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 the middle of 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 Co-operation 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 Defenition 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 co-operation in general and for monetary and financial co-operation in particular.





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