Introduction

The possibility of a common currency depends upon several economic factors like regional volume of trade, labor and capital mobility, interest rates movements, exchange rate trends, etc. It is considered that if countries of a specific region have similar trends or shocks in relevant economic factors then adopting a common currency will be successful. Apparently the SAARC region has reasonably similar efficiencies of labor and capital factors, therefore a common currency for this bloc is a possibility. This report intends to determine the likelihood of a monetary union for the SAARC economic bloc.

History of SAARC
The South Asian Association for Regional Cooperation (SAARC) comprises seven countries of South Asia - Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka. The idea of regional cooperation in South Asia was first rooted around November 1980. After consultations, the foreign secretaries of the seven countries met for the first time in Colombo in April 1981. This was followed by a meeting of the Committee of the Whole, which identified five broad areas for regional cooperation. The foreign ministers of South Asia, at their first meeting in New Delhi in August 1983, adopted the Declaration on South Asian Regional Cooperation (SARC) and formally launched the Integrated Program of Action (IPA) initially in five agreed areas of cooperation-agriculture, rural development, telecommunications, meteorology, and, health and population activities. The heads of state or government at their first SAARC Summit held in Dhaka on 7th and 8th December 1985 adopted the Charter formally establishing the South Asian Association for Regional Cooperation. There are some institutional setup in SAARC countries

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Summit
The highest authority of the Association rests with the heads of state or government, who meet annually at the Summit level. To date, eleven meetings of the heads of state or government have been held respectively in Dhaka (1985), Bangalore (1986), Kathmandu (1987), Islamabad (1988), Male (1990), Colombo (1991), Dhaka (1993), New Delhi (1995), Male (1997), Colombo (1998), and Kathmandu (2002). The Twelfth SAARC Summit is scheduled to be held in Pakistan.

Council of Ministers Comprising the foreign ministers of member states, the Council is responsible for formulating policies, reviewing progress, deciding on new areas of cooperation, establishing additional mechanisms as deemed necessary, and, deciding on matters of general interest to the Association. The Council is expected to meet twice a year and may also meet in extraordinary session by agreement of member states. It has held twentytwo regular sessions.

Standing Committee The Standing Committee comprising the foreign secretaries of member states is entrusted with the task of overall monitoring and coordination of programs. The Committee has held twenty-seven regular sessions and three special sessions, the latest in Colombo in August 2001. The twentyeight session of the Committee will be held in Kathmandu.

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Committee on Economic Cooperation In July 1991, the Council of Ministers at their Ninth session in Male established the Committee on Economic Cooperation (CEC) comprising Commerce/Trade secretaries of the SAARC member states. The function of the CEC was to formulate and oversee implementation of specific programs within the SAARC framework to strengthen intra-regional cooperation in economic relations. So far, the CEC has held ten meetings.

Meetings of Commerce Ministers The first meeting of SAARC Commerce ministers was held in New Delhi in January 1996. Since then, two more meetings of Commerce ministers have been held which focused on enlarging the scope and coverage of regional economic cooperation. Meetings of Commerce ministers have also taken place on WTO issues.

SAARC Preferential Trading Arrangement (SAPTA) The Tenth Summit in Colombo approved the formulation on an institutional framework for trade liberalization in SAARC through SAPTA. IN 1993, the framework agreement on SAPTA was finalized and signed at the Seventh Summit at Dhaka. It entered into force in 1993. So far three rounds of trade negotiations have been concluded under SAPTA covering over 5000 commodities.

South Asian Free Trade Area (SAFTA)

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The Tenth Summit in Colombo in 1998 decided on the setting up of a Committee of Experts which would draft a comprehensive treaty regime for creating a free trade area within the region. The Committee has been set up and a draft prepared by the Secretariat is under consideration.

Common Currency
Common currency means that individual countries do not have their own currency, and whole task of currency creation and monetary policy is agreed at a regional level with agreements on national component of currency and money creation. Interest rate and exchange rate policies are also centralized. That system requires surrender of monetary sovereignty associated with currency creation and monetary expansion.

Steps Needed to Introduce a Common Currency Economic cooperation is an integrated process. To achieve economic integration such as introduction of common currency, a certain level of integration is necessary. Otherwise it will never be possible to introduce a common currency in any such region. Before economic integration there are three levels of cooperation exists. In the following they are described in brief:

1. Free trade area: Free trade area is the least level of integration In a free trade area, all barriers to the trade of goods and services among member countries are removed. no discriminatory tariffs, quotas, subsidies or administrative impediments are allowed to distort trade between members

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Each country however is allowed to determine its own trade policies with regard to non members. Thus for example the tariffs placed on the products of nonmember countries may vary from member to member.

2. Customs union:

The customs union is one step further down the road for complete economic integration.

A customs union eliminates trade barriers between member countries and adopts a common external trade policy. Establishment of a common external trade policy necessitates significant administrative machinery to oversee trade relations with, non members.

3. Common market:

The next level of economic integration is common market. A common market has no barriers to trade between member countries, includes a common external trade policy, and allows factors of production to move freely between members.

Labor and capital are free to move because there are no restrictions on immigration, emigration, or cross border flows of capital between member countries.

Establishing a common market demands a significant degree of harmony and cooperation on fiscal, monetary and employment policies.

4. Economic union
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Economic union is the level of integration that we are seeking in this report in South Asia. Like the common market, an economic union involves the free trade flow of products and factors of production between member countries and the adaptation of a common external trade policy but it also requires a common currency, harmonization of members' tax rates and a common monetary and fiscal policy. Such a high degree of integration demands a coordinating bureaucracy and the sacrifice of significant amount of national sovereignty to that bureaucracy.For Example: European Union is an economic union

Rationale behind Common Currency

In this report we are trying to develop a hypothesis. This hypothesis we are callings the rationale behind economic cooperation that is introducing a common currency. The introduction of common currency will be beneficial up to highest point if there is interdependency between the member countries that are going for a common currency. For example the inter trade among the European Union countries was a significant amount. For this reason the transaction cost of converting currencies was huge. Since they were heavily independent and the inter trade cost them a lot, they went for introducing a common currency. So if we can show that there is great deal of interdependence among the South Asian countries then, it can be viable basis for introducing a common currency. In the following, a statistics is given in percentage terms of inter trade among the South Asian nations. In the following statistics India is considered to be the base country. Then we have tried to compare that how much each of the other six countries is dependent on India in terms of Trade.

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The above table shows the percentage figures of inter regional export of South Asia. The blank space indicates either insignificant export or no export relationship with ''the countries. From the table it is evident that 35.55% of Bhutan's total export is to India. Similarly Nepal exports 54.4% of its total export to India. Sri Lanka on the other hand exports only 7.2% to India. Maldives export 13.4% of its total export to Sri Lanka. Bangladesh and Pakistan have no significant export trade relationship with any of the South Asian countries.

The above table shows inter regional import trade relationship. From the table it is evident that except Pakistan, all the countries have import relationship with India and they are quite significant. Bangladesh imports
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14.70% of its total import from India and in fact India is the highest import

partner of Bangladesh. Same thing goes for most of the countries. So from the above two tables it is evident that though all the countries are not that much dependent to each other in terms of export, they are very much dependent on India terms of import. Since these countries are importing significant amount from India, it involves a transaction cost during currency conversion. So if a common currency can be introduced then, this transaction cost of currency convertibility can be eliminated and all the member countries will be benefited. Comparative Analysis of Economic Indicators: This section provides key macroeconomic facts about the SA region, including the exchange arrangements, trading patterns of member countries and their growth and inflation performance in recent years. The economic analysis is limited to the seven original member countries of SAARC; Afghanistan is excluded due to its recent membership into SAARC.

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The SAARC member states not only have a legacy of political conflicts and tensions but also differ greatly in land area, size of the economy and population (Table above). The shared features of their economies arise from underdevelopment. None of the countries have been able to move up to the status of a middle income country, though the region as a whole experienced relatively rapid growth in recent years, facilitated by reforms to the restrictive trade and investment regimes of the past. Financial sector reforms have lagged trade policy reforms and the financial architecture in the region is still quite underdeveloped; this is the case even in India, despite its active equity markets and some limited progress in developing bond markets. There is no regional bond market. Domestic financial markets (to varying degrees) have been progressively opened up to integration with international markets and current account convertibility (IMF Article VIII) was agreed to by the five larger countries (Bangladesh, India, Nepal, Pakistan, Sri Lanka) in 1994 but none of the countries have yet permitted free capital mobility. In economic terms, India, the largest member state of SAARC, dominates the region. Compared with Maldives, the smallest member, it is over ten thousand times larger in land area, over three thousand times bigger in population and has an economy which is a thousand times larger. This economic and demographic dominance of India and its strained 3 Bhutan is also excluded in some cases due to data unavailability.

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These summary statistics of inflation and output growth for SAARC member countries suggest some broad similarities as well as some important differences. Inflation was in the 68% band for Bangladesh, Bhutan, India, Nepal and Pakistan, but Sri Lanka had much higher (10.3%) inflation while Maldives (3.8%) had significantly lower inflation. The real output growth suggests some broad similarities, with average growth higher than 6% being recorded by Bhutan, India and Maldives. However, these are period averages and can mask changing trends. In fact, inspection of the time trends of inflation and real growth rates indicate significant differences. No wonder, India has the highest GDP among the SAARC countries, as it possesses the largest population as well as largest' country size and resources. The GDP growth rate of the seven SAARC countries during the period 1995 - 2007 lacks steadiness. Although, India and Bhutan show a stable growth rate in GDP, other countries suffer from significant fluctuations. Specially, Nepal and Sri Lanka had an experience' of negative growth rate and Pakistan had its least growth of 1.0% in 1997 from 4.8% in 1996.Despite major steps towards trade liberalization in recent years by member countries, intra-SAARC trade is relatively small. Intra-SAARC trade has increased slightly from 3.8% in 2000 to 4.1% in 2004, involving mainly primary products (RIS, 2002). Trade with countries
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outside the region (i.e., regional trade openness) which was 25% of regional GDP in 2000 had grown by 2004 to 28% of regional GDP.

It is important to note that because the Indian economy massively dominates the regional economy by virtue of its size, intraregional trade is bound to be a small figure when computed as a proportion of the regions total international trade. Indias trade with its neighboring small economies is a relatively small part of its global trade. Indias exports to the region have stagnated at around 5% of its total exports while its imports comprise a tiny 1% of its total imports. But the picture changes when we look at the importance of India in the total trade, in particular of imports, of several of these neighboring counties. Trade (both imports and exports) with India comprises about 60% of the total trade of Nepal, whose landlocked economy has become increasingly more integrated with that of India. For Bhutan the figure is almost certainly higher, though accurate data are not available. India is the source of nearly a fifth of all of Sri Lankas imports. It is the source of over 15% of Bangladeshs imports and 10% of Maldives imports. As the Indian economy started to grow rapidly in
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the 1990s, it has also started to become a major source of imports for its smaller neighbours. Indias growth also started to spur substantial outward FDI from India into neighbouring countries and increased the attraction of India as a destination for (both legal and illegal) labour migration from neighbouring countries such as Nepal and Bangladesh. India has also emerged as an exporter of a range of services to its neighbours, including health/medical services and education. On the one hand, it is quite clear that intraregional trade (in both goods and services) is inhibited by many policy-imposed restrictions, though all South Asian countries have enjoyed greater access to each others markets in recent years. This is because trade restrictions throughout the region have come down as a result of unilateral trade liberalization undertaken by member countries, rather than due to trade preferences granted as part of regional agreements. Indeed, despite lofty statements about a free trade area, actual trade preferences granted to members through the preferential trading arrangements (SAPTA and SAFTA) is very limited. At the end, by observing all the relevant economical features of the seven SAARC counties, we can come to a conclusion that these countries lack homogeneity. They differ from each other at a large scale in terms of inflation rate, GDP growth rate and trade balance .

Discussion In Light of European Union & Euro

Political and economical factors are the stimulus for pushing countries towards regional integration. European Union is the precise example in this case. The European Monetary System (EMS) was created on account of a Resolution of the European Council on the 5th of December 1978. It entered into force on the 13th of March 1979, according to an agreement celebrated the same day between the central banks of the countries that formed part of the Community. It had 3 fundamental objectives:
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to stabilize the exchange rates in order to rectify the existing instability,

to reduce inflation and to prepare European monetary unification through cooperation.

The three basic elements of this System are:

The ECU: it referred to a composed currency (or currency

basket), formed by given percentages of each one of the participating currencies, established in function to the contribution of the respective countries to the GNP of the Community and to the communities inter-exchanges. The value of the basket was calculated by multiplying the weight attributed to each currency by its exchange rate with respect to the ECU.It is a currency that was used to specify the community budget, however it was not legal tender. It served as a means of payment and reservation at the central banks.

An exchange rate and intervention mechanism (ERM): It

is the basis of the EMS. The ERM established, for each one of the communities currencies, a central type of change to the ECU (central pivot), and some central exchange rates or fixed parities for each currency with respect to the remainder
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(lateral pivots). With this gridiron of parities, formed by all the bilateral exchange rates, the different exchange rates of the participating currencies had to stabilize. In this way, the central banks were committed to intervening in order to attempt to maintain their currencies always within an established fluctuation margin.

European Monetary Cooperation Fund (EMCF): created in

October 1972 and whose principal functions were:

to facilitate interventions in the currency markets,

to effect liquidations between the central banks and to manage the short-term credit facilities associated with the EMS. By looking Europian monetary system, SAARC may wish to consider a regional currency unit, perhaps to be called South Asian Currency Unit (SACU). One of the major components of doing such a monetary system is to create a regional fund mechanism. It facilitates increased monetary cooperation and finance costly shortterm adjustments resulting from balance of payment disequilibrium.

A Proposal for a South Asian Monetary System

The fact that in narrow in any sence institutional terms, SAARC may be at a stage of economic and monetary integration which is not very dissimilar to Europe in the late 1960s and early 1970s period does not mean that SAARC is in a position to follow the steps that Europe took towards further integration. As Frankel and Rose (1998) suggest, the criteria for a common currency can be largely endogenous. If there is a commitment to monetary integration, that itself generates movement towards meeting the criteria
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for a currency union. This can also be generalized more broadly for overall economic integration. Growing regional economic integration and political commitment to that goal generates conditions for both greater monetary coordination and broader economic integration. In the same way, enhancing regional monetary integration may facilitate greater trade and payments between member states and accelerate the process of economic integration. It is in this spirit that we should interpret the suggestion by the SAARC GEP to establish a single monetary system (SAARC, 1997/1998, p. 21) as a step for a common currency. Maskay (2003) has attempted to link both processes together (e.g., economic and monetary integration) by suggesting that the present process [for monetary cooperation] must be structured so as to be harmonized with the level of regional South Asian economic integration. We believe that the current situation of volatility in global financial markets and pressures on payments systems and capital flows may help prepare the ground establishing a South Asian Monetary System (SAMS) to enhance the level of monetary cooperation in the region. The essential step for establishing a SAMS would be for a political decision, perhaps at the summit level, which would lead to recommendations along the lines of the 1970 Werner Report. Such a decision would enhance its sustainability and signal the commitment by the member states to achieve greater monetary and economic integration. It is important to note that all SAARC countries also have a similar stance on both the current and the capital account the former is largely liberalized (with the exception of Bhutan and Maldives) with the later being only partly liberalized, mainly for FDI flows. In this situation, SAMS can draw some useful lessons from how the EMS was structured in developing a system appropriate to the admittedly quite different circumstances in the SAARC region. Recall that, in the EMS there were three essential elements, namely: (1) the Exchange Rate and Intervention Mechanism (ERM); (2) the European Currency Unit (ECU); and (3) the European Monetary Cooperation Fund (EMCF). A brief outline of the EMS is provided in Box 1. The SAARCFINANCE network can provide a useful framework and mechanism which can evolve from a forum for
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discussions on cooperation on certain monetary policy issues to one that can implement joint policy actions when appropriate.25 In other words, the network can provide the foundation for developing a mechanism such as the ERM in the EMS if integration continues to proceed and political commitment deepens. As economic integration and policy collaboration becomes stronger, SAARC may wish to consider a regional currency unit, perhaps to be called the South Asian Currency Unit (SACU). Political constraints clearly preclude the use of the Indian currency as the anchor currency for a South Asian currency unit. But there are other options, such as the use of another currency (or a basket of currencies) to serve as an anchor currency, that may be more politically palatable. The major absent component is a regional fund, like the EMCF, to facilitate increased monetary cooperation and finance costly short-term adjustments resulting from balance of payment disequilibria. Again, such a regional funding mechanism was identified in the 13th Summit Declaration for a SAARC Development Fund (SDF; 2005, para 11), although limited to SAARC-related projects and programmes. While SAARC Development Fund may not be appropriate for this activity, it is not hard to visualize that a similar type of institution a South Asian Cooperation Fund (SACF) can be established to finance adjustment to BOP. This was partly concretized in the last Summit when the SAARC Finance Ministers [finalized] the framework on financial issues in the region (SAARC, 2007, para 17). In this context, SAARC may wish to look at the progress made by countries in the Chiang Mai Initiative and explore whether they can establish some links with the richer East Asian countries such as China and Japan.

Advantage of Common currency

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** Reduction in transaction costs across the frontiers. In fact, conversion of one currency to another involves costs that increase the production and distribution costs. ** Facilitating the movement of scientific and technical manpower among member nations, as conversion losses will be neutralized. ** As the conversion costs are eliminated, a common currency could play a major role in reducing informal trade. If free trade is permitted in the region, much of this informal trade could be translated into formal trade that, in turn, could earn valuable revenue for the governments. ** Pre-empting a South Asian Central Bank, this will facilitate further economic integration.

Disadvantage

of

Common

currency

&

Impediments to Economic Union

Regional monetary policy

The biggest disadvantage of economic integration is that there has to be a regional central bank and that bank will be the sole authority in making regional monetary policies. Like the European Central Bank, a similar South Asian Central Bank has to be created in order to supervise the common currency. Now this means individual countries cannot make their own monetary policies. This is where the problem begins. The considerations, of sovereignty have traditionally weighed heavily on South-Asian Countries. They have been averse to surrendering their decision-making powers on a wide range of issues. Slow collective decision-making

Collective decision- making is a slow affair in the SAARC network. Even matters of vital importance lie in balance for decades without any decision being made. The issues of the creation of SAPTA and SAFTA are
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good instances. The creation of both would have enabled all countries of the region derive vital producer and consumer surpluses. But decisions on this issue have been notoriously slow. Peculiar geographic region

Another awkward block is the peculiar geography of the region. India is bigger than all the other countries of the region put together. This has driven the smaller countries to believe that India is the 'dominant big brother'. Consequently, any meaningful effort on India's part is looked upon with suspicion. Lacks in homogeneity

This region also lacks in homogeneity in terms of economic variables like inflation, GDP growth rate and some other. This lacking in homogeneity is a big impediment in introducing common currency. South Asia is also weighed down by its weak economic fundamentals. For the creation of the monetary union, controlling inflation within a fixed range is a pre-requisite. But in the South-Asian region, different countries are at different levels of economic development.

Present Political Problems in South Asia

Intra-state conflicts There is no single factor as main cause of conflict in South Asia. It involves many issues and provides a disappointing picture in every social, economic and political context. This is due to the fact that South Asia is almost perpetually burdened by various inter and intra-state conflicts and crisis stemming from the careless approach of the ruling forces toward resolution of such problems which are based on narrow considerations of caste, religion, ethnicity, language, community, and the like. This distorts the, national integrity and the overall law and order situation of the affected states.
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Furthermore,

South

Asia

is

an

area

of

tremendous

political ruled by

complexities. States: like Pakistan have

been largely

authoritarian military rulers. India, as such faces several unresolved issues that stem from internal as well as external sources. These include ethnicity, border disputes, separatist demands, terrorism and subversive activities, communalism, religious problems and so on. In Nepal, for example, the series of democratically elected government failed to produce any better result than the old royal regime due to widespread corruption and crisis of good governance. The political fundamentalists such as Maoists and mainstream political parties are posing major threat to democracy in Nepal. In addition to creating law and order problems, increased human rights violations and a heavy reliance on security forces have undermined the question of legitimacy of governance in Nepal. Moreover,the problem of civil violence in recent years has emerged as a more serious security issue than the problem of inter-state warfare in South Asia. India has been variously preoccupied with separatists and religious conflicts such as in the state of Punjab and Kashmir, an issue that remains controversial between India and Pakistan. Alsoilthe conflict with separatists of Mizoram, Assam, and Nagaland (Eastern India) for autonomy and in Gujrat, Mumbai and other parts have certain religious, ethnic, psychological and economic underpinnings. Sri Lanka has also had its own set of problems. Democracy in this tiny island-nation remains overshadowed by the civil war originating from Tamil-Singhalese ethnic conflicts. These conflicts in Sri Lanka have pushed successive governments on the edge of collapse. Ruling parties in Sri Lanka failed to reform economic policies due to polarized political debate. In Pakistan, the society faces periodic bursts of violence derived from ethnic, sectarian and religious differences in its diverse community. For instance, conflict in the Sindh province between ethnic Sindhis and those residents who migrated from India following partition
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has made the province, especially its capital Karachi, ungovernable. Conservative religious elements are also very powerful in Pakistan leading to tensions and conflicts over religious differences, which has also played a major role in sustaining the Indo-Pakistan disagreement over Kashmir. Religious fundamentalism is also evident in Bangladeshi society manifesting itself in attacks on cultural groups, judges, prominent non-governmental organizations. Recent series of bomb blasts in Bangladesh are the evidence of fundamentalism which terrorized the whole nation.

Inter-state conflicts South Asia is one of the critical regions with complex security in the world primarily due to the fact that most of the South Asian states are engulfed with varying degrees of conflicts and disputes. Inter-state conflicts in South Asia probably are highest compared to any other regional blocs. Bilateral relations are defined by hostility and mistrust. The differences between India and Pakistan over Kashmir, between Sri Lanka and India; over the nationality of Tamilian, where Sri Lanka accused India, especially state government of Tamil Nadu for supplying arms and providing trainings to the Tamil terrorists in its Southern areas are only two of the most outstanding examples in this regard. Dispute exists between India and Bangladesh over illegal migration from the Chittagong Hill Tracts (CHT) and the demarcation of boundaries involving fertile islands and enclaves and also in sharing the water of river Ganges. Recently when a series of bomb blasts occurred in Mumbai, India directly accused Pakistan and Bangladesh for facilitating; the attack. The most pronounced security dilemma, however, stems from

escalating arms race in South Asia, particularly between the two military powers - India and Pakistan. These disputes among countries

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further complicate the scenario and have created a lot of problems among the leaders for friendly talks. Similarly the cultural diversity based in languages, religions and ethnicities is another factor that disables the region to unite. Rather it frequently exerts a negative impact on inter-sate relations in South Asia due to religious differences. Countries with widely differing political systems, democracies, military dictatorships and monarchies, characterize the area. Though most of the South Asian states have emerged with shared colonial pasts, similar political experiences, common social values divergences, however, are still significant. India and Sri Lanka are said to have performed better than other functioning democracies with varying degrees of success. Pakistan and Bangladesh at the beginning of the 1990s witnessed a sweeping democratic transition in their domestic scenarios. Nepal's transition to democracy is at the crossroad following the Maoist movement. Bhutan retains the authority of monarch as the dominant institution while the Maldives has yet to experience multiparty political systems. The troubles in South Asia, its widespread tensions, mutual distrust and occasional hostilities are largely considered products of the contradictions of India's security perception with that of the rest of the countries of the area. India's neighbors perceive threats to their security coming primarily from India whereas India considers neighbors as an integral part of its own security system. The supremacy of India in the South Asian power configuration given its geography, demography, economics, and ecology is something about which neither India nor its neighbors can do nothing but accept. But, the image of India in South Asia is that of a power that demands habitual obedience from its neighbors. Thus, the main theme of this doctrine is that South Asia is to be regarded as an Indian backyard. No wonder then, that there has always been certain psychological doubt on the part of the smaller states about their

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Recommendation
The first and immediate step that can be taken is to introduce a parallel currency and utilize that instrument effectively to promote regional cooperation in trade and investment, which can eventually prepare the ground for a common currency. The parallel currency will be fully convertible into any international currency and will be fully backed by reserve fund. It will be legal tender for cross country transactions within South Asia and will be increasingly used as unit of account for trade and investment transactions within the region. The issue of stability of the parallel currency will of course be important. However, it should be noted that relative values of currencies in South Asia in the last ten years have been more stable than those between the three major world currencies, US$, Euro and Yen which dominate the SDR. South Asian countries can create a pool of foreign exchange reserves in an institution. Backed with these reserves, the parallel currency, equivalent of a multiple of basic reserves, can be created to be used for giving loans or buying bonds issued by South Asian governments or corporations as appropriate. The lending rates on these loans will be higher than the interest paid on reserves which will be higher than what most reserves banks in the region are getting today from their dollar reserves. As the parallel currency gets accepted the reserve fund can earn profits, which will be distributed among members as grants for development purposes. The principle of creation and utilization of SDRs1 for development purposes has been advocated by a long line of economists. Provision of regional public goods and concessionary assistance for the lagging regions will help to build confidence in the region and facilitate bolder programmers such as open borders, labor mobility and common currency. The manner in which the bigger countries in Europe won the confidence of the smaller countries and helped to accelerate
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development of lagging will be a model for South Asia to learn from. The steps involved in the proposed process are: (a) creation of a parallel currency and associated agreements for its stability, (b) setting up of a reserve fund, (c) funding of regional public goods to promote trade and investment, (d) special and differential treatment of lagging parts of the region to help the convergence process in the region, and (e) building of mutual trust and confidence among the partners in the region. These steps will create conditions, which are usually necessary for a common currency area. SAARC Summit could take steps to set up a Working Group comprising of Central Bank Governors to evaluate; the feasibility of the proposal and take it forward.

CONCLUSION
The formation of SAARC was a landmark step taken by the leaders of the region. The main rational behind was to develop a friendly environment through summit diplomacy where all nations could interact peacefully with each other, cultivate sustainable peace and promote mutual economic well being by harnessing available resources in the region through the process of economic integration. Nevertheless, after 20 years' of establishment, neither South Asian nations have been able to push the process of integration into full
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swing nor the organization itself has become viable that could promote peace and harmony or prevent conflicts in the region. South Asia has emerged as a regional entity in the international political system with the creation of SAARC but it failed to strengthen regional cohesiveness. Regional cooperation in South Asia cannot be said to have evolved into a complete bloc in terms of regionalism and economic integration due mainly to the prevalence of conflict over the desire of peace and stability. Hence right at this moment, SAARC countries have to improve their relationships and attitudes towards each other and they need to take initiatives to eliminate the existing conflicts among them. In order to introduce a common currency in the region, economical homogeneity is the prime factor, which has some deficiencies in the SAARC countries. Any move towards introducing a common currency for SAARC countries in recent time will not be viable unless a good neighborly relationship and economic homogeneity in the region are achieved.

References
The Convergence Criteria And The Saarc Common Currency - FAROOQ RASHEED, EATZAZ
AHMED - College of Management Sciences PAF-Karachi Institute of Economics and Technology.

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Can South Asia Adopt A Common Currency - Sweta Chaman Saxena, University of Pittsburgh

Prospects And Possibilities Of Introducing A Common Currency In Saarc Countries- Anup Chowdhury, Suman Paul Chowdhury and Shamim Ehsanul Haque, BRAC Business School, Brac University Enhancing Economic Integration In South Asia - SISIRA JAYASURIYA, Professor of Economics, La Trobe University, Melbourne, Australia & NEPHIL MATANGI MASKAY Director, Nepal Rastra Bank, Nepal

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