A system for buying and selling products between two countries that does not depend on hard currency payments has been seen as a good alternative to letters of credit (L/Cs) by governments of countries experiencing foreign exchange difficulties or those wanting to develop trade with countries where hard currency is hard to come by.

But account trade, under which governments basically guarantee payment for international trades in transactions that for the trading parties are conducted on a buy now pay later basis has apparently not worked in all cases.

Political will

Account Trade between Bangladesh and Myanmar for example is yet to start a year after the two countries signed a Memorandum of Understanding (MoU) to do so.

The MoU was signed in March 2003 for a period of one-year and received support from top politicians from both countries, including Myanmar's Prime Minister Khin Nyunt who called this month for a renewal of the account trade agreement during a visit to Bangladesh.

L/Cs unavailable

The purpose of the scheme was to increase trade between Bangladesh and Myanmar, which has been hampered by problems with foreign exchange availability.

Myanmar importers have not able to open L/Cs due to foreign exchange difficulties and account trade was introduced to help resolve this problem and facilitate increased trade between the two countries.

How it works

Account trade is a form of transaction system for buying and selling products between two countries, without depending on hard currency in payment. The trading partners agree not to pay cash immediately, but they will record their trade value in an account.

Typically, the central bank or export-import bank, authorised by the governments of both sides, will handle debt settlement for the account. The debtor country must pay the net difference to the creditor bank.

Confidence boost

Under the account trade system, governments will usually be responsible for transaction risks in international trade, thus creating confidence between exporters or importers and trading partners. No hard currency such as the US dollar, the Japanese yen or the euro is used in each transaction.

In some account agreements - such as those that Thailand has signed with several countries, for example - importers will have to open L/Cs and exporters will seek packing credit from commercial banks.

This article represents the views of the author and not necessarily those of the ICC or any of the other partners in DC-PRO.