The economic commission for Asia and far east monetary co operation schemes

S:

f _»

'AFRICAIN MINI

!

Abidjan,

2nd May, 1973

^S0S8

11, um 1973

;.D3/CONFIlIÎJ/73/iP/lIl/5

ENGLISH

Original: ENGLISH Distribution:

RESTRICTED

di

THE ECONOMIC COMMISSION FOR. ASIA AND FAR EAST

MONETARY CO-OPERATION SCHEMES

by

Professor S.Y. LEE

Report presented to the meeting of the

group of experts responsible for

the preparatory studies

Abidjan,

26-28

February, 1973

THE AFRICAN DEVELOPMENT BANK IS NOT 30UND BY THE OPINIONS EXPRESSED IN

THE WORKING PAPERS

* '

r i

,tk.

TH5 ECONOMIC COMMISSION FOR ASTA AMD FAH

HAST

MOHETARY CO-OPEBATIOH SCHEMES

I. HISTORICAL REVIEW

After the first Ministerial Conference on

Asian

Economic Co-operation in

19Ó3, ECAFE has been endeavouring to

implement two

schemes simultaneously, namely, (aN ECAFE trade

liberalisation and expansion scheme,

and (b) ECAFE monetary

co-operation scheme,

which comprises (i) the Asian Reserve Bank

and (ii) the Asian Clearing Union.

The monetary scheme has

been considered ^{as a} financial aspect of

trade expansion,

so

that in I967 a Seminar on Financial

Aspects of Trade Expansion

was convened in which "-a simple clearing

union" and "payments

and reserve arrangements" were proposed.

_l/ Professor Robert

Triffin and Mr. J.R. Gunn presented two papers

and

gave

their

guidance and advice

to the Seminar. %J The idea of ^a payment

union and the need for statistical

analysis have then been further

elaborated by some

economists.j/

\J

See

Report and Recommendations of the Seminar on Financial

Aspects of Trade

Expansion, Regional Economic Co-ooeration

Series N°.6, p. 3-13.

2,/ Professor R,

Triffin, "Payments Arrangements within the ECAFE

Region'

(TRADE/TE/9), and

J.R. Gunn,

"Alternative Payments

Arrangements for the ECAFE Region

(TRADE/TE/1}.

2./

S. Y. Lee,

"Asian Payments Union', (ECAFE/RC/TF/i8), which was

presented as an

agenda in

a

meeting in February, 1970; S.Y. Lee,

"ECAFE Clearing Union" an unpublished ^paper

i>/ritten in April

I97O after the Brussel

Consultation; and Prof. Burnham Camohell,

"Prospect and Implications of Monetary Co-operation in

Southeast Asia. : The Reserve Bank Proposal", a paper

presented

to the SEADAG Regional Development Panel seminar on

"Trade

and Monetary Co-operation in.Southeast

Asia* held in Bangkok

on 20 ^- 22 January, 1972.

In March 197&>--there wan. a meeting of experts in Brussels

such as Professor Triffin, Professor Pierre „Uri, George Sol and

Prok Amranand (called the Brussels

Consultation^,

to consider the strategy of presenting the trade and monetary schemes to ECAFE

countries for implementation. An important document, called

"Considerations and Proposals for Trade and Monetary Co-ooeration

in the ECAFE Region", dated 13 July 1970 was sent out to countries for consideration. This document forms the general framework of the

two schemes. High-level technical missions led by Professor Triffin,

for the monetary scheme and Professor Uri for the trade scheme visited _many ECAFE countries in August and September 1970 to

explain the schemes. There were the Meeting of the Government and Central Bank Officials in November 1970 and the Meeting of the

Council of Ministers on Asian Economic Co-ooeration in Kabul, Afganistan in December 1970.

In pursuance of the Kabul Declaration, the first meeting

of the preparatory committee for the establishment of an Asian Clearing Union was convened in March 1971. A draft agreement was

presented to countries for consideration. The International Monetary

Fund has a comment on the legal aspect.of the draft agreement,i.e.

whether the agreement should be signed as a treaty by the narti- cipating governments or not. It has then been decided that the Union should be established under a simple operational agreement among central banks, and not under a treaty to be signed by

plenipotentiaries. To take a step forx^ard, ECAFE is now holding

the meeting of Senior Government and Central Bank officials for the Establishment of an Asian Clearing Union on 23 ^— 28 February, 1973.

ECAFE had made a feasibility study of the Asian Reserve

3ank.^/

A meeting of the Intergovernmental Committee on Establishment

£/

See "Feasibility Study on the Establishment of an Asian Reserve

Bank", a paper prepared by Professor Burnham Camobell

(TRADE/

TLP/ARB

(l)/l).

of an Asian Reserve Bank was then held ^on 15 ^- August 1972.

Our discussion on the Asian Reserve Bank is centered ^on the report

of that meeting, which is the latest stage

of the implementation»

Theoretical Framework

The theoretical framework of the Asian Reserve Bank and the

Asian Reserve Bank can be said to be related to Keynes' idea of

the International Clearing Union and BANCOR. Kis proposals

5./

presented to the world monetary

conferences in 1943

^>

anfî

were

based

on the principles of using credit

instead of gold and foreign

exchange as the basis of international finance;

of requiring the

creditor countries to extend credit to the debtor countries through

the International Clearing Union, instead_ of letting creditor

countries hold gold and foreign exchange ^{as a} command ^over

resources, which they did not choose to employ for

the time being;

of requiring the creditor countries meeting the debtor

countries

halfway in the matter of international balances

of payments,

instead of compelling the debtor countries to go

the whole

way

to re-adjust their balance of payments position; of creating an international unit of account for international settlements instead

of using any reserve currency, such ^as the U.S. dollar and

pound

sterling; and in short, of having a "built-in" flexibility

in the

international monetary system» Keynes' proposals were not accepted by the world at Bretton Wood in 1944» but it is hoped that his sound principles ^{can now} find expression in the FCAFE region, and that

this

regional monetary co-operation may guide and accelerate worldwide

IMF reforms, on which full agreement is still distant. However, Keynes® International Clearing Union is equivalent to the presently proposed Asian Reserve Bank, whereas, the Asian Clearing Union is

1/

J.M. Keynes, Proposals for An International Clearing Union»

London : H*M.S^»0. 1943 (Cmd 6437)» See particularly Section TV

"Some Advantages of the Plan " pp. 11-13.

only a preliminary

step towards the ideal arrangement for monetary

co-operation.

His international unit of account, BANCOR, is similar

to the "Asian Monetary Unit" in the

proposed Asian Reserve Ban!-.

T'7hen countries endeavour to liberalise-

trade by reducing

tariff and non-tariff restrictions

against

one

another, their imports

would be increased. Although in the long run

their exports would

be stimulated, thereby

increasing the volume of regional trade,

yet some countries may

face the balance of payments difficulty in

the first instance. If there were no monetary

oo-oneration,

coun¬

tries would be compelled to import and

payment restrictions (the

reverse of trade

liberalisation),

^or exchange

depreciation

or

contractionary monetary-fiscal policy,

causing deflation and hence

affecting adversely emplojanent

and production. All those

measures

would have unfavourable effect on their trading partners.

Thus

one of the primary or ultimate

objectives of monetary co-operation

is to help solve the balance

of payments difficulty and consequently

to have trade liberalisation and expansion in the Region.

II. ASIAN RESERVE BANK

' ' '' ' ' ' J •

The Concept.

The Asian Reserve Bank can be conceived as a

saving bank

(without the ^power of creating

deposit) for the ECAFE region in

the beginning. Later, as the

Bank gains confidence of the world

and the "new" money created by the

Ban!: is acceptable by outsiders,

the Bank can be evolved as a commercial bank with the power

of

credit-creation.

The 3ank is to accent deposits from

member and non-member

countries, to hold a fractional reserve

against the deposits and

to make loans and investments withe the balance fund. A

hypotheti¬

cal balance sheet is to illustrate the main ooints :

ASSETS LIABILITIES

_ " ,

Required reserves

Members' deposits -(a) required

(M voluntary

Excess reserves

Loans to members Other deposits

(non-members')

Securities Borrowed funds

Net worth

The reserves will be held in gold, acceptable reserve

currencies,

and SDRs, which ^are liquid assets

available to be xvithdrawn by

depositors at any time.

The balance fund in

excess

of the required

reserves can be used (a) to make loans to members to finance

deficit

balance of payment as i^ell as development

projects of member

countries, and

(b)

to buy marketable

securities of member government

and international institutions. The main idea is to combine

liquidit

1 V

- 6 -

'A ^'

with development. However, in the event that

members withdraw

deposits considerably from the Bank

owing to their declining

international reserves, thus causing the Bank's

required

reserves

fall belov/ the minimum requirement, the Bank has to

stop lending

and investment.

Apart from

the required deposits, members and non-members are

encouraged to make deposits with the

Ban!: by payment of the interest

rate in accordance with the market rate in the major international

financial centres, by the better bargaining ^power

against deprecia¬

tion of reserve currencies (U.S. dollar and round

sterling)

because

of

collective pooling of ^resources, and by the

possibility of investing

the deposit-fund in longer term

securities in order to

earn

higher

interest rate.

6J

Members ^can

withdraw

some

of their required deposits

from the Bank as their international reserves fall, and ^can borrow

from the Bank in meet balance of payments difficulty. Non-members

cannot borrov/ from the Bank. It is homed that developed countries nay

support the developing countries by depositing funds

in the Bank,

thereby strengthening the regional monetary co-operation scheme,

which is much moro meaningful and effective than direct aid or loan.

The Bank can also issue bonds in the international financial centres, and use the borrowed funds to provide ^more loans to members.

In other words, the Bank can serve as a financial intermediary

between supplj/ of fund in the world market and demand for fund among members for payment and development _purposes

6 /if a member holds individually its international ^reserves, it

has no guarantee against the depreciation of reserve currencies.

Collectivelj/, the Bank, ^can diversify the holding of gold and foreign exchange more effectively and can bargain with New York

and London for some sort of guarantee, otherwise it ^may, for example, switch the deposits tc a regional financial centre,

like Singapore and Tokyo, with more stable currencies at present.

Besides, the maturity structure of securit: es held by a member individually is

likely

to be shorter for the sake of maintaining liquidity than that held by the Bank collectively. Normally long-

tern securities would earn higher rates of interest than short-term

ones.

The benefit is virtual to all members, no matter whether they

have deficit or surolus balance of oayments. The deficit members

can borrow from the Bank, which can be regarded as a source of finance in addition to their international _reserves, IMF position

and SDRs. The required deposits with the Bank should also be

counted as a part of their international _reserves, because, just like

a deposit with a bank, the deoositor can have full control over it.

Since the balance fund of the Bank in excess of the required reserves is available for loans and investments, the additional ^source of

finance for the region as a whole would be measured to that extend.

ECAFE proposes that for _every dollar of deposits, two-third of

a dollar would be kept as the required reserves and one-third,

available for loans and investments. Hence one-third of the Bank's total deposits ^can be regarded ^as an additional ^source of finance.

Although the surplus members do not need to borrow from the

Bank, the]/- would be benefitted indirectly in the long ^run because with trade expansion and liberalisation of the Region, their exoort trade would be stimulated; they would be free from the possibility

of restrictive _measures adopted by their trading oartners. And yet

the opportunity cost of joining the Bank is negligibly small,

because the required deposits can be counted as their international reserves, depositors can gain the market rate of interest, members

can withdraw from the Bank with due notice and the risk of non— via¬

bility of the Bank is _very small. 7/

2/Since ECAFE _pronoses the required deposit of 10 percent of each member's international _reserves, and the required reserves of the Bank of two-third of deposits, the risk of loss to a member in the event of the close-down pf the Bank is limited to 3.3 percent of

a member's international _{reserve. This is a very}

unlikely case, unless all members have balance of payments difficulty and have

thexr_and international reserves declining by more than 67 _nercent,

unless the Bank's debtors would not meet their obligations

100 percent. See the oaper, "Feasibility

Study

on the Establishment of an Asian Reserve Bank", pp. 12 - 14.

Other benefits include (a) development financing and export

credits to promote intra-regional trade,

(b)

better

bargaining

power against depreciation of reserve currencies, and

(c) better

management of the reserve assets by investing in longer term

securities thus earning higher rate of interest,,

The ECAFE Proposal.

The proposal can be summarised as follows ^:

(1) Required deposit. Bach member is to deposit 10 percent

of its _gross official international reserves, as defined by IMF, and calculated at the end of each preceding quarter

8/

Member's

contribution should be in terms of gold, acceptable reserve

currencies and SDRs. But the statutorjr deposit of ^{any one} country

should not exceed 25 percent of the total. The rationale behind this

is that if a country's statutory deposit is too big, and hence the corresponding borrowing right, the Bank may not be able to lend to

it in time of its need.

(2) Required reserves. The Bank has to maintain two-third of its total deposits in required reserves, also in terms of gold, acceptable reserve currenci.es and SDRs. This high liquidity ratio is a very conservative measure to safeguard the interest of creditor countries. My personal comment is that the Bank should be remitted

to maintain the reserves in other convertible and hard foreign exchange

such as Japanese Yen, Deutschemark, Swiss Franc etc, so that the Bank

can diversify its portfolio holding of foreign exchange in view of

the present weakness of both U.S."dollar and round sterling.

(3) Loans and Investments. Consequently, the balance fund (one-third of the deposit obligations) is available for loans and investments.

8/

The idea of 10 percent deposit came originally from Professor Triffin.

(4) Asian Monetary Unit

(AMU).

The Bank creates this

unit of

account, which is equivalent to one SDR. Deposits

arid leans to

neabers will be denominated in AMU. The reasons of creating this

unit are twofold - first, to relate the Asian Reserve

Bank with the

International Monetary Fund and the SDR system, and secondly, to

have a stable unit of account for trade and investment, irrespective

of the fluctuation of exchange value of U.S. dollar, pound sterling

and other major currencies.

(5) Borrowing Limit. Member borrowing v/ill be limited to

one-half of the decline of the member's international reserves.

Within this limit, a member nay borrow ^un to the amount

of its

statutory deposit

(automatic credit),

and unto the amount

of twice

its statutorj/ deposit,

(discretionary credit)

if approved

by

a majority vote of the managing board. Borrowing beyond the latter

amount has to be approved by a two-third

majority

vote

of the

managing board, and only under special circumstances. In

fact, this

is a matter of automatic or discretionary credit. For the sake of

encouraging trade liberalisation, automatic credit should be liberally

provided. But for the sake of inducing deficit countries to take

proper monetary—fiscal measures to correct their balance of payments, discretionary credit should be used. ECAFE's proposal of the

automatic credit is rather a cautious measure because a member simoly borrows back its own deposit and the interest of creditor countries is well safeguarded.

(6) ^Interest rates. The deposit rate would be in accordance

with the world market, whilst the loan rate is slightly higher

than

the deposit rate in order to ^cover the cost of operation of the Bank,

••/hat should bo the appropriate rate of interest charged to a bor¬

rowing member? The SDR rate is only

lit

^per cent, which is very

favourable to borrowers. For the sake of helming the deficit members,

interest rate should be low. But ECAFE adopts, the policy of paying

the deposit rate according to market and of encouraging members and

non-members to deposit in the Bank, Safeguarding the interest of

creditor countries is important

for the viability of the Bank.

To deposit

with the Bank without

any

borrowing is equivalent to lending

to the deficit members through the 3ank, a

multilateral channel.

(7) Repayment. The

full amount of

any

increase in a member's

international reserves subsequent to

borrowing from the Bank must

be paid to the

Bank within

a

period of three years from the date

of borrowing unti the debt

is discharged. If this is not accomplished

within three years, then the

remaining balance must be repaid in

full by contractual

quarterly instalments extending over a period of

not ^more than two years.

(8) Guarantees. In the event

of

^a

default, all facilities

normally available to a

member will be suspended, without prejudice

to the right of the Bank to recover

the amount due by the defaulting

member, including accrued interest

at

a

penalty rate that will be

twice the loan rate. At the same time, all other

members will

participate in ^a

solidary guarantee

pro

rata of their statutory

deposits at the tine

when the default

occurs.

On deeper thinking,

one would realise that the guarantees are rather

in

a

passive

way,

because the Bank cannot hold a mortgage nor seize

the assets

or international reserves of a defaulting member. But

since this is

related to international standing, the

probability of actual

defaulting is very small.

(9) Withdrawal. A member ^can withdraw

freely from the Bank

by serving a written notice. The

membership will

cease on

the date

specified in its notice, but not less

than six months after the

notice date.

(10) Organisation and Yoting. The Bank

will have

a

Board of

Governors, an Executive Board and a Managing

Di.rector, similar to

the organisation of IMF, and will be

democratically controlled

by the members. One-third of the total

voting

power

in the

Governing Board will be distributed prorata

of member's votes in

the IMF and the other two-thirds pro rata of the membersT statutory deposits, calculated on the

basis of the

averages

during the

previous financial ^year.

III. ASIAH CLEARING UNION.

Objectives.

The- objectives of. the Asian Clearing Union

(ACU)

are-:

(a) to promote the use of regional currencies

for regional

trade :

(b) to effect economies in the use of

foreign exchange;

(c! to _encourage Participating countries to

liberalise

trade among themselves; ACU*is regarded ^{as a} financial aspect of

trade expansion, or as a complementary measure of the

trade scheme;

(d) to promote monetary co-operation and consultation ^among participating countries by establishing the ACU as a clearing

mechanism for the multilateral settlement of payments.

(a) It is the present banking practice-to use U.S.

dollar and

pound sterling as the trading currencies, and to have

the settlement

made at the financial centres of New York and London, even though

the U.S.A. or the U.K. is not a trading partner, e.g. regional

trade

between Thailand and Japan, or between Thailand and Singapore.

The

ACU is an attempt to break this tradition by using

regional

curren¬

cies for regional trade. Suppose Thailand imports machinery

from Japan, payment ^can be made in Thai baht, or Japanese yen, or Asian Clearing Dollar

(ACD),

which is a unit of account, created

in the Union.

(b) Since local currencies can be used for regional trade, and regional deficit countries can obtain interim finance fron~the ACU, participating countries can reserve their foreign exchange primarily

for extra-regional trade and hence can effect economjr in the use of foreign exchange.

(c) Countries which,, liberalise trade by tariff reduction, government

bulk purchase from other ECAFE countries and elimination or reduc¬

tion of other import and exchange restrictions nay often face

balance of payments difficulty. It is therefore advisable to have a

monetary co-operation scheme, whereby the deficit countries can draw

some limited short tern finance from other creditor countries and would not worry too much about their balance of pa3>nents position.

If the participating countries have the financial facility to

liberalise regional trade, then there would be a multiplier effect

of increasing export among all of

thou,

which is precisely the aim of

the trade scheme.

(d) The ACU thus established would naturally lead to ^more

consultation _among participating countries, which may pave the way for more monetary co-operation in tine to cone.

General Framework of Operation.

(1) Unit of Account

£/

The Asian Clearing Dollar (ACD) is created as a common unit of account of the Union. It is equivalent to one Special Drawing Right

(SDR)

cf the IMF, and is equivalent to 0.888671 grammes of fine gold or one United States dollar at the then par par

value.10/

It is officially linked to SDR, because it is highly desirable to relate the ACU with the IMF. Since countries have tc declare

parities of their currencies to the IMF, they would automatically declare partities with the ACD. This is an advantageous noirit for the working of the Union. Moreover, the ACD would be keot stable

$_J

If the Asian Reserve Bank is simultaneously established, the

Asian Monetary Unit can be used as a unit of account of the Asian Clearing Union. Thus the AMU and ACD are one and the same

unit,

12J

The Draft Agreement states as such. Since the U.S. dollar has been twice devalued against gold, this clause will have to be changed.

in value in accordance with the

most stable

currency

in the ECAFE

region

11/

In

the event of the U.S. dollar or sterling devaluation,

the ACD nay not follow

it pari

passu;

the Union may then have the

option of maintaining the

gold parity of ACD by more or less the

same extent.

(2) The Clearing

Mechanism

Payments

through the Union

can

be denominated in the ACD

(preferably),

^or

importer's currency or exporter's currency.

The clearing mechanism is

illustrated-in Appendix I. Suppose

Japan exports

goods to Thailand. Japanese exporters present the

shipping

documents with the bills of exchange to the exporter's

bank and obtain Japanese yens

immediately. The Japanese exporter's

bank will in turn obtain

re-imbrusement in

yens

from the Bank of

Japan, the

central bank, which will notify the ACU accordingly. Th-

ACU will credit the exporting

county and debit the importing country

in ACD.

12J ï

The importer's

bank in Thailand having received the shipping

documents from the Japanese

exporter's bank will present them to

the importer and obtain

payment in bahts. The importer's bank will

in turn pay the baht

proceeds to the Bank of Thailand, which will

J.l/ln the draft agreement, the parity of the ACD with respect to

SDR can only be changed

with the unanimous decision of all

members. Since a creditor

country would naturally oppose a

lowering of the parity

of the ACD, it would be difficult to

secure a change of the parity. However,

suppose a country has

devalued her currency by 10

percent, she cannot oppose a proposal

to devalue the parity

of the ACD by 10 (or less than 10) percent.

These measures are to maintain

the stable value of the ACD.

12/This system is to

centralise the work in the hand of the ACU with

modern computers. An

alternative system is to let the centra1

credit and debit accounts with

all participating countries and

notify the ACU

of the net balance to

pay

to, or to receive from,

the ACU after multilateral

transactions in

a

period. In the lator

system, the

central bank v/ill have to do more computation work.

- 14

also notify the ACU. Thus

the transactions would be accounted

at the ACU and the central banks

of the exporting and importin

countries would act as intermediaries between

commercial banks

and the ACU.

It should be noted that in our present

banking practice,

final settlement in U.S. dollar or pound

sterling is actually

made in financial centres of New York or

London, which take

the place of the

proposed ACU, and big international banks hav

a great role in effecting

the settlement; this role is assign

to central banks in the new proposal. If a

transaction is

denominated in U.S. dollar, the Japanese

exporter has to

^.

convert his dollar proceeds into yens,

v/hilst the Thai importes

has to convert his bahts into U.S..dollars, thus

involving two

foreign exchange conversions

in

every

transaction. In the new

proposal, if the

transaction is denominated in the impox^ter's

or exporter's currency,

there is only

one

direct conversion

between the currencies of the two trading partners,

which is

determined in accordance with the declared

parities of the

two currencies. If the transaction is

denominated in

ACD,

the conversion of ACD into yens by the Japanese

exporter and

that of bahts into ACD by the Thai importer

would also be at

par. Hence there is a

saving of foreign exchange transaction

cost. - \

(3) Scope of Transactions

The draft agreement proposes that current

transactions,

both visible and invisible,

can

be channelled

through the ACU. However, if a country

chooses not to channel

through the ACU outgoing payments due to

other countries for

some invisible items, she may not

accept incoming payments for

such invisible items.

Personally, I think

that it would be better if

we

start with the ACU covering only the merchandise trade tran¬

saction, travel items

and

some

selected invisible items of

current transactions, because

the interim finance is related

only to vicible exports and imports. Later on,

after the ACU

has been in operation smoothly the scope of

transaction

can

be widened to cover more invisible items,

(4) Use of the Clearing Mechanism

It is entirely at the option of banks, business

firms

or individuals of a country whether they would send

their bill

of exchange through the ACU ^or through the ordinary

banking

channel, because in accordance

with the IMF principle, the

ACU is not supposed to have any compulsory

restriction

on

the

bills of exchange or to cause any discriminatory currency arrangement. However, a country can,

if she

so

desires, make

it mandatory for her import bills to

channel through the ACU

by, for

example, granting import licence with that condition.

This may be a çieasure to encourage

the

use

of the ACU,

- 16 -

A second measure to induce the bills of exchange to

go through the ACU ^may be that the central banks of

the countries

may deal in one another's currencies or other foreign exchange,

either at the par value or on the fc^sis of ^a spread that should

be narrower than the current spread in the foreign exchange

market outside the clearing mechanism. In fact, this has been

the practice of the central banks cf the Central American Clearing Arrangement so that the ratio of total clearings to

visible intra—regional trade has increased from 48 percent in 1962 to 85 percent or more in 1967-1970. 10

(5) Accounting Period

Initially, it will be two weeks, at the end

of which the

clearing house will compute the net position of each member in respect to the group and determine its net creditor or debtor position vis-a-vis the other members.

13* See IMF Report on "Existing International Banking and

Credit Facilities in the ECAFE Region",

6

February

I96Ç,

Appendix on "Central American Clearing House",

p042-48.

For a discussion of the Central American Clearing House,

see also Bahram Nowzad and Joan Messinesi,

"Regional

Payments Arrangements ^among Developing Countries", a document of II/IF, dated 10 August 1971, PP« 7-9 and Appendix Tables 2 and 3»

-17 - ^-

(6)

Settlement Period

Initially,

it will be four weeks, at the end of which th;e net claims of the credits shall be paid in full by the

debtors in

gold,

convertible currencies or any other international

asset acceptable to the creditors.

In our existing banking system, we have to pay foreign exchange for every transaction of export and to receive foreign exchange for every transaction of import. In the ACU, only the

net balance is to be settled in the period. Thus there is a

saving of transaction cost. Suppose in a

period,

country A

exports 510 million to country B, and imports

$6

million from 3, Then the net balance to settle is $4 million. The total trade is 016 million. The compensable trade, in the sense that the

"ï /

import value is offset by the export value, is

$12

million,

x

^'

Likewise,

in a multilateral clearing system, A may have a credit

balance with 3, a debit balance with ^,,, and so on, but A would

have a net balance to settle with the whole _group of members0 At the end of the settlement period, all members need only to settle

the net balance with the ACU, In a way, the ACU functions like

a cheque-clearing system in banking.

The longer the settlement period, the smaller would be the aggregate or cumulative net balances to settle, and hence the greater would be the saving of transaction cost. Perhaps in future tiie settlement period will be extended to two or three months,

^

14» It can be defined as twice the value of exports or imports,

whichever is lower•

15* _isI" the Central American Clearing

House,

the settlement period

six months

(June

^and December),

- 18 -

(7) ínterim Finance

Each member will extend a credit ' line, denominated in ACJ, to all other members, via the

ACU,

to

the extent

of

1/12

of that country's annual visible exports

(excluding

petroleum

and petroleum

product's)

to the other members. The debit line allocated to each member v/ill not exceed

1/24

of that country's

visible imports

(excluding

petroleum and petroleum

products)

from other members.

The _re.ason why petroleum and petroleum products are

excluded is that some petroleum exporting countries argue that

the big petroleum companies such as Shell and Esso, operating

in their countries have their inter-company account clearance

at New York or London so that export and.import of petroleum

and petroleum products and import of equipment for the petroleum industry would not involve apparently the receipt and payment of foreign exchange". Suppose a petroleum còmpany in the Middle

East exports crude petroleum to Japan, The foreign exchange earning would be accredited to the inter—company's account at

Nov/ York to be used for thé purchase of capital equipments and

materials to be imported into the Middle East for the petroleum company, and other purposes. The foreign exchange proceed, would

not be sold wholly to the central bank of the petroleum exporting countries. This argument is in fact not very sound, because ^a petroleum exporting company would have to remit some money back

to the country concerned to meet local cost, such as payment

of

wages and salaries and other management expenses and so the country would gain some foreign exchange with favourable effect

on her balance of payments. ^•

The interim finance is also meant to take account of a

country's swings in payments and. receipts arising

from seasonal

fluctuation of exports and imports. Being

limited

to

the credit

line of about one month's exports and the debit line

of about

half-a-nonth's imports,

it

^can

be considered

as very

small,

an':,

would cause little constraint to creditor countries. Here, the

drafters of the draft agreement face a dilemma. For

the sake

of encouraging intra-regional trade

(objective (c)), interim

finance should be permitted ^more liberally,

particularly

so, when it is hoped that the settlement period ^can be

extended in

future. But for the sake of easier acceptance by creditor

countries, and of

gaining wider participation, the interim finan

has been proposed as such. In future, it is

hoped that the

interim finance can be extended in order to achieve the real objective of trade expansion,

(8) ^Interest Rate

It is payable by net debtors to net creditors ^on

the daily

balances outstanding between settlement dates. The

draft

agree¬

ment does not specify the rate nor criterion

which is left to

the decision of members. But there are two possibilities,

i.e.

(a) the market rate of interest in

international trade bills,

or

(b)

a rate below the market rate. As the SDR rate

is

as

low

as

15$, it has

been

suggested that the rate should be slightly

below the market rate in order to encourage international ^mone¬

tary co-operation. But the general opinion is

that it should

be comparable with the market rate so as to encourage

creditor

countries to use the clearing uechanismj

^

^countries

^with

a credit balance with the ACU would not feel that they lose

some interest amount»

(9) Exchange Guarantee

Each member has to guarantee the rate of exchange

of its

currency vis-a-vis the ACD for all positions

outstanding bet¬

ween itself and the other members and for instruments in transit payable by the member. This would impose no difficulty for a country with fixed exchange rate system, because

the declaratio

of parity of a currency to IMF implies also that to the

ACU,

«

But for a country with a floating exchange rate system, the exchange guarantee is imperative for the operation of the clearing mechanism,

(10) Guarantee Against Default

In the draft agreement, the guarantee

is expressed in

a rather passive manner as it states only that the defaulting

member will be suspended from further access to any credit of t

the ACU and will be required to withdraw from the ACU, A moro effective way of guarantee is, in ^my opinion, to let

all

members have a small deposit (relative ^to the volume of intra- regional trade) with the ACU,

*

16, See Report and Recommendations of the Seminar on

Financial Aspects of Trade Expansion, p,

8,

which states

"credit should earn interest at a rate at least equal to

that earned by comparable investments in major money

markets,

primarily

Mew York and London",

But; that would militate against the wish of countries. In fact, in the experience of the Central

American Clearing Union,

each member has to place a deposit of U.S.

$1,5

million. This problem ^can be solved, if the Asian Reserve Bank can be success, fully implemented,

whereby each member has

to

place

a

certain

reserve—deposit with the Bank, Then the ACU will operate in conjunction with the Bank.

(11) Clearing House

The site of the clearing house will be decided after

all

questions have been settled, ^as it is rather a

political

question. In principle, it should be

sited in

a

country where

there is good corimunic ation and the least

exchange—control and

where a central bank ^or monetary authority ^may act as the agent

of iphe ACU, 17 Some countries may consider that there is a

political risk in joining the ACU if the ACU ^were

sited

at an undesirable place.

17, For example, the Central American

Clearing Union is at

the main office of the Central Bank of Honduras,

X %

• i

- 2 2 -A <

s 1

iv. problems and prospects.

Inter—relationship between Asxan Reserve Bank

and Asxan

Clearing Union»

BCAFE attempts to implement both

schemes simultaneously,

which are in fact inter—related. However,

each scheme

xs

also

designed independently or

separately,

^so

that

one can

be esta¬

blished without the other.

If the Asian Reserve Ban!: is

established, the

corx.on

unit

of account, Asian Monetary

Unit,

can

be applied to both schemes;

the interin finance of ACU can be merged into the borrowing

right

of the Bankj and there is r.o need for

members of ACU to place

a small deposit for clearing purpose.

In _my view, the

ACU is siuplier and easier to implement

than the Bank so that the appropriate policy for

ECAFE should

be to do the easier task first. If the- ACU is successfully

established and gains confidence of

'countries, ^then countries

will be more willing to support the scheme of the

Asian

Reserve

Bank,

■Some Arguments.

The greatest stumbling block to the establishment

of the

Asian Reserve Bank is that ^some countries are not willing to contribute their required deposits. They have the

misconception

that they may lose control of the deposits or that

their

inter¬

national reserves would be reduced to the extent of the deposits.

Some creditor countries with rapidly increasing

international

reserves such as Japan and Singapore are not

prepared

to

place