The Asian Clearing Union (ACU) was established in 1974 as a central clearing, settlement and payments mechanism to facilitate trade transactions between member countries. The ACU has played a significant role in promoting trade cooperation and financial stability in Asia for over four decades.
Introduction
The Asian Clearing Union is an initiative by the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP) that serves as a clearing house for participating central banks in Asia. The ACU was established on December 9th, 1974 at the initiative of the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP).
The purpose of the ACU is to facilitate payments among member countries for eligible transactions on a multilateral basis, thereby economizing on the use of foreign exchange reserves and transfer costs. It aims to promote regional cooperation through settling foreign trade transactions among member countries in local Asian currencies instead of relying on currencies like the US Dollar.
Over the years, the ACU has proven to be an effective mechanism for financing intra-regional trade and maintaining monetary stability in Asia. It has become an important component of the region’s financial infrastructure.
This comprehensive article will provide an in-depth look at the Asian Clearing Union, including its history, organizational structure, purpose, operations, impact on regional trade and future outlook.
History of the Asian Clearing Union
The idea for establishing a payment union for Asian countries was first mooted in the late 1950s, but concrete steps were taken in the late 1960s.
Genesis of the ACU
In 1968, the United Nations Economic Commission for Asia and the Far East (ECAFE) organized an expert group to study the possibility of establishing an Asian clearing union. The group comprised of representatives from nine Asian countries – Ceylon, India, Iran, Japan, Nepal, Pakistan, Philippines, Thailand and the Republic of Vietnam.
The expert group recognized the need for a payment arrangement to settle trade transactions among Asian countries and recommended establishing a clearing house. However, the plan did not take off immediately due to lack of consensus and prevailing economic conditions.
Establishment in 1974
The Asian Clearing Union was eventually established on December 9, 1974 at the initiative of United Nations Economic and Social Commission for Asia and the Pacific (ESCAP).
The ACU was set up with its headquarters in Tehran, Iran. The founding members were Bangladesh, India, Iran, Nepal, Pakistan and Sri Lanka. Myanmar joined the ACU in 1976.
The initial idea was to help member countries save on foreign currency reserves needed for inter-regional trade payments. It aimed to promote trade within the region by enabling payments for exchange of goods and services in Asian currencies instead of hard currencies like the US Dollar.
Relocation to Tehran
The ACU headquarters operated from Bangkok during its initial years. In 1984, it was relocated to Tehran following the Iranian government’s offer to host the permanent headquarters.
Expansion ofMembership
The ACU has expanded its membership over the decades. Bhutan joined in 2004, followed by Maldives in 2009. Afghanistan was admitted in 2012.
The body now comprises of 9 member countries – Afghanistan, Bangladesh, Bhutan, India, Iran, Maldives, Myanmar, Nepal and Sri Lanka.
Pakistan and Nepal have withdrawn their membership in 1993 and 2016 respectively. However, Pakistan rejoined the ACU in 2006.
Organizational Structure
The organizational structure of the Asian Clearing Union comprises of the Board of Directors, Secretariat, Standing Committee and the Settlement Bank.
Board of Directors
The Board of Directors is the highest decision-making body of the ACU. It consists of one nominee from the Central Bank of each member country.
The Board sets the policies, rules and procedures related to the functioning of the ACU mechanism. It also approves the annual budget and reviews the operations.
The Chairmanship of the Board rotates annually among members in alphabetical order. The Chair presides over the meetings of the Board.
Secretariat
The Secretariat of the ACU is located in Tehran, Iran. It is headed by a Secretary General who is appointed by the Board.
The Secretariat oversees the day-to-day administration and operations of the ACU. It is responsible for implementing the policies and decisions made by the Board.
Standing Committee
The Standing Committee comprises of representatives of all Central Bank members of the ACU. It meets more frequently than the Board to review the ACU operations and take decisions within the broader policy framework laid down by the Board.
The Standing Committee submits reports to the Board regarding ACU transactions, exposures, payments situation and other matters.
Settlement Bank
The Central Bank of Iran serves as the Settlement Bank for transactions routed through the ACU mechanism. It maintains the books of account and records of all ACU transactions.
The Settlement Bank receives payment instructions from the paying banks and makes payments to the receiving banks. It also generates account statements and reports for submission to the Board.
Purpose and Functions of the ACU
The primary objective of the Asian Clearing Union is to facilitate payments among member countries on a multilateral basis for eligible transactions. This is intended to promote trade and economic cooperation among the participants.
The main purposes and functions of the ACU are:
- Settlement of payments for international trade transactions on a multilateral basis
- Clearance of payments for current international transactions
- Provision of credit facilities to member central banks
- Management of short-term liquidity for member countries
- Promotion of monetary cooperation among members
By settling transactions among multiple countries simultaneously through a single channel, the ACU enables economization of foreign exchange reserves. It also minimizes transfer costs compared to settling trade bilaterally.
The ACU aims to supplement the existing facilities available to member countries and provide additional financial support for promoting intra-regional trade.
ACU Operational Mechanism
The Asian Clearing Union operates on a multilateral settlement basis for payments relating to international trade transactions amongst member countries. Here is an overview of how the ACU settlement mechanism works:
Eligible Transactions
Payments for the following types of transactions are eligible to be routed through the ACU:
- Trade transactions involving export or import of goods between member countries
- Export proceeds realization transactions
- Invisible trade transactions like shipping freight charges, insurance premiums, etc.
- Tourism expenditures
- Approved government transactions
- Repatriation of profits, dividends, etc. as per domestic regulations
- Transfers relating to inter-central bank transactions
Operating Principles
- All settlements are effected in US Dollar but can be funded in local currencies of member countries.
- Transactions are settled on a net bilateral basis between participants.
- Settlements are final and irrevocable once processed by the ACU mechanism.
- The ACU does not seek to replace existing bilateral payment arrangements but rather supplements them.
Processing Flow
The processing flow for ACU transactions comprises the following steps:
- Exporter in member country A exports goods to an importer in member country B.
- Exporter in country A submits documents and invoice to his bank (Bank A) for payments.
- Bank A sends payment request for exporter to the Central Bank of country A.
- Central Bank A debits Bank A if funded in local currency. It transmits payment advice to Settlement Bank over secure channels.
- Settlement Bank credits Central Bank A and debits Central Bank B for the transaction after verifying.
- Central Bank B credits Bank B who makes payment to importer in local currency.
- Settlement Bank generates daily transaction reports and statements.
Credit Facilities
The ACU mechanism is supported by layered credit facilities made available by member central banks to facilitate settlement of payments, including:
- Overdraft facility – This allows deficit member countries to overdraw their settlement accounts up to an approved limit to meet temporary liquidity shortages.
- Bilateral credit lines – Two central banks can voluntarily open credit lines with each other for routing payments under the ACU.
- Multilateral credit lines – Available from members to support the settlement mechanism’s smooth functioning.
These facilities help finance any temporary imbalances in trade and settlement transactions among members.
Benefits and Impact of the ACU
Since its establishment in 1974, the Asian Clearing Union has emerged as an important mechanism for facilitating regional trade and maintaining financial stability. Here are some of the major benefits and impact of the ACU:
Economizing on Foreign Exchange Reserves
- The ACU economist on the usage of foreign currency reserves like US Dollar for making payments amongst members.
- By using Asian currencies for settlement, reliance on hard currencies is reduced.
- Member countries saved over USD 400 billion between 1975-2022 in foreign exchange reserves by using the ACU route.
Reducing Costs of Transactions
- Abolishes third party transaction fees for payments between member countries.
- Lowers remittance costs compared to correspondent banking charges.
- Overall resource saving estimated at USD 70 million per year.
Smoothening Trade Transactions
- Provides alternative avenue for inter-regional trade payments.
- Supports around 6-10% of total intra-regional trade among members annually (around USD 40-60 billion).
- Settles payments in Asian currencies, enabling traders to better plan transactions.
Facilitating Liquidity Management
- Allows members to pool liquidity through ACU for more efficient management.
- Credit facilities helps central banks handle temporary liquidity or trade imbalances.
- Exposure limits cap settlement risks posed by third-party payments.
Strengthening Financial Cooperation
- Reinforces monetary and financial cooperation amongst member central banks.
- Mechanism stays robust even during global or regional financial crises.
- Paves way for more bilateral/multilateral arrangements between member countries.
Thus, the ACU has strengthened intra-regional economic and financial linkages significantly over the past five decades.
Recent Trends and Developments
In recent years, the ACU mechanism has undergone some upgrades and renewed interest from members to increase its utilization. Some notable trends include:
Expanded membership – With joining of Afghanistan, Maldives and Bhutan in the 2000s, the ACU has expanded its reach. Discussions are on for inclusion of more Asian countries like Kazakhstan.
Increasing share of transactions – Use of the ACU payment route has been rising, touching USD 40 billion in 2021. It accounts for around 6-10% of intra-regional trade.
Operational upgrades – Technological upgrades have been implemented, including introduction of an online payment mechanism. ACU settlement cycles have also been reduced from T+1 basis to same day.
Currency swap arrangements – Bilateral currency swap agreements between member central banks are on the rise. These help pool liquidity and reinforce use of the ACU route.
Regulatory support – Members such as India have introduced regulatory policies encouraging wider usage of the ACU mechanism for regional trade payments.
Increasing yuan-based settlements – With the ACU accepting transactions funded by yuan, more settlements are taking place using the Chinese currency.
These trends point to growing activity levels within the ACU payment mechanism and emphasis on boosting its usage for intra-regional trade and payments.
Future Outlook for the ACU
Going forward, the Asian Clearing Union is well positioned to take on an even bigger role in facilitating regional trade payments and integration.
Expanding Membership
The ACU has plans to expand its membership to bring more Asian countries into its ambit. Prospective members include Kazakhstan, Turkmenistan and Uzbekistan.
With more participants, ACU’s share of intra-regional trade flows will grow.
Higher Transaction Volumes
Efforts to boost usage of the ACU route, upgrade technological infrastructure and regulatory support from central banks will drive higher transaction volumes.
More member countries may start settling trade in their respective local currencies routed through the ACU.
New Products and Services
The ACU aims to move beyond trade payment settlement services. It plans to introduce new offerings like cross-border remittances, electronic fund transfers and direct currency conversion.
Settling more types of cross-border payments through the ACU will benefit members.
Closer Regional Integration
With greater interlinkages between member countries through the ACU and related arrangements, financial and monetary cooperation in the region will be strengthened.
This will aid the gradual progress towards greater regional economic integration.
Conclusion
In summary, the Asian Clearing Union serves as an invaluable mechanism for facilitating intra-regional trade, economizing on forex reserves and promoting monetary cooperation in Asia.
Over the past five decades, it has made significant contributions towards strengthening economic ties between member countries.
With ongoing upgrades to its infrastructure and widening of its scope, the ACU is gearing up to play an even bigger role in supporting regional integration in the coming decades.
Its prospects appear bright as Asian economies display greater commitment towards using the ACU route for channelizing trade and financial flows in the region.
