De-dollarisation

In recent years, there has been heightened concern among some countries around the world regarding their dependence on the US dollar. As a result, many nations are now seeking alternative currencies as they look to reduce their reliance on the greenback. This phenomenon is known as de-dollarization or the end of the kingship of one globally recognized currency. But it could have significant implications for the global economy. As part of the post-war Bretton Woods agreement, the dollar was established as the world’s reserve currency. This meant that other countries held large amounts of US dollars in their foreign exchange reserves. It also meant the dollar was used as the primary currency for international trade and finance. Now, de-dollarization would require a vast and complex network of exporters, importers, currency traders, debt issuers and lenders to independently decide to use other currencies. Unlikely. Dollar share went from 73% in (2001) to 55% in (2020). Went from 55% to 47% since sanctions launched on Russia, now de-dollarizing at 10x faster than the previous two decades. Although not much is being talked about in Pakistan, de-dollarization is becoming a hot topic for debate around the globe. The year 2022 became critical in terms of de-dollarization. The Russia-Ukraine war has adversely affected Eastern Europe and Euro Atlantic countries and organizations. Russian military operations in Ukraine sparked multifarious sanctions against the Russian Federation and its leadership. These sanctions were mainly invoked by the US and EU and applied globally.

The growing recourse to a sanction regime against countries such as Iran, especially since 2006, and Russia after the 2014 annexation of Crimea, encouraged alternative currency arrangements. As of today, Washington’s sanctions policy punishes 22 nations. The invasion of Ukraine by Russia in 2022 and the extension of sanctions hampering the use of the US Dollar encouraged even more de-dollarized practices. In response to the decision to disconnect Russia from SWIFT (Society for Worldwide Interbank Financial Telecommunication). Moscow advanced bilateral fuel transactions with partial payment in Rubles. Simultaneously, Russia and a group of African countries initiated talks to establish settlements in national currencies, discontinuing both the US Dollar and the Euro. Meanwhile, China is trying to insulate itself from the West and is attempting to internationalize the Renminbi, even though it represents less than 3 percent of the official reserves worldwide. Moscow and Beijing are coming closer in terms of financial cooperation, the world’s largest oil exporter, Saudi Arabia, has also indicated open trade in currencies other than the US dollar. During President Xi Jinping’s visit to Saudi Arabia last year, both the countries agreed to conduct oil trade in yuan, while Bangladesh became the 19th country to trade with India in rupees.

Recently, China also entered into an agreement with resource-rich Brazil to transact trade in each other’s currencies. China has also executed a test trade for natural gas with France in a bid to establish its currency internationally and to weaken the dollar’s grip on world trade. Similarly, India and Malaysia have set up their respective banks to allow international trade between the countries in Indian rupee. India intends to use the G20 platform to pave the way for its currency to be conscripted in international trade warfare. Meanwhile, Central Bank Digital Currencies (CBDC) can play a significant role in the future of global trade and settlements, as demonstrated by the successful pilot of the m-Bridge wholesale CBDC platform, co-led by the Hong Kong Monetary Authority, Bank of Thailand, Central Bank of the United Arab Emirates, and the People’s Bank of China Digital Currency Institute, and the Bank for International Settlements (BIS) Innovation Hub. Despite various bans related to the crypto industry, the Greater China region continues to lead the digital asset space. Many of these industry activities are driven by the de-dollarization trend that has gained momentum as countries seek to reduce their reliance on U.S. dollars while also accelerating cross-border CBDC experiments across Asia.

Last but not least, de-dollarization could significantly impact the US dollar and its dominance. As more countries seek alternative currencies, demand for the dollar is likely to decline, which could lead to a weakening of the currency. Additionally, if the dollar loses its status as the world’s reserve currency, it could lead to a decline in the US’s ability to influence the global economy and politics. Furthermore, as other currencies gain importance, the dollar may face increased competition in international trade and finance. It is important to note, however, that the US dollar is still the dominant currency, with central banks holding 60% of their foreign exchange reserves in USD. Moreover, in order to analyze the pros and cons of de-dollarization, Pakistani state institutions, think-tanks and academia should hold seminars to sketch out a financial strategy where Pakistan can get paramount of the change. We should also prepare our people by giving them a manifestation of Chinese language, culture and industrial development. To have strong and fastening ties with the spiraling economic superpower is bound to be good for the country.

The write is an economic analyst