Facilitating Intra-OIC trade through T-SDRs: A catalyst for SMEs development in the OIC region

Facilitating Intra-OIC trade through T-SDRs: A catalyst for SMEs development in the OIC region

ADFIMI-SME Bank

International Development Forum 2014 20 – 21 October 2014

Kuala Lumpur - Malaysia

Mahmoud Sami Nabi Tunisia Polytechnic School, IRTI-IDB & ERF

Any views expressed in this presentation do not necessarily represent those of TPS, IRTI- IDB and ERF.

In plenary Session 4 :

OUTLINE

1) Need for trade finance regional mechanism

2) Islamic Dinar as settlement currency for intra-OIC trade

3) T-SDR and intra-OIC trade payment system

4) Way forward

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• The 5th OIC Consultative Group Meeting on enhancing intra-OIC trade recommended the establishment of Trade Finance Support Schemes, as one of the driving factors, to accelerate the dynamic of the intra-OIC trade.

Intra-OIC trade and other intra-regional trade (2009)

Source: KOÇ (2011), "Cooperation in the Area of Trade", COMCEC Concept Paper

1) Need for trade finance regional mechanism

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• Access to trade finance is the second most problematic factor for exporting :

Source : The Global Enabling Trade Report 2012

1) Need for trade finance regional mechanism

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1) Need for trade finance regional mechanism Results of the questionnaire about the constraints on intra- OIC trade

and way forward according to the participants to the "OIC High Level Forum on Trade Facilitation“ ? – Morocco, February, 2013. (Nabi, M.S. and Chachi, A. mimeo, IRTI-IDB, 2013)

17 countries 22 respondents

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1) Need for trade finance regional mechanism

Source: Nabi, M.S. and Chachi, A. mimeo, IRTI-IDB, 2013.

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1) Need for trade finance regional mechanism

• Access to credit is one of the main factors in explaining SMEs’ export performance (Source:

Jinjarak, Y. et al (2014) "Does Finance Really Matter for the Participation of SMEs in International Trade? Evidence from 8,080 East Asian Firms," ADBI Working Paper Series)

• Ata et al (2013) : “Asia’s economic miracle is often associated with large, multi-national companies. While these organizations are important drivers of the region’s growth, SMEs have played a key role. However, unlike larger companies SMEs struggle with finance as a limiting factor rather than a lever for value generation”

Proposition of Credit Facilitating Platform (Source: Ata et al (2013), "Financing SME Supply Chains,” Malaysia Institute for

Supply Chain Innovation)

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1) Need for trade finance regional mechanism

• The increase of the intra-regional is associated with a growing interconnectedness of production processes across the countries : specialization in particular stages of a good’s production “international production networks”/ “global value chains”

• Global supply-chain finance : “set of solutions available for financing specific goods and/or products as they move from origin to destination along the supply chain. It is related to a quickly growing use of a battery of technologies and financial business practices that allow for dynamic payables discounting.” (Source: Wikipedia)

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Source: Holt, Rinehart and Winston http://go.hrw.com

• Muslim explorers and traders created a prosperous global economy through a commercial network that stretched from the Atlantic Ocean and the Mediterranean to the Indian Ocean and China Sea.

2) Islamic Dinar as settlement currency for intra-OIC trade

• A monetary system based on a strong, stable and high valued currency (the dinar) was created in the 7th century to facilitate the exchange of goods and production factors.

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• Tun Dr. Mahathir Mohamad (Doha, November 2000 OIC Summit): called on the Islamic world to embrace the use of the Gold Dinar for international trade.

• Tan Sri Nor Mohamed Yakcop (Kuala Lumpur, August, 2002 in a conference “Stable and Just Global Monetary Systems”) : use of gold dinar to settle net trade balances among the participating countries.

• In 2002, researchers from the OIC Countries constituted a Task Force on the Feasibility of Using Islamic Gold Dinar as a Currency for International Trade.

2) Islamic Dinar as settlement currency for intra-OIC trade

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• Lee (2011) ("Gold dinar for the Islamic countries?," Economic Modelling)

shows that the response of the OIC economies to structural shocks are largely asymmetric suggesting that creating a common currency is still an unfeasible target and the author recommends the creation of small currency areas in a first stage.

• Progressively enhancing trade integration is the pre-requisite of any tentative of creating common currency (Frankel and Rose, 1998)

• The subject is continuously discussed: - Noureddine Krichene (2013) “Re-introducing gold: An Islamic finance

approach,“ ISRA International Journal of Islamic Finance, Vol. 5, Issue 2. - Murat Cizakca (2010) "The case against the Islamic gold dinar," MPRA

Paper No. 26645.

2) Islamic Dinar as settlement currency for intra-OIC trade

3) Trade based SDR and intra-OIC trade payment system

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• Conceive a solution - more feasible economically and institutionally- while enabling :

- Saving of foreign exchanges, - Enabling of multilateral payment settlement of trade transactions, - Incentivizing countries to enhance their contribution to the intra- OIC trade.

Mahmoud Sami Nabi - Rami Abdelkafi Imed Drine - Sami Al-Suwailem

3) Trade based SDR and intra-OIC- trade payment system

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• In 2012, the UN considered that issuing new SDRs constitutes one of the solutions for the international community to mobilize additional resources for Development Finance (Source: United Nations World Economic and Social Survey, 2012)

• SDRs are issued and allocated by the IMF to its MC who can exchange them for euros, yen, pounds sterling, or US dollars. They represent also the Unit of account of the IMF. The SDRs are made up of a basket of currencies : U.S. Dollar (44 %), Euro (34 %), Yen (11 %) and Pound (11 %)

• Nabi et al. (2014) suggest the creation of intra-OIC- trade payment system coupled with the issuance of Trade-based Special Drawing Rights (T-SDRs) by a dedicated regional financial institution on a regular frequency and according to a special mechanism.

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Related proposal to facilitate regional trade settlement:

3) Trade based SDR and intra-OIC trade payment system

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How to create the T-SDRs?

• Create the T-SDRs out of “thin air” by a regional institution to

“purchasing power” backed by the volume of intra-trade. The amount of the first general allocation (S) could be 1% of the intra-OIC trade during the previous year:

S = 1% x Value of the intra-OIC trade the year before

• S= ID 4.509 billion (US$ 6.742 billion) for the value of OIC-trade in 2011.

• Issue the T-SDRs each three years with gradually increasing amounts taking in account:

-- the evolution of the OIC-intra trade, -- the degree of utilization of the past allocated T-SDRs.

3) Trade based SDR and intra-OIC trade payment system

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How to value the T-SDR? • Avoid the long process of negotiating the value of T-SDR vis-à-vis the

currencies of the OIC member countries Use the existing value of the SDRs issued by the IMF (also the value of the Islamic Dinar the unit of account of IDB Group) :

3) Trade based SDR and intra-OIC trade payment system

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How to allocate the T-SDRs?

• The rule of allocation of the T-SDRs should be designed in a manner that incentivizes a member country to enhance its trade within the OIC region.

Option 1) Creation of an OIC regional financial institution responsible of the T-SDRs

Allocation Rule

i assigned to country i represents its average

share in the OIC intra-trade during the last three

years

3) Trade based SDR and intra-OIC trade payment system

Illustration of the parameters for some IDB MCs

Source : Author’ calculation based on data from ERPD-IDB

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%

10%

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How to use the T-SDR ?

• In the paper we describe the settlement process of the transactions via an electronic platform hosted by the mandated regional institution, • To benefit from T-SDR payment system, the initiating country pays a commission of 1% of the transaction’s volume in USD : • T-SDR balance : fluctuate between 20% and 150% during the three-year period but each country should end the three-year period with a level equaling the initial allocation. This mechanism brings flexibility and avoids the free-riding problem (chronic trade-balance deficit).

—> 0.6 % : for the reserve account to cover default by the in deficit countries —> 0.1% : to cover the operational costs —> 0.3 % : for the remuneration account (on a monthly basis) countries having accumulated T-SDRs above their initial allocation.

3) Trade based SDR and intra-OIC trade payment system

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• Countries with surplus of T-SDR shall be offered an option to invest their T-SDRs surplus… • Remunerations mechanisms of the T-SDR surplus: a return on a monthly basis calculated proportionally to the remuneration reserve and the surpluses of the other countries,

a return from investment in sovereign Sukuk issued in T-SDR by the in-deficit countries

3) Trade based SDR and intra-OIC trade payment system

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4) Way forward

• Identify pilot countries [at least 3, e.g.: (Algeria, Morocco, Tunisia); (Brunei, Indonesia, Malaysia); (Bangladesh, Pakistan, Saudi Arabia ); (Egypt, Syria, Sudan); (GCC); (Iran, Jordan, Turkey); (Kazakhstan, Kyrgyz Republic, Tajikistan); (Mali, Mauritania, Senegal); (Nigeria, Togo, Uganda) etc…] willing to initiate the project.

• Create/mandate a regional Institution to play the role of issuing the general allocations and Clearing House and holds a T-SDRs account for each participating country.

• Initial three-year stage (launching stage) : the use of the T-SDRs shall be restricted to central banks.

• Second stage : extension to selected large financial institutions.

• Advanced stage : private sectors firms could handle their OIC trade transactions directly in T-SDRs.

• Opening the membership for the OIC countries each three years.

كرا ش

Thank you

[email protected]

[email protected]

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