The talks on de-dollarization, have occupied the news-space for quite a time now. Initially this concept was incepted and ventilated by Europe, Russia and china and now discussed globally. With the US imposing sanctions on Russia amidst Russia-Ukraine war, the talks seem to have gained momentum again. According to a recent report by International Monetary Fund, dollar is slowly, but surely losing its dominant place at center of global financial order or its place at the center of economic solar system.
Decoding-de-dollarization
De-dollarization simply refers to the process of reducing the dependence of global economies on dollar, thereby shifting to other alternative substitutes for their reserves like gold or other foreign currencies, and reducing share of dollar in global market for foreign trade.
How dollar gained its prominence?
Just like the city of Rome was not build in a day, dominance of dollar was not established in a day. The story begins with the Bretton-woods system when there was a need of strong currency which could be pegged against gold and all other currency to peg in comparison to it and dollar seemed the most viable alternative. Furthermore, with signing off deal with oil-rich nations, dollar became the fuel for accelerating global energy transactions. As the dollar gained confidence and acceptance, its share increased many-fold globally. Titles of ‘risk-free asset’ and ‘safe-heavens’ were associated with it. At present more than forty percent of global debts are issued in dollars, sixty to sixty-five percent of foreign exchange reserves of central banks are in dollars, ninety percent of forex trading and about seventy percent of global trade is conducted using USD.
Dollarization itself answers need of de-dollarization:
The US has time and again displayed a disproportionate amount of influence and coercion on other economies if their policies didn’t go well with their desired objectives. Dollar has been often weaponized as a tool to make everything work in its favor. As a part of its foreign policy tool, US impose sanctions on economies and create hindrances in smooth trading using drastic shifts in the policy rates. Recently, federal reserve announced its policy decision of speeding the process of tapering of interest rates within two three months, to tackle its sky-touching inflation, but unsurprisingly it managed to bring most of the stock markets down to earth within a day. No stone was left unturned to showcase dollar as sizable and chief currency, from having a considerable say in major institutions to [mis]using SWIFT as an extreme step U.S pitched well. As per Gal Luft, [senior advisor to U.S. energy security council] US has imposed sanctions on a total of ten percent or one in every ten countries globally, and if China is also included in it numbers would turned out to be furthered. In addition to this, U.S should not hold itself back from taking a share of credit in pushing countries like Iraq, Afghanistan and Pakistan into a serious economic distress.
De-dollarization is imminent in current scenario because the world is witnessing an evolution from a unipolar to a multi-polar world. And the one in power cannot remain in power forever therefore it fits well in multi-polar world. This process targets to protect the central-banks and their economies from geo-political risks and uncertainties.
How can de-dollarization process speed up?
There could be certain measures that can speed up de-dollarization process like, preferring to make bilateral agreements in domestic currencies instead of dollar, for instance Rupee-Ruble or Rupee-Riel. Promoting-non SWIFT transactions [society for worldwide interbank financial telecommunication] and switching to other alternatives. Also, granting/projecting loans in currency other than dollar. Additionally, reducing overall demand of dollar and reducing share of dollar and related denominated assets and diversifying investments in alternative currencies.
Challenges associated with it:
Thinking practically, replacing it in a day or two is not possible as it could be a long term plan, but medium and short term plan needs to be chalked out. Evidently, some countries like Russia and China have been continuously working towards it by building their own replacements of SWIFT and planning to collaborate the two i.e. [systems for transfer of financial messages and Cross Border Interbank Payment System]. Adding to this Russia drastically reduced its DDA [dollar-denominated assets] to sixteen percent. Considering the deep roots dollar has developed, a sudden dumping of dollar will prove to be a catastrophe and pose significant balance sheet risks as it will erode its value. Currently, there is no other substitute currency available which has full convertibility as dollar. Moreover, such significant international trade channelization can challenge US hegemony in global currency market.
Way forward:
The past experiences have been forcing central banks world-wide to rethink their dependency on dollar. The global financial crisis of 2008 showed unaddressed and underlying cracks within U.S. economy. As of now the U.S is experiencing highest inflation in decades, due to excess-minting of notes. On one hand it is issuing sanctions on economies and on other issuing debt instruments expecting world economies to finance it. The economy itself seems to be struggling to stand. The need of the hour is there should not be single currency driving hegemony and determining the fate of global market alone.
(Writer is a Member of Finance and Economics Think Council)