The Hindu : Single currency suggested for south Asia

Online edition of India's National Newspaper
Wednesday, Feb 04, 2004

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Single currency suggested for south Asia

By Sushma Ramachandran

NEW DELHI, FEB. 3. An economic think tank has presented a compelling case for the south Asian region to form an economic and monetary union, ultimately moving towards a single currency. This can be effected in a phased manner, beginning with a parallel currency to be known as the South Asian Rupia or SAR as a unit of account backed by a SAARC reserve fund.

The proposal has been mooted in the report on South Asian Development and Cooperation 2004 prepared by the Research and Information Systems (RIS), a think tank attached to the External Affairs Ministry. It suggests that the transition to the European Union style economic and monetary union can be made gradually by implementing the South Asian Free trade Area (SAFTA), forming a SAARC Customs Union and then going for a parallel currency as an intermediate step to a single currency.

The report highlights the fact that a parallel currency is distinct from a common or single currency. Even in the EU, when the European Currency Unit (ECU) was introduced, the countries initially retained their own currencies and the evolution to the Euro was gradual. This formula, it is suggested, can be followed in the South Asian region, where a common currency may be not be immediately acceptable.

The RIS research team says the growth outlook for the South Asian region appears "promising" in 2003-4 and 2004-5, with the GDP expected to grow at 6.9 and 7.2 per cent respectively. This will make it the second fastest growing region in the world after China. An interesting development is the broad-based nature of growth, with all the economies displaying growth dynamism. In particular, the team found that the least developed economies like Bangladesh showed markedly superior industrial dynamism in terms of development of manufacturing industries and improved competitive industrial performance. In other words, the report notes that there is evidence of a convergence of economic structures in the region.

On the need for regional economic integration, the report says even the limited experience with trade liberalisation under SAPTA has produced encouraging results in terms of trade expansion. The bilateral free trade agreements in the region appear to have led to an equitable expansion of trade flows, with exports from smaller and less developed partners growing faster. In the case of the India-Sri Lanka FTA, the experiences have led to the scope being expanded to a comprehensive economic partnership agreement.

"The research shows that the region satisfies many of the criteria for an optimal currency area and could benefit from the adoption of a single currency," the RIS says. The single currency can evolve in a phased manner, beginning with a parallel currency to be known as the South Asian Rupia or SAR. This is expected to not only facilitate intra-regional trade, but also create a mechanism for funding joint infrastructural development projects. Eventually, it is envisaged SAR could replace national currencies much in the same way as the Euro has replaced currencies in Europe.

Suggesting that the transition be carried out expeditiously, the report also suggests the adoption of a SAARC Agreement on Promotion and Protection of Investment and movement towards harmonised investment policies across the region to facilitate intra-regional investments. It argues these steps will help efficiency-seeking restructuring of industry in the region, thus enabling them to exploit economies of scale and specialisation. Sri Lanka may emerge as the region's hub for rubber-based industries, Bangladesh for energy-intensive industries and Bhutan, forest based industries and so on.

The regional economic integration will also make member-countries, especially the smaller ones, more attractive destinations for third country investments, by obviating the constraint of a small domestic market.

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