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#4734, 11 November 2014

Regional Economy

18th SAARC Summit: An Economic Agenda
Amita Batra
Professor of Economics, Centre for South Asian Studies, School of International Studies, JNU

The 18th SAARC summit is scheduled to be held in Kathmandu, Nepal, in a little less than three weeks from now. The theme of the summit is ‘deeper integration for peace and prosperity’.  Deeper integration, in addition to the creation of a free trade area, entails liberalisation of services, investment, elimination of non-tariff barriers, and in general, going beyond traditional market access issues.

The theme is appropriately timed, given that the neighbouring ASEAN bloc is expected to achieve the formulation of an economic community by 2015 and the larger region of the ASEAN+3 (China, Japan, Korea) +3 (Australia, New Zealand, India) is negotiating a Comprehensive Economic Partnership Agreement (CEPA), also to be finalised by 2015. Compelling regional forces therefore exist for South Asia to accelerate towards deeper integration. 

What could be a possible agenda for the SAARC to take forward the idea of deeper integration in South Asia? 

First, evaluate the South Asian Free Trade Agreement (SAFTA) for its continued relevance in the region. There are overlapping trade agreements and unilateral policy announcements among member countries that undermine the regional agreement. The bilateral agreement between India and Sri Lanka is operating successfully with both sides desirous of its elevation to a CEPA. India has a preferential trade agreement with Afghanistan, and trade treaties operating like de facto free trade agreements with Bhutan and Nepal. Exports of all Least Developed Countries (LDCs) are allowed to enter India free of duty and quota restrictions.

A major proportion of regional trade is thus covered by preferential terms of trade, independent of the SAFTA. India-Pakistan trade will remain below potential as a natural outcome of traders’ risk-return calculations in an atmosphere of constant friction, and Pakistan’s continued hesitation to grant India the Most Favoured Nation (MFN) status (euphemistically termed as Non Discriminatory Market Access). Eight years of implementation of the SAFTA have not led to intra-regional trade expanding beyond 6 per cent of the region’s total trade.

The 2010 SAARC Agreement on Trade in Services (SATIS) has made less than impressive progress. Resource-constrained South Asian economies must therefore make future calculations with due recognition of existing conditions and past performance of regional agreements.

Second, focus on factors that could facilitate trade in South Asia. An aspect that has drawn relatively less attention but is of critical importance is the lack of financial connectivity in the region. As banking channels are limited in many areas, financial support measures for trade capacity build-up could be of major assistance. Local currency swap arrangements, with assistance from central banks for settling payments in local currencies of cross-border charges and fee for cross-border movement of goods could be a feasible option in the near future. India and Bhutan signed a currency swap arrangement whereby the Royal Monetary Authority of Bhutan (RMAB) is enabled to make withdrawals of US dollars, Euros or Indian rupees in multiple tranches up to a maximum of $100 million or its equivalent.

In 2012, the Reserve Bank of India (RBI) announced it would offer swap facilities aggregating $2 billion in both foreign currencies and Indian rupees to SAARC member countries for a three-year period to help bring financial stability in the region. However, these swaps are denominated in dollars and earmarked only as a line of reserve for partner countries during a balance-of-payment crisis and not for enabling trade payment. India’s Exim Bank could also extend operations in context-suitable trade finance instruments, provide export credit insurance and undertake risk assessment of small producers and exporters. Countries could also evolve ways and means of joint information access and exchange for better risk assessment of individual traders and general financial environment.

Lack of financial connectivity is a particularly severe constraint for border trade that therefore remains confined to a limited number of commodities and barter systems.  Border regions and communities are amongst the poorest in South Asia. Setting up a regional fund or a bilateral fund for border trade could be taken up for consideration at the SAARC summit. Trade finance could help border regions develop in a manner such that they become channels of absorbing and transmitting economic dynamism of neighbouring countries rather than being solely dependent on the their own countries.

The last item on my agenda for the upcoming SAARC summit is to review the involvement of the nine SAARC observer nations. Do we share a common agenda? Could we involve these states to strengthen the regional voice at international fora? There must be a broader vision to utilise the expertise of these nations to build a more substantive association on a regional basis – given that some of these observer nations are our co- participants in emerging regional economic formulations – as also their expertise in achieving peaceful co-existence via economic integration in their respective regions.

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