SAARC Common Currency Feasibility Study
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Apon DasSAARC Common Currency Feasibility Study
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Apon DasCommon questions
Powered by AISAARC can learn the importance of phased economic coordination from the Eurozone, which established structures like the European Monetary System and fiscal convergence criteria under the Maastricht Treaty prior to adopting the Euro. These measures ensured exchange rate stability and fiscal discipline. SAARC needs similar preparatory frameworks involving economic convergence and robust institutions to manage and harmonize regional monetary policies effectively .
Creating a SAARC Central Bank would provide the necessary institutional framework to issue and regulate a common currency, ensuring monetary policy cohesion across member countries. A SAARC Monetary Fund could offer balance-of-payments support, facilitating macroeconomic stability and confidence among countries. Together, they would help align fiscal and monetary policies, essential for the eventual introduction of a shared currency .
Gradual institutional and financial harmonization is crucial as it builds a foundation of trust and stability among member countries. It addresses existing disparities in economic and monetary policies, increases trade volumes, and strengthens regulatory frameworks. These steps are essential to ensure that the economic benefits of a common currency can be fully realized without triggering potential financial crises due to misalignments and lack of cohesion .
Low intra-regional trade, with only about 6% of total trade volume within SAARC compared to over 60% in the EU, signifies weak economic interdependence and integration. This lack of trade linkages would make a currency union economically unsustainable as it limits the economic benefits that a common currency would typically provide, such as streamlined transactions and increased market efficiency .
SAARC must address longstanding political tensions, especially between India and Pakistan, that undermine trust and cooperation. Additionally, the association's current lack of effective institutions similar to the EU's strong supranational structures is a major barrier. Overcoming these challenges requires building mutual trust, enhancing institutional effectiveness, and potentially creating organizations like a SAARC central bank .
The SAARC region's wide disparities in income, inflation, and fiscal policies make monetary harmonization challenging. India’s economic dominance adds the risk of asymmetric influence in monetary decisions. The existing economic divergence is further compounded by the lack of a central bank and regional fiscal mechanisms, making the coordination required for a common currency difficult .
The success of a common currency depends on several economic factors such as labor mobility across regions, capital mobility and financial integration, openness to trade, fiscal transfers between regions, and symmetry of economic shocks. These factors ensure that economies can adjust to changes and shocks uniformly, reducing the potential adverse impacts on various member nations .
A common currency could facilitate trade by eliminating exchange rate conversion costs, enhance price transparency and market efficiency, and strengthen regional identity and political cooperation. Financial stability might also improve if the currency is managed by a credible regional central bank, allowing weaker economies to benefit from the collective economic strength of the region .
The European Union had established strong supranational institutions such as the European Monetary System for exchange rate stability, the Maastricht Treaty for fiscal convergence, and the European Central Bank for monetary leadership, all of which facilitated the creation of the Euro. In contrast, SAARC lacks these mechanisms, as there is no regional central bank, fiscal framework, or binding legal agreements in place, making its readiness for a common currency significantly lower .
The recommended phases include: 1) Strengthening trade and financial cooperation through tariff reduction and mutual recognition agreements, and creating a payment system like SAPSS. 2) Achieving macro-economic convergence by setting shared inflation and fiscal targets and establishing a SAARC Monetary Council. 3) Developing institutions like a South Asian Monetary Fund for policy coordination. 4) Implementing the common currency after instituting a regional accounting unit as a precursor to full monetary union .