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ASIAN CLEARING UNION ANNUAL REPORT 2003 Shiraz, May 2004 ASIAN CLEARING UNION ANNUAL REPORT 2003 Submitted to: The Thirty Third Meeting of the Board of Directors Held at: The Central Bank of the Islamic Republic of Iran Shiraz, Iran May 10 -11, 2004 I BOARD OF DIRECTORS AT THE 32nd ACU MEETING 16 - 17 June 2003 Bangalore, India II nd PARTICIPANTS AT THE 32 MEETING OF THE ACU BOARD OF DIRECTORS 16 - 17 June 2003 Bangalore, India III CONTENTS Page Administrative Organization VIII Board of Directors IX Officers in Charge XI Letter of Transmittal XII World Economic Developments and Outlook 1 Economic Highlights of the ACU Member Countries 4 Country Performance: Bangladesh 11 Bhutan 30 India 37 Iran 53 Myanmar 67 Nepal 72 Pakistan 88 Sri Lanka 107 Auditors’ Report 129 Clearing Operations 131 Interest Paid / Received 142 SWAP Facility 144 Activities to Enlarge the Role of ACU in the Region 146 Twenty Eight Years of ACU Operations 151 Tables 155 VII ASIAN CLEARING UNION ( BOARD OF DIRECTORS, 2003) BANGLADESH BANK: H.E. Dr. Fakhruddin Ahmed Governor. (Director) Mr. M. A. M. Kazemi Deputy Governor. (Alternate) 1 ROYAL MONETARY AUTHORITY H.E. Mr. Daw Tenzin OF BHUTAN: Governor. (Director) Mr. Dechen Tshering Deputy Managing Director. (Alternate) 2 RESERVE BANK OF INDIA: H.E. Dr. Y. Venugopal Reddy Governor.(Director) Dr. T. C. Nair Chief General Manager. (Alternate) CENTRAL BANK OF THE H.E. Dr. Ebrahim Sheibany ISLAMIC REPUBLIC OF IRAN: Governor. (Director) Dr. Mohammad Jafar Mojarrad Vice Governor. (Alternate) CENTRAL BANK OF MYANMAR: H.E. Mr. Kyaw Kyaw Maung Governor. (Director) 3 Mr. Than Nyein Deputy Governor. (Alternate) IX NEPAL RASTRA BANK: H.E. Dr. Tilak Rawal Governor. (Director) Mr. K. B. Manandhar Chief Controller. (Alternate) STATE BANK OF PAKISTAN: H.E. Dr. Ishrat Husain Governor. (Director) Mr. Farhat Saeed Executive Director. (Alternate) CENTRAL BANK OF SRI LANKA: H.E. Dr. A. S. Jayawardena Governor. (Director) Mrs. K. R. M. Siriwardhane Director Payments & Settlements, Department. (Alternate) 1. From 04.12.2003. 2. From 06.09.2003. 3. From 07.11.2003. X ASIAN CLEARING UNION ( OFFICERS IN CHARGE, 2003 ) 1 BANGLADESH BANK: Mr. Md. Belayet Hossain General Manager Forex Reserve and Treasury Management Dept. ROYAL MONETARY AUTHORITY Mr. Namgay Tshering OF BHUTAN: General Manager Foreign Exchange Division 2 RESERVE BANK OF INDIA : Mr. Shyam Sunder General Manager, DEIO. 3 CENTRAL BANK OF THE Mr. Reza Nadali ISLAMIC REPUBLIC OF IRAN: Director, International Dept. CENTRAL BANK OF MYANMAR: Ms. Naw Eh Hpaw Deputy Director, Accounts Dept. 4 NEPAL RASTRA BANK: Mr. Purushottam Bhakta Shrestha Assistant Director, Foreign Exchange Dept. STATE BANK OF PAKISTAN: Mr. Muhammed Saleem Rehmani Director, Accounts Dept. CENTRAL BANK OF SRI LANKA: Mrs. P. Sudasinghe Senior Assistant Director, Payments and Settlements Dept. 1. From 06.10.2003. 2. From June 2003. 3. From 04.12.2003. 4. From 20.05.2003. XI World Economic Developments and Outlook WORLD ECONOMIC DEVELOPMENTS AND OUTLOOK After growth of less than 2 per cent for over two years, the world economy is gaining momentum. Following the setbacks caused by the prospects of war in Iraq and the outbreak of SARS early in 2003, economic growth in an increasing number of countries shifted to a measurably higher gear in the second half of the year, raising the growth of gross world product (GWP) for 2003 as a whole to 2.5 per cent. Despite some lingering uncertainties and downside risk, the economic recovery is expected to strengthen and broaden further, raising global economic growth of 31/2 per cent in 2004. The growth of world trade is expected to reach 71/2 per cent in 2004, up from 4.7 per cent in 2003. The improved performance and outlook does not, however, compensate for the subdued growth of the previous two years when world per capita output failed to increase. The global economic recovery is being drive mainly by the United States, but increasing contributions from a number of other economies are becoming evident. Particularly notable is the rapidly rising weight of China in the world economy and its role in the present recovery. East Asia has maintained its strength, accompanied by a turnaround in Japan that has been stronger than anticipated. In 2003, some of the economic difficulties facing a number of Latin American countries diminished, while the short-term prospects for Africa also improved. After the setbacks associated with their transformation, the economies in transition have achieved sound growth for a number of consecutive years despite the slowdown elsewhere. In contrast, Western Europe has been a source of the weakness that began to dissipate only in late 2003. The recovery is being accompanied and supported by a degree of improvement in international trade and finance. World trade grew by 4.75 per cent in 2003, with much of the increase attributable to import demand from developing countries, and is forecast to grow 71/2 per cent in 2004. The international prices of non-fuel commodities have been rising as the demand for minerals and metals and, to a lesser extent, agricultural raw materials strengthens, 1 but a large part of the increase in accounted for by the depreciation of the dollar. Further increase in non-fuel commodity prices are expected in 2004, but the price of oil is expected to ease. At almost US Dollars 82 billion, net private capital flows to developing countries were about 50 per cent higher in 2003 than in 2002, but mostly as a result of lower repayments and other outflows. Foreign direct investment (FDI) and official loans and grants were the only net sources of capital inflow for these countries. FDI, both globally and to developing countries, was almost unchanged from 2002, and in both cases was well below the peak it reached in 2000. Official development assistance (ODA) increased in 2002 but data are not yet available for 2003. Taking into account developing counties’ accumulation of reserves and their net outflows of dividends, interest and other payments on capital, there was a net transfer of financial resources from the developing countries of almost US Dollars 190 billion in 2002. This is estimated to have remained largely unchanged in 2003. The strength of the current recovery is still heavily dependent on the policy stimulate of low interest rates and expansionary fiscal measures. While the required mix of such policies varies across countries, continued stimulus remains crucial for nurturing the recovery because autonomous effective demand remains below potential in many economies. The challenge for policymakers in the short run, particularly in the developed countries, is to strike a balance between two possible outcomes: either choking off the recovery through a premature withdrawal of stimuli or sowing the seeds of economic overheating through a precipitate tightening of policy. 2 Economic Highlights ECONOMIC HIGHLIGHTS OF THE ACU MEMBER COUNTRIES BANGLADESH: Higher growth of agriculture, industry and services Sectors along with other major of monetary and economic adjustments in the fiscal year 2003 resulted the real GDP to grow by 5.3 per cent as compared to 4.4 per cent in 2002. GDS as well as investment as percentage of GDP increased to 18.23 and 23.22 in FY2003 compared to 18.16 and 23.15 in FY2002. Government’s revenue earnings as percentage of GDP improved marginally to 10.3 per cent as compared to 10.2 per cent in FY2002. In FY2003 broad money (M2) grew by 15.6 per cent as compared to 13.1 per cent in 2002 and 12.5 per cent programmed expansion for the year. Consumer price inflation was slowly started from the second half of FY2002 continued over FY2003. The annual average rate of inflation increased to 4.4 per cent as compared to 2.8 per cent in 2002. Increases in the import prices of petroleum, rice, edible oil and sugar in FY2003 were the main contributors to the upward pressure on prices. Exports receipts during FY2003 reached to US Dollars 6.5 billion compared to US Dollars 5.9 billion in the preceding year. The increase in export earnings was mainly reflected in higher earnings from oil, fertilizer, raw jute, frozen shrimps and fish, knitwear and hosiery products, jute goods, ready-made garments. Import payments of Bangladesh in FY2003 recorded US Dollars 8.7 billion. The import payments for spices, edible oil, coconut oil, cotton, pharmaceutical products, crude petroleum, iron, steel and other base metal increased. Workers remittances stood at US Dollars 3.0 billion or 22.4 per cent higher than of the previous year. The overall balance of payments position showed a surplus of US Dollars 815 million during FY2003 as against US Dollars 365 million in the last year. BHUTAN: In FY2003, Bhutan economy experienced notable developments including approval of the Bhutan foreign direct investment policy, Bhutan’s 4 membership to the International Finance Corporation (IFC), and the submission of the memorandum on the foreign trade regime document to the World Trade Organization (WTO), Geneva as part of the process of Bhutan’s accession. Real GDP growth was 7.7 per cent in 2002, inflation reached to 1.8 per cent in June 2003, the lowest level of the last 20 years. Agriculture sector remains significant, contributing around 33 per cent of the total nominal GDP. At the end of 2002-2003 Bhutan’s tourism industry displayed encouraging signs of recovery. Figures of visitors and tourist revenue increased 11.0 per cent and 5.2 per cent respectively. In the year under review, Bhutan’s balance of payments improved significantly. Foreign exchange reserves accumulated to US Dollars 374 million, which is sufficient to cover 23 million of imports.