Saarc Common Currency

Introduction

The possibility of a common currency depends upon several economic factors like regional

volume of trade, labor and capital mobility, interest rates movements, exchange rate trends,

etc. It is considered that if countries of a specific region have similar trends or shocks in

relevant economic factors then adopting a common currency will be successful. Apparently

the SAARC region has reasonably similar efficiencies of labor and capital factors, therefore a

common currency for this bloc is a possibility. This report intends to determine the

likelihood of a monetary union for the SAARC economic bloc.

History of SAARC

The South Asian Association for Regional Cooperation (SAARC) comprises seven countries of

South Asia - Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. The idea of

regional cooperation in South Asia was first rooted around November 1980. After

consultations, the foreign secretaries of the seven countries met for the first time in

Colombo in April 1981. This was followed by a meeting of the Committee of the Whole,

which identified five broad areas for regional cooperation.

The foreign ministers of South Asia, at their first meeting in New Delhi in August

1983, adopted the Declaration on South Asian Regional Cooperation (SARC) and formally

launched the Integrated Program of Action (IPA) initially in five agreed areas of cooperation-

agriculture, rural development, telecommunications, meteorology, and, health and

population activities. The heads of state or government at their first SAARC Summit held in

Dhaka on 7th and 8th December 1985 adopted the Charter formally establishing the South

Asian Association for Regional Cooperation. There are some institutional setup in SAARC

countries

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Summit –

The highest authority of the Association rests with the heads of state or government, who

meet annually at the Summit level. To date, eleven meetings of the heads of state or

government have been held respectively in Dhaka (1985), Bangalore (1986), Kathmandu

(1987), Islamabad (1988), Male (1990), Colombo (1991), Dhaka (1993), New Delhi (1995),

Male (1997), Colombo (1998), and Kathmandu (2002). The Twelfth SAARC Summit is

scheduled to be held in Pakistan.

Council of Ministers –

Comprising the foreign ministers of member states, the Council is responsible for

formulating policies, reviewing progress, deciding on new areas of cooperation, establishing

additional mechanisms as deemed necessary, and, deciding on matters of general interest

to the Association. The Council is expected to meet twice a year and may also meet in

extraordinary session by agreement of member states. It has held twenty-two regular

sessions.

Standing Committee –

The Standing Committee comprising the foreign secretaries of member states is entrusted

with the task of overall monitoring and coordination of programs. The Committee has held

twenty-seven regular sessions and three special sessions, the latest in Colombo in August

2001. The twentyeight session of the Committee will be held in Kathmandu.

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Committee on Economic Cooperation –

In July 1991, the Council of Ministers at their Ninth session in Male established the

Committee on Economic Cooperation (CEC) comprising Commerce/Trade secretaries of the

SAARC member states. The function of the CEC was to formulate and oversee

implementation of specific programs within the SAARC framework to strengthen intra-

regional cooperation in economic relations. So far, the CEC has held ten meetings.

Meetings of Commerce Ministers –

The first meeting of SAARC Commerce ministers was held in New Delhi in January 1996.

Since then, two more meetings of Commerce ministers have been held which focused on

enlarging the scope and coverage of regional economic cooperation. Meetings of Commerce

ministers have also taken place on WTO issues.

SAARC Preferential Trading Arrangement (SAPTA) –

The Tenth Summit in Colombo approved the formulation on an institutional framework for

trade liberalization in SAARC through SAPTA. IN 1993, the framework agreement on SAPTA

was finalized and signed at the Seventh Summit at Dhaka. It entered into force in 1993. So

far three rounds of trade negotiations have been concluded under SAPTA covering over

5000 commodities.

South Asian Free Trade Area (SAFTA) –

The Tenth Summit in Colombo in 1998 decided on the setting up of a Committee of Experts

which would draft a comprehensive treaty regime for creating a free trade area within the

region. The Committee has been set up and a draft prepared by the Secretariat is under

consideration.

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Common Currency

Common currency means that individual countries do not have their own currency, and

whole task of currency creation and monetary policy is agreed at a regional level with

agreements on national component of currency and money creation. Interest rate and

exchange rate policies are also centralized. That system requires surrender of monetary

sovereignty associated with currency creation and monetary expansion.

Steps Needed to Introduce a Common Currency

Economic cooperation is an integrated process. To achieve economic integration such as

introduction of common currency, a certain level of integration is necessary. Otherwise it

will never be possible to introduce a common currency in any such region. Before economic

integration there are three levels of cooperation exists. In the following they are described

in brief:

1. Free trade area:

Free trade area is the least level of integration

In a free trade area, all barriers to the trade of goods and services among member

countries are removed. no discriminatory tariffs, quotas, subsidies or administrative

impediments are allowed to distort trade between members

Each country however is allowed to determine its own trade policies with regard to

non members. Thus for example the tariffs placed on the products of nonmember

countries may vary from member to member.

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2. Customs union:

The customs union is one step further down the road for complete economic

integration.

A customs union eliminates trade barriers between member countries and adopts a

common external trade policy. Establishment of a common external trade policy

necessitates significant administrative machinery to oversee trade relations with,

non members.

3. Common market:

The next level of economic integration is common market.

A common market has no barriers to trade between member countries, includes a

common external trade policy, and allows factors of production to move freely

between members.

Labor and capital are free to move because there are no restrictions on immigration,

emigration, or cross border flows of capital between member countries.

Establishing a common market demands a significant degree of harmony and

cooperation on fiscal, monetary and employment policies.

4. Economic union

Economic union is the level of integration that we are seeking in this report in South

Asia. Like the common market, an economic union involves the free trade flow of

products and factors of production between member countries and the adaptation

of a common external trade policy but it also requires a common currency,

harmonization of members' tax rates and a common monetary and fiscal policy. Such

a high degree of integration demands a coordinating bureaucracy and the sacrifice of

significant amount of national sovereignty to that bureaucracy.For Example:

European Union is an economic union

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Rationale behind Common Currency

In this report we are trying to develop a hypothesis. This hypothesis we are callings the

rationale behind economic cooperation that is introducing a common currency. The

introduction of common currency will be beneficial up to highest point if there is

interdependency between the member countries that are going for a common currency. For

example the inter trade among the European Union countries was a significant amount. For

this reason the transaction cost of converting currencies was huge. Since they were heavily

independent and the inter trade cost them a lot, they went for introducing a common

currency. So if we can show that there is great deal of interdependence among the South

Asian countries then, it can be viable basis for introducing a common currency. In the

following, a statistics is given in percentage terms of inter trade among the South Asian

nations. In the following statistics India is considered to be the base country. Then we have

tried to compare that how much each of the other six countries is dependent on India in

terms of Trade.

The above table shows the percentage figures of inter regional export of South Asia. The

blank space indicates either insignificant export or no export relationship with ''the

countries. From the table it is evident that 35.55% of Bhutan's total export is to India.

Similarly Nepal exports 54.4% of its total export to India. Sri Lanka on the other hand

exports only 7.2% to India. Maldives export 13.4% of its total export to Sri Lanka.

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Bangladesh and Pakistan have no significant export trade relationship with any of the South

Asian countries.

The above table shows inter regional import trade relationship. From the table it is evident

that except Pakistan, all the countries have import relationship with India and they are quite

significant. Bangladesh imports 14.70% of its total import from India and in fact India is the

highest import partner of Bangladesh. Same thing goes for most of the countries.

So from the above two tables it is evident that though all the countries are not that much

dependent to each other in terms of export, they are very much dependent on India terms

of import. Since these countries are importing significant amount from India, it involves a

transaction cost during currency conversion. So if a common currency can be introduced

then, this transaction cost of currency convertibility can be eliminated and all the member

countries will be benefited.

Comparative Analysis of Economic Indicators:

This section provides key macroeconomic facts about the SA region, including the exchange

arrangements, trading patterns of member countries and their growth and inflation

performance in recent years. The economic analysis is limited to the seven original member

countries of SAARC; Afghanistan is excluded due to its recent membership into SAARC.

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The SAARC member states not only have a legacy of political conflicts and tensions but also

differ greatly in land area, size of the economy and population (Table above). The shared

features of their economies arise from underdevelopment. None of the countries have been

able to move up to the status of a middle income country, though the region as a whole

experienced relatively rapid growth in recent years, facilitated by reforms to the restrictive

trade and investment regimes of the past. Financial sector reforms have lagged trade policy

reforms and the financial architecture in the region is still quite underdeveloped; this is the

case even in India, despite its active equity markets and some limited progress in developing

bond markets. There is no regional bond market. Domestic financial markets (to varying

degrees) have been progressively opened up to integration with international markets and

current account convertibility (IMF Article VIII) was agreed to by the five larger countries

(Bangladesh, India, Nepal, Pakistan, Sri Lanka) in 1994 but none of the countries have yet

permitted free capital mobility.

In economic terms, India, the largest member state of SAARC, dominates the region.

Compared with Maldives, the smallest member, it is over ten thousand times larger in land

area, over three thousand times bigger in population and has an economy which is a

thousand times larger. This economic and demographic dominance of India and its strained

3 Bhutan is also excluded in some cases due to data unavailability.

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These summary statistics of inflation and output growth for SAARC member countries

suggest some broad similarities as well as some important differences. Inflation was in the

6–8% band for Bangladesh, Bhutan, India, Nepal and Pakistan, but Sri Lanka had much

higher (10.3%) inflation while Maldives (3.8%) had significantly lower inflation. The real

output growth suggests some broad similarities, with average growth higher than 6% being

recorded by Bhutan, India and Maldives. However, these are period averages and can mask

changing trends. In fact, inspection of the time trends of inflation and real growth rates

indicate significant differences. No wonder, India has the highest GDP among the SAARC

countries, as it possesses the largest population as well as largest' country size and

resources. The GDP growth rate of the seven SAARC countries during the period 1995 - 2007

lacks steadiness. Although, India and Bhutan show a stable growth rate in GDP, other

countries suffer from significant fluctuations. Specially, Nepal and Sri Lanka had an

experience' of negative growth rate and Pakistan had its least growth of 1.0% in 1997 from

4.8% in 1996.Despite major steps towards trade liberalization in recent years by member

countries, intra-SAARC trade is relatively small. Intra-SAARC trade has increased slightly

from 3.8% in 2000 to 4.1% in 2004, involving mainly primary products (RIS, 2002). Trade

with countries outside the region (i.e., regional trade openness) which was 25% of regional

GDP in 2000 had grown by 2004 to 28% of regional GDP.

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It is important to note that because the Indian economy massively dominates the regional

economy by virtue of its size, intraregional trade is bound to be a small figure when

computed as a proportion of the region’s total international trade. India’s trade with its

neighboring small economies is a relatively small part of its global trade. India’s exports to

the region have stagnated at around 5% of its total exports while its imports comprise a tiny

1% of its total imports. But the picture changes when we look at the importance of India in

the total trade, in particular of imports, of several of these neighboring counties. Trade

(both imports and exports) with India comprises about 60% of the total trade of Nepal,

whose landlocked economy has become increasingly more integrated with that of India. For

Bhutan the figure is almost certainly higher, though accurate data are not available. India is

the source of nearly a fifth of all of Sri Lanka’s imports. It is the source of over 15% of

Bangladesh’s imports and 10% of Maldives’ imports. As the Indian economy started to grow

rapidly in the 1990s, it has also started to become a major source of imports for its smaller

neighbours. India’s growth also started to spur substantial outward FDI from India into

neighbouring countries and increased the attraction of India as a destination for (both legal

and illegal) labour migration from neighbouring countries such as Nepal and Bangladesh.

India has also emerged as an exporter of a range of services to its neighbours, including

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health/medical services and education. On the one hand, it is quite clear that intraregional

trade (in both goods and services) is inhibited by many policy-imposed restrictions, though

all South Asian countries have enjoyed greater access to each other’s markets in recent

years. This is because trade restrictions throughout the region have come down as a result

of unilateral trade liberalization undertaken by member countries, rather than due to trade

preferences granted as part of regional agreements. Indeed, despite lofty statements about

a free trade area, actual trade preferences granted to members through the preferential

trading arrangements (SAPTA and SAFTA) is very limited.

At the end, by observing all the relevant economical features of the seven SAARC counties,

we can come to a conclusion that these countries lack homogeneity. They differ from each

other at a large scale in terms of inflation rate, GDP growth rate and trade balance .

Discussion In Light of European Union & Euro

Political and economical factors are the stimulus for pushing countries towards regional

integration. European Union is the precise example in this case. The European Monetary

System (EMS) was created on account of a Resolution of the European Council on the 5th of

December 1978. It entered into force on the 13th of March 1979, according to an

agreement celebrated the same day between the central banks of the countries that formed

part of the Community. It had 3 fundamental objectives:

to stabilize the exchange rates in order to rectify the existing instability,

to reduce inflation and

to prepare European monetary unification through cooperation.

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The three basic elements of this System are:

The ECU: it referred to a composed currency (or currency basket), formed by

given percentages of each one of the participating currencies, established in

function to the contribution of the respective countries to the GNP of the

Community and to the communities inter-exchanges. The value of the basket

was calculated by multiplying the weight attributed to each currency by its

exchange rate with respect to the ECU.It is a currency that was used to

specify the community budget, however it was not legal tender. It served as a

means of payment and reservation at the central banks.

An exchange rate and intervention mechanism (ERM): It is the basis of the

EMS. The ERM established, for each one of the communities currencies, a

central type of change to the ECU (central pivot), and some central exchange

rates or fixed parities for each currency with respect to the remainder (lateral

pivots). With this gridiron of parities, formed by all the bilateral exchange

rates, the different exchange rates of the participating currencies had to

stabilize. In this way, the central banks were committed to intervening in

order to attempt to maintain their currencies always within an established

fluctuation margin.

European Monetary Cooperation Fund (EMCF): created in October 1972 and

whose principal functions were:

to facilitate interventions in the currency markets,

to effect liquidations between the central banks and

to manage the short-term credit facilities associated with the EMS.

By looking Europian monetary system, SAARC may wish to consider a regional

currency unit, perhaps to be called “South Asian Currency Unit” (SACU). One of the

major components of doing such a monetary system is to create a regional fund

mechanism. It facilitates increased monetary cooperation and finance costly short-

term adjustments resulting from balance of payment disequilibrium.

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A Proposal for a South Asian Monetary System

The fact that in narrow in any sence institutional terms, SAARC may be at a stage of

economic and monetary integration which is not very dissimilar to Europe in the late 1960s

and early 1970s period does not mean that SAARC is in a position to follow the steps that

Europe took towards further integration. As Frankel and Rose (1998) suggest, the criteria for

a common currency can be largely endogenous. If there is a commitment to monetary

integration, that itself generates movement towards meeting the criteria for a currency

union. This can also be generalized more broadly for overall economic integration. Growing

regional economic integration and political commitment to that goal generates conditions

for both greater monetary coordination and broader economic integration. In the same

way, enhancing regional monetary integration may facilitate greater trade and payments

between member states and accelerate the process of economic integration. It is in this

spirit that we should interpret the suggestion by the SAARC GEP to establish a “single

monetary system” (SAARC, 1997/1998, p. 21) as a step for a common currency. Maskay

(2003) has attempted to link both processes together (e.g., economic and monetary

integration) by suggesting that “the present process [for monetary cooperation] must be

structured so as to be harmonized with the level of regional South Asian economic

integration”.

We believe that the current situation of volatility in global financial markets and pressures

on payments systems and capital flows may help prepare the ground establishing a South

Asian Monetary System (SAMS) to enhance the level of monetary cooperation in the region.

The essential step for establishing a SAMS would be for a political decision, perhaps at the

summit level, which would lead to recommendations along the lines of the 1970 Werner

Report. Such a decision would enhance its sustainability and signal the commitment by the

member states to achieve greater monetary and economic integration. It is important to

note that all SAARC countries also have a similar stance on both the current and the capital

account — the former is largely liberalized (with the exception of Bhutan and Maldives) with

the later being only partly liberalized, mainly for FDI flows. In this situation, SAMS can draw

some useful lessons from how the EMS was structured in developing a system appropriate

to the admittedly quite different circumstances in the SAARC region. Recall that, in the EMS

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there were three essential elements, namely: (1) the Exchange Rate and Intervention

Mechanism (ERM); (2) the European Currency Unit (ECU); and (3) the European Monetary

Cooperation Fund (EMCF). A brief outline of the EMS is provided in Box 1. The

SAARCFINANCE network can provide a useful framework and mechanism which can evolve

from a forum for discussions on cooperation on certain monetary policy issues to one that

can implement joint policy actions when appropriate.25 In other words, the network can

provide the foundation for developing a mechanism such as the ERM in the EMS if

integration continues to proceed and political commitment deepens. As economic

integration and policy collaboration becomes stronger, SAARC may wish to consider a

regional currency unit, perhaps to be called the “South Asian Currency Unit” (SACU).

Political constraints clearly preclude the use of the Indian currency as the anchor currency

for a South Asian currency unit. But there are other options, such as the use of another

currency (or a basket of currencies) to serve as an anchor currency, that may be more

politically palatable.

The major absent component is a regional fund, like the EMCF, to facilitate increased

monetary cooperation and finance costly short-term adjustments resulting from balance of

payment disequilibria. Again, such a regional funding mechanism was identified in the 13th

Summit Declaration for a SAARC Development Fund (SDF; 2005, para 11), although limited

to SAARC-related projects and programmes. While SAARC Development Fund may not be

appropriate for this activity, it is not hard to visualize that a similar type of institution — a

South Asian Cooperation Fund (SACF) — can be established to finance adjustment to BOP.

This was partly concretized in the last Summit when “the SAARC Finance Ministers

[finalized] the framework on financial issues in the region” (SAARC, 2007, para 17). In this

context, SAARC may wish to look at the progress made by countries in the Chiang Mai

Initiative and explore whether they can establish some links with the richer East Asian

countries such as China and Japan.

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Advantage of Common currency

** Reduction in transaction costs across the frontiers. In fact, conversion of one currency to

another involves costs that increase the production and distribution costs.

** Facilitating the movement of scientific and technical manpower among member nations,

as conversion losses will be neutralized.

** As the conversion costs are eliminated, a common currency could play a major role in

reducing informal trade. If free trade is permitted in the region, much of this informal trade

could be translated into formal trade that, in turn, could earn valuable revenue for the

governments.

** Pre-empting a South Asian Central Bank, this will facilitate further economic integration.

Disadvantage of Common currency & Impediments to Economic

Union

Regional monetary policy

The biggest disadvantage of economic integration is that there has to be a regional

central bank and that bank will be the sole authority in making regional monetary

policies. Like the European Central Bank, a similar South Asian Central Bank has to be

created in order to supervise the common currency. Now this means individual

countries cannot make their own monetary policies. This is where the problem begins.

The considerations, of sovereignty have traditionally weighed heavily on South-Asian

Countries. They have been averse to surrendering their decision-making powers on a

wide range of issues.

Slow collective decision-making

Collective decision- making is a slow affair in the SAARC network. Even matters of vital

importance lie in balance for decades without any decision being made. The issues of the

creation of SAPTA and SAFTA are good instances. The creation of both would have enabled

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all countries of the region derive vital producer and consumer surpluses. But decisions on

this issue have been notoriously slow.

Peculiar geographic region

Another awkward block is the peculiar geography of the region. India is bigger than all

the other countries of the region put together. This has driven the smaller countries to

believe that India is the 'dominant big brother'. Consequently, any meaningful effort on

India's part is looked upon with suspicion.

Lacks in homogeneity

This region also lacks in homogeneity in terms of economic variables like inflation, GDP

growth rate and some other. This lacking in homogeneity is a big impediment in

introducing common currency. South Asia is also weighed down by its weak economic

fundamentals. For the creation of the monetary union, controlling inflation within a

fixed range is a pre-requisite. But in the South-Asian region, different countries are at

different levels of economic development.

Present Political Problems in South Asia

Intra-state conflicts

There is no single factor as main cause of conflict in South Asia. It involves many issues

and provides a disappointing picture in every social, economic and political context. This

is due to the fact that South Asia is almost perpetually burdened by various inter and

intra-state conflicts and crisis stemming from the careless approach of the ruling forces

toward resolution of such problems which are based on narrow considerations of caste,

religion, ethnicity, language, community, and the like. This distorts the, national integrity

and the overall law and order situation of the affected states.

Furthermore, South Asia is an area of tremendous political complexities. States: like

Pakistan have been largely ruled by authoritarian military rulers. India, as such faces

several unresolved issues that stem from internal as well as external sources. These

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include ethnicity, border disputes, separatist demands, terrorism and subversive

activities, communalism, religious problems and so on.

In Nepal, for example, the series of democratically elected government failed to produce

any better result than the old royal regime due to widespread corruption and crisis of

good governance. The political fundamentalists such as Maoists and mainstream

political parties are posing major threat to democracy in Nepal . In addition to creating

law and order problems, increased human rights violations and a heavy reliance on

security forces have undermined the question of legitimacy of governance in Nepal.

Moreover,the problem of civil violence in recent years has emerged as a more serious

security issue than the problem of inter-state warfare in South Asia. India has been

variously preoccupied with separatists and religious conflicts such as in the state of

Punjab and Kashmir, an issue that remains controversial between India and Pakistan.

Alsoilthe conflict with separatists of Mizoram, Assam, and Nagaland (Eastern India) for

autonomy and in Gujrat, Mumbai and other parts have certain religious, ethnic,

psychological and economic underpinnings.

Sri Lanka has also had its own set of problems. Democracy in this tiny island-nation

remains overshadowed by the civil war originating from Tamil-Singhalese ethnic

conflicts. These conflicts in Sri Lanka have pushed successive governments on the edge

of collapse. Ruling parties in Sri Lanka failed to reform economic policies due to

polarized political debate. In Pakistan, the society faces periodic bursts of violence

derived from ethnic, sectarian and religious differences in its diverse community. For

instance, conflict in the Sindh province between ethnic Sindhis and those residents who

migrated from India following partition has made the province, especially its capital

Karachi, ungovernable. Conservative religious elements are also very powerful in

Pakistan leading to tensions and conflicts over religious differences, which has also

played a major role in sustaining the Indo-Pakistan disagreement over Kashmir. Religious

fundamentalism is also evident in Bangladeshi society manifesting itself in attacks on

cultural groups, judges, prominent non-governmental organizations. Recent series of

bomb blasts in Bangladesh are the evidence of fundamentalism which terrorized the

whole nation.

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Inter-state conflicts

South Asia is one of the critical regions with complex security in the world primarily due

to the fact that most of the South Asian states are engulfed with varying degrees of

conflicts and disputes. Inter-state conflicts in South Asia probably are highest compared

to any other regional blocs. Bilateral relations are defined by hostility and mistrust. The

differences between India and Pakistan over Kashmir, between Sri Lanka and India; over

the nationality of Tamilian, where Sri Lanka accused India, especially state government

of Tamil Nadu for supplying arms and providing trainings to the Tamil terrorists in its

Southern areas are only two of the most outstanding examples in this regard. Dispute

exists between India and Bangladesh over illegal migration from the Chittagong Hill

Tracts (CHT) and the demarcation of boundaries involving fertile islands and enclaves

and also in sharing the water of river Ganges. Recently when a series of bomb blasts

occurred in Mumbai, India directly accused Pakistan and Bangladesh for facilitating; the

attack.

The most pronounced security dilemma, however, stems from escalating arms race in

South Asia, particularly between the two military powers - India and Pakistan. These

disputes among countries further complicate the scenario and have created a lot of

problems among the leaders for friendly talks.

Similarly the cultural diversity based in languages, religions and ethnicities is another

factor that disables the region to unite. Rather it frequently exerts a negative impact on

inter-sate relations in South Asia due to religious differences. Countries with widely

differing political systems, democracies, military dictatorships and monarchies,

characterize the area. Though most of the South Asian states have emerged with shared

colonial pasts, similar political experiences, common social values divergences, however,

are still significant. India and Sri Lanka are said to have performed better than other

functioning democracies with varying degrees of success. Pakistan and Bangladesh at

the beginning of the 1990s witnessed a sweeping democratic transition in their domestic

scenarios. Nepal's transition to democracy is at the crossroad following the Maoist

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movement. Bhutan retains the authority of monarch as the dominant institution while

the Maldives has yet to experience multiparty political systems.

The troubles in South Asia, its widespread tensions, mutual distrust and occasional

hostilities are largely considered products of the contradictions of India's security

perception with that of the rest of the countries of the area. India's neighbors perceive

threats to their security coming primarily from India whereas India considers neighbors

as an integral part of its own security system. The supremacy of India in the South Asian

power configuration given its geography, demography, economics, and ecology is

something about which neither India nor its neighbors can do nothing but accept. But,

the image of India in South Asia is that of a power that demands habitual obedience

from its neighbors. Thus, the main theme of this doctrine is that South Asia is to be

regarded as an Indian backyard. No wonder then, that there has always been certain

psychological doubt on the part of the smaller states about their

Recommendation

The first and immediate step that can be taken is to introduce a parallel currency and

utilize that instrument effectively to promote regional cooperation in trade and

investment, which can eventually prepare the ground for a common currency.

The parallel currency will be fully convertible into any international currency and will be

fully backed by reserve fund. It will be legal tender for cross country transactions within

South Asia and will be increasingly used as unit of account for trade and investment

transactions within the region. The issue of stability of the parallel currency will of

course be important. However, it should be noted that relative values of currencies in

South Asia in the last ten years have been more stable than those between the three

major world currencies, US$, Euro and Yen which dominate the SDR.

South Asian countries can create a pool of foreign exchange reserves in an institution.

Backed with these reserves, the parallel currency, equivalent of a multiple of basic

reserves, can be created to be used for giving loans or buying bonds issued by South

Asian governments or corporations as appropriate. The lending rates on these loans will

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be higher than the interest paid on reserves which will be higher than what most

reserves banks in the region are getting today from their dollar reserves. As the parallel

currency gets accepted the reserve fund can earn profits, which will be distributed

among members as grants for development purposes. The principle of creation and

utilization of SDRs1 for development purposes has been advocated by a long line of

economists.

Provision of regional public goods and concessionary assistance for the lagging regions

will help to build confidence in the region and facilitate bolder programmers such as

open borders, labor mobility and common currency. The manner in which the bigger

countries in Europe won the confidence of the smaller countries and helped to

accelerate development of lagging will be a model for South Asia to learn from. The

steps involved in the proposed process are: (a) creation of a parallel currency and

associated agreements for its stability, (b) setting up of a reserve fund, (c) funding of

regional public goods to promote trade and investment, (d) special and differential

treatment of lagging parts of the region to help the convergence process in the region,

and (e) building of mutual trust and confidence among the partners in the region. These

steps will create conditions, which are usually necessary for a common currency area.

SAARC Summit could take steps to set up a Working Group comprising of Central Bank

Governors to evaluate; the feasibility of the proposal and take it forward.

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CONCLUSION

The formation of SAARC was a landmark step taken by the leaders of the region. The

main rational behind was to develop a friendly environment through summit diplomacy

where all nations could interact peacefully with each other, cultivate sustainable peace

and promote mutual economic well being by harnessing available resources in the

region through the process of economic integration. Nevertheless, after 20 years' of

establishment, neither South Asian nations have been able to push the process of

integration into full swing nor the organization itself has become viable that could

promote peace and harmony or prevent conflicts in the region. South Asia has emerged

as a regional entity in the international political system with the creation of SAARC but it

failed to strengthen regional cohesiveness. Regional cooperation in South Asia cannot be

said to have evolved into a complete bloc in terms of regionalism and economic

integration due mainly to the prevalence of conflict over the desire of peace and

stability. Hence right at this moment, SAARC countries have to improve their

relationships and attitudes towards each other and they need to take initiatives to

eliminate the existing conflicts among them. In order to introduce a common currency in

the region, economical homogeneity is the prime factor, which has some deficiencies in

the SAARC countries. Any move towards introducing a common currency for SAARC

countries in recent time will not be viable unless a good neighborly relationship and

economic homogeneity in the region are achieved.

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References

The Convergence Criteria And The Saarc Common Currency - FAROOQ RASHEED,

EATZAZ AHMED - College of Management Sciences PAF-Karachi Institute of Economics

and Technology.

Can South Asia Adopt A Common Currency - Sweta Chaman Saxena, University of

Pittsburgh

Prospects And Possibilities Of Introducing A Common Currency In Saarc Countries- Anup

Chowdhury, Suman Paul Chowdhury and Shamim Ehsanul Haque, BRAC Business

School, Brac University

Enhancing Economic Integration In South Asia - SISIRA JAYASURIYA, Professor of

Economics, La Trobe University, Melbourne, Australia & NEPHIL MATANGI

MASKAY Director, Nepal Rastra Bank, Nepal

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