India’s central bank has said payments for trade with Iran should be settled outside the Asian Clearing Union (ACU), prompting fears in India that oil imports from the OPEC member could dry up without an alternative. Central bank officials of both countries were due to meet on Friday in Mumbai to discuss an alternative settlement mechanism to the long-standing ACU, through which central banks of eight South Asian countries plus Iran settle payments for bilateral trade. Indian officials have said that they expect a quick solution. 

Why did India halt settlement with Iran through the ACU? 

Iran already faces sanctions from the United Nations over its nuclear programme, and though the sanctions do not ban purchases of crude, Washington has been lobbying governments and companies to stop dealings with Tehran. ACU in Brief Asian Clearing Union (ACU) is the simplest form of payment arrangements whereby the participants settle payments for intra-regional transactions among the participating central banks on a multilateral basis. The main objectives of a clearing union are to facilitate payments among member countries for eligible transactions, thereby economizing on the use of foreign exchange reserves and transfer costs, as well as promoting trade among the participating countries.

The ACU is a clearing houses/payments arrangements operating in various regions of the world. 

History of Clearing Unions 

The need for the formation of clearing unions was felt as early as in the 1930s due to foreign exchange shortages, the breakdown of the gold standard, and the collapse of the international capital markets forcing the governments to introduce controls on foreign exchange and foreign trade on the one hand and to sign bilateral trade and payments agreements on the other. It was recognized after a while, however, that bilateral clearing arrangements had a repressive effect on trade and that they led to inefficient use of resources. 

In the early 1940s, J. M. Keynes proposed a kind of an international clearing union that would operate on a multilateral basis but the United States opposed the idea on the grounds that it rested on automatic credits and controlled trade. At the end of the Second World War, scarcity of hard currencies in Europe led the Western European countries to sign numerous bilateral agreements once again. These bilateral agreements reached to payments and credits limits soon; however, these countries had the choice of establishing either current account convertibility or a multilateral payments union. They have opted for the second solution and concluded two agreements for multilateral settlements, one in 1947 and the other in 1948, by reporting their balances to the Bank for International Settlements (BIS). 

In mid-1950, 18 Western European countries joined in a multilateral clearing union known as the European Payments Union (EPU). In this system, at the end of each settlement period the balance (the amount which has not been cleared in the system) settled by US dollar. Success of EPU encouraged developing countries to set up similar Clearing Unions in Africa, Latin America as well as in Asia and the Pacific region.

Establishment of Asian Clearing Union (ACU) 

The ACU was established at the initiative of the United Nations Economic and Social Commission for Asia and the Pacific (ESCAP). The Decision to establish the ACU was taken at the Fourth Ministerial Conference on Asian Economic Cooperation held in December 1970 at Kabul. The Draft Agreement Establishing the ACU was finalized at a meeting of senior officials of the governments and central banks held at ESCAP, Bangkok, in December 1974 after five central banks (India, Iran, Nepal, Pakistan, and Sri Lanka) signed the Agreement. Bangladesh and Myanmar were the sixth and seventh signatories to this Agreement. Bhutan and Maldives signed the Agreement in 1999 and 2009 respectively and the number of the ACU participants reached nine. 

Clearing Union Definition and Reasons for Existence 

A clearing union can be defined as a multilateral payments arrangement that periodically offsets the debits and credits accumulated by each member against the other members in the process of trade and other transactions. Multilateral clearing or payments arrangements facilitate the use of national currencies, and thus serve to relax the foreign exchange constraints of the members.

Among the basic reasons for the formation of a clearing union, the following can be mentioned:

i) Exports and imports among members can expand relatively faster because of conservation of foreign exchange in intra-group transactions, at least until the settlement date.
ii) Trade liberalization can be promoted initially among the members.
iii) Exploitation of scale economies would be made possible by enlarged trade.
iv) An adjustment process can be promoted that would raise the international competitiveness of the members which have similar distortions in trade and production.
v) Measures and surveillance by the union can help to secure a more balanced current account which in turn contributes to the creation of conditions for the future convertibility of each of the currencies of member countries.
vi)  Ground can be prepared for regional economic cooperation in general and for monetary and financial cooperation in particular.
 
General Provisions Article I-Asian Clearing Union
 
The central banks and other monetary authorities on whose behalf the present Agreement is signed, hereinafter referred to as "participants", agree to establish a system for clearing payments among their respective countries on a multilateral basis, hereinafter referred to as the "Asian Clearing Union", which shall be governed by the provisions of this Agreement and by the rules, regulations and decisions agreed within its framework. 

Article II-Purposes 

The purposes of this Agreement are: 

(a) To provide a facility to settle, on a multilateral basis, payments for current international transactions among the territories of participants;
(b) To promote the use of participants' currencies in current transactions between their respective territories and thereby effect economies in the use of the participants' exchange reserves;
(c) To promote monetary co-operation among the participants and closer relations among the banking systems in their territories and thereby contribute to the expansion of trade and economic activity among the countries of the ESCAP region; and
(d) To provide for currency swap arrangement among the participants so as to make Asian Monetary Units available to them temporarily.

Article III-Participation Section 1- Eligibility to Participate 

(a) Participation in the Asian Clearing Union shall be open to the central bank or monetary authority of each regional member or associate member of ESCAP.
(b) Participation in another clearing group or arrangement is not precluded by participation in the Asian Clearing Union.

Section 2 - Original Participants

Original participants shall be those central banks or monetary authorities that are eligible to participate in and which sign this Agreement not later than three months from the date this Agreement has been signed by the duly authorized representatives of five such central banks or authorities. Each shall become a participant on the date this Agreement enters into force. 

Section 3 - Other participants 

A central bank or monetary authority that is eligible to participate and is not an original participant may apply to the Board of Directors to become a participant and be admitted as a participant if the Board so decides by a two-third vote of all the Directors and upon such central bank or monetary authority signing this Agreement and accepting the rules, regulations and decisions of the Board of Directors. The Chairman of the Board shall determine the date on which the payments and transfers with respect to such a participant shall be included in the clearing facility.