange for value.

“When international transactions are denominated in local currencies, countries can avoid currency fluctuations and the associated risks. This stability helps to mitigate exchange rate volatility, reducing uncertainty and facilitating more accurate planning for businesses,” explains UMB, a financial analyst firm.

For many years, the US dollar (USD) or king dollar has been the world’s dominant currency, leading many American businesses to assume that all foreign trade partners prefer to do business in USD, the analyst explains.

“It is also assumed that this payment method (the dollar) is the easiest because the foreign exchange process is time-consuming and complex. Yet, advances in technology make payments in local currencies just as easy as paying in USD.”

Also, using local currency can provide multiple benefits when engaging in, or advising clients on, international trade, business, or realty.

As such, Tanzania and India note that; “The Reserve Bank of India has cleared the way for trade using local currencies, that is, Indian rupee and the Tanzanian Shilling by allowing the authorized banks in India to open Special Rupee Vostro Accounts of correspondent banks of Tanzania and that transactions using this mechanism have already materialized.”

The decision has now come into play but was originally tabled at the end of the year when Tanzania’s President Samia visited India on a four-day state tour. President Samia’s visit to India was at the invitation of her Indian counterpart Droupadi Murmu.

President Samia has reinforced the decision following further talks with Indian Prime Minister Narendra Modi in January. That meeting resulted in the signing of several Memorandum of Understanding poised to enhance trade and investments.

India’s Prime Minister Modi described the meeting as “excellent and successful”. The two countries reviewed what their joint statement defined as “the full range of India-Tanzania relations.”

Four advantages of trading in local currencies

Better exchange rates

Leveraging an existing relationship with a local bank can help businesses and clients receive preferential rates, which puts them in control of the conversion process. By dealing in local currencies, instead of sending in USD, unfavorable “surprise” exchange rates often offered by foreign banks can be avoided.

In addition, by pricing in local currency terms, the decision on whether or not to actively manage exchange rate risk can be made internally.

Some companies may hedge specific transactions while others take a more generic approach. An example of the latter would be to lock in exchange rates for a percentage of anticipated transactions every quarter.

2. Pricing discounts

Importers who pay for goods in the local currency may benefit from suppliers who offer a lower price on the goods purchased. When importers remove the exchange rate risks associated with converting USD to the local currency, suppliers are more likely to offer customers a 1 per cent to 5 per cent discount on the transaction.

For example, a discount of only 1 per cent can save an importer $10,000 for every $1 million paid to suppliers.

3. Brand loyalty

While often overlooked because it’s difficult to quantify, brand loyalty—and its repeat purchases—can be earned by saving foreign trade partners the hassle and risks of currency conversion.

This benefit is particularly important for exporters whose products are commoditized.

In this scenario, the pre-determined exchange rate allows international buyers to know the exact cost of what they’re purchasing and the profit margin to be made on each sale, time and time again. It eliminates surprise costs which can be a leading cause of failed business relationships.

When importers take ownership of the exchange rate process, foreign suppliers sometimes extend the payment period for the goods purchased. This prolonged timeframe gives importers more time to recoup investments and conserve cash before paying the supplier.

In a highly competitive environment, importers and exporters should not overlook the positivity and brand dedication that can be earned by simplifying the financial component of a business relationship.

4. Speed of payment

Exporters may be paid sooner when they submit invoices in the importer’s local currency than invoicing in USD. This is because the importer’s local bank, and other potential intermediaries, do not need to be involved in the currency exchange process.

Reducing the number of parties involved makes the financial transaction more likely to be settled faster.

The same rationale applies to having a multi-currency account in your customer’s country. The payment process is expedited by eliminating the currency exchange process and depositing money directly into your foreign account.

Source: UMB blog

Tanzania-India local currency used to boost trade

“India and Tanzania have agreed to work on increasing trade in local currencies and expand defense co-operation through a five-year roadmap with New Delhi also offering collaboration in areas of space technologies and digital public infrastructure,” Prime Minister Narendra Modi and President Samia Hassan’s joint statement notes.

President Samia and Modi also agreed on improving their Indo-Tanzania relationship to the strategic partnership level. “Tanzania is the biggest and the closest partner of India in Africa,” Prime Minister Modi said.

The statement said both countries have agreed that the strategic partnership will help them work together on maritime security, defense cooperation, development partnership, trade, and investment, among others.

The two leaders reviewed and expressed satisfaction with the second Joint Defence Co-operation Committee meeting held in Arusha, Tanzania. The June meeting resulted in a five-year roadmap for defense cooperation between the two countries.

Further, the two sides agreed on new dimensions in military training, maritime cooperation, capacity building, and development of their defense industry.

Additionally, India has agreed to extend the collaboration with Tanzania into space technologies and digital public infrastructure. This alliance will be led by India Stack and will include the Unified Payments Interface (UPI) and Digital Unique Identity (Aadhar).

Prime Minister Modi also expressed his enthusiasm at Tanzania’s decision to join the Global Biofuels Alliance launched by India at the G20 Summit last month.

Tanzania is India’s third-largest trade partner in Africa, and their bilateral trade is experiencing exponential growth. The projected trade volume between Tanzania and India will hit US$6.5 billion dollars in 2023/24, up from US$4.5 billion in 2022/2023.

During celebrations of India’s 75th anniversary of independence, the Indian High Commissioner to Tanzania, Mr. Manoj Verma, emphasized trade growth between the two sides.

“There have been significant achievements in the India-Tanzania bilateral relationship. Our bilateral relations were upgraded to a strategic partnership during President Samia Suluhu Hassan’s state visit to India.”

Mr Verma also announced India’s plans to establish an Industrial Park in Tanzania; “As we enter 2024, we take immense pride in our achievements during 2023 and the progress made in our bilateral relations. In the coming years, we are committed to working together to strengthen India-Tanzania relations further,” he affirmed.

To strengthen their relations further, India’s 75th anniversary of independence included the official inauguration of the India-Tanzania Friendship Exhibition. The well-visited exhibition is held at the National Museum of Tanzania and was inaugurated by Tanzania’s Minister for Tourism and Natural Resources, Ms Angellah Kairuki.

India-Tanzania trade growth trend

In 2021, India exported goods worth $1.63 billion to Tanzania. The main products that India exported to Tanzania include refined petroleum ($342 million), packaged medicaments ($227 million), and motorcycles and cycles ($43.8 million).

During the last 26 years, India’s exports to Tanzania have increased at an annualized rate of 10.8%, from $114 million in 1995 to $1.63 billion in 2021.

On the other hand, Tanzania exported $1.86 billion to India, with the main products that Tanzania exported to India being raw copper ($757 million), gold ($518 million), and dried legumes ($257 million).

During the last 26 years, Tanzania’s exports to India have increased at an annualized rate of 12.3%, from $92.1 million in 1995 to $1.86 billion in 2021.