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BRICS Currency: De-Dollarization of World Economy and Pakistan By Kashif Mirza

Byadmin

Apr 25, 2023

The writer is an

economist, anchor,

analyst and the

President of all

 Pakistan Private

Schools’ Federation

president@Pakistan

privateschools.com

BRICS advances alternative to the US-dominated financial system and indicated that a new currency project might be announced at the upcoming BRICS summit in South Africa. Earlier this year, Brazil and Argentina also proposed to work towards creating a common currency, called the “SUR”, to enhance regional trade and financial exchanges while reducing reliance on the US dollar. The alliance’s other members—Brazil, China, Russia, and India—have already taken steps to bypass the US-dominated global trade and finance system. The current BRICS countries already account for 40% of the global population and one-fourth of the global GDP.  The alliance is now set to expand with Iran and Saudi Arabia having initiated the formal process to join. Over 10 other countries, including Egypt, Algeria, the UAE, Mexico, Argentina, and Nigeria, have also expressed interest in joining the bloc. The growing trend towards seeking alternatives to reduce dollar dependence, including trade in local currencies, is also being deliberated upon by regional organizations, including the Association of Southeast Asian Nations (ASEAN). Not only is the BRICS bloc seeking to move away from dollarization in matters of trade and finance, but it has also attempted to provide an alternative to the US-dominated Bretton Woods institutions, the International Monetary Fund (IMF) and the World Bank, in the form of the New Development Bank (NDB). At present, aside from the five BRICS countries, Egypt, the UAE, and Bangladesh are also members of the NDB.  More and more countries — from Brazil to Southeast Asian nations — are calling for trade to be carried out in other currencies besides the U.S. dollar. To be clear, the U.S. dollar remains dominant in global forex reserves even though its share in central banks’ foreign exchange reserves has dropped from more than 70% in 1999, IMF data shows. Geopolitical risks and economic dynamics have accelerated the trend to move away from the U.S. dollar. The U.S. dollar has been king in global trade for decades — not just because the U.S. is the world’s largest economy, but also because oil, a key commodity needed by all economies big and small, is priced in the greenback. Most commodities are also priced and traded in U.S. dollars. But since the Federal Reserve embarked on a journey of aggressive rate hikes to fight domestic inflation, many central banks around the world have raised interest rates to stem capital outflows and a sharp depreciation of their own currencies.

The dollar’s share of international reserves had fallen from 70 per cent to 58.36 per cent,  marking its lowest level in 25 years. Idea of BRICS New Currency is a Quest for Global De-Dollarization Accelerates.

By diversifying their holdings reserves into a more multi-currency sort of portfolio, perhaps they can reduce that pressure on their external sectors. The U.S. dollar accounted for 58.36% of global foreign exchange reserves in the fourth quarter last year, according to data from the IMF’s Currency Composition of Foreign Exchange Reserves (COFER). Comparatively, the euro is a distant second, accounting for about 20.5% of global forex reserves while the Chinese yuan accounted for just 2.7% in the same period. China is one of the most active players in this push given its dominant position in global trade right now and as the world’s second-largest economy. Russia and China have also been working towards connecting their banking communication systems. However, the US has threatened to expel Chinese banks from SWIFT if this proceeds. Nevertheless, both Russia and China have reaffirmed their commitment to advancing bilateral trade in their national currencies. Based on the calculation of IMF’s data on the 2022 direction of trade, mainland China was the largest trading partner to 61 countries when combining both imports and exports. In comparison, the U.S. was the largest trading partner to 30 countries. As China’s economic might continues to rise, that means that it’ll exert more influence in global financial institutions and trade, etc. But China isn’t the only country calling for a shift away from the U.S. dollar. Brazilian President Lula made a state visit to Beijing in April where he reportedly called for reduced reliance on the U.S. dollar for global trade. Trade between Brazil and China reached $150 billion in 2022, a 10% jump from a year ago, according to S&P Global Market Intelligence. During a recent visit to China, Malaysia’s Prime Minister Anwar Ibrahim was said to have suggested setting up an Asian Monetary Fund (AMF) to reduce reliance on the U.S. dollar. In early April, the Indian Ministry of External Affairs (MEA) announced that India and Malaysia were starting to settle their trade in the Indian rupee. The changing global economic dynamics are driving the co-called de-dollarization trend which can benefit local economies in a number of ways. Trading in local currencies will allow exporters and importers to balance risks, have more options to invest, to have more certainty about revenues and sales. Another benefit for countries moving away from using the dollar as the middleman in bilateral trade is to help them move up the value chain. Meanwhile, the growth of non-U.S. economic blocs also encourages these economies to push for wider use of their currencies. The IMF estimates that Asia could contribute more than 70% to global growth this year. U.S. growth might slow, but U.S. growth isn’t what it’s all about anymore. There is a whole non-U.S. block that’s growing, which is going to be a re-internationalization of flows.

Geopolitical risks have also accelerated the trend to move away from the U.S. dollar. Political risk is really helping introduce a lot of uncertainty and variability around how much of a safe haven the U.S. dollar really is, which accelerated the calls for de-dollarization was the U.S. decision to freeze Russia’s foreign currency reserves after Moscow invaded Ukraine in February 2022. According to Bloomberg, the yuan has replaced the U.S. dollar as the most traded currency in Russia. So far, the U.S. and its Western allies have frozen more than $300 billion of Russia’s foreign currency reserves and slapped multiple rounds of sanctions on Moscow and the country’s oligarchs. This forced Russia to switch trade to other currencies and increase gold in its reserves. In the Middle East, major oil exporter Saudi Arabia has signaled it’s open to trade in other currencies other than the greenback. Although it’s not a complete break away from dollar-denominated oil trade over the short-term, what they’re saying more is, well, there’s another player in town, and we want to look at how we trade with them on a bilateral basis using yuan. Despite the slow erosion of its hegemony, the U.S. dollar is not expected to be dethroned in the near future — simply because there aren’t any alternatives right now. Euro is somewhat an imperfect fiscal and monetary union, the Japanese yen, which is another reserve currency, has all sorts of structural challenges in terms of the high debt loads. The Chinese yuan also falls short, the yuan reserves as a share of total reserves, it’s only about 2.5% of total reserves, and China still has current account restrictions. That means that it’s going to take a long time for any other currency, any single currency to really usurp the dollar from that perspective. The dollar’s share of international reserves had fallen from 70 percent to 58.36 percent,  marking its lowest level in 25 years. Data from IMF shows that as of the fourth quarter of 2022, more than 58.36% of global reserves are held in the U.S. dollar — that’s more than double the share of the euro, the second most-held currency in the world. The international reserve system is still a U.S.-reserve-dominated system. So long as that commands the majority, so long as you don’t have another currency system or economy that’s willing to step up to that international reach, convertibility, and free-floating and the responsibility of a reserve currency, it’s hard to say the dollar will be displaced over the next 3 to 5 years. unless someone steps up. In fact, the de-dollarization trend has already emerged in a number of countries and regions including Russia, China, and 17 other countries. About a quarter of the decline in the dollar’s share can be accounted for by greater use of the Chinese renminbi. But less than 3 percent of global central bank reserves are denominated in Beijing’s currency, IMF data show. Beijing was also in the process of internationalizing the renminbi before the current crisis and was already ahead of other nations in adopting a central bank digital currency. The war would also spur the adoption of digital finance, from cryptocurrencies to stablecoins and central bank digital currencies. The greater use of other currencies in global trade would lead to the further diversification of the reserve assets held by national central banks. Countries tend to accumulate reserves in the currencies with which they trade with the rest of the world, and in which they borrow from the rest of the world, so you might see some slow-moving trends towards other currencies playing a bigger role in reserve assets. The dominance of the dollar — backed by strong and highly credible institutions, deep markets and the fact that it is freely convertible — was unlikely to be challenged in the medium term. But in the past few years, the trend toward the de-dollarization of economies in the world has become increasingly apparent. The main task is to reduce its dependence on the world’s main reserve currency – the US dollar. Indeed, more and more countries striving to switch to settlements in national currencies, and the already-emerging global de-dollarization push could further accelerate with countries increasingly adopting alternatives to the US dollar. Although Pakistan has not been an enthusiastic advocate for such a de-dollarization partnership but has been exploring a rupee-ruble trade arrangement with Russia.  Pakistan must seriously think about diversifying its foreign exchange reserves, increasing investments in other currencies, and switching to settlements in its own national and other international currencies between partner countries.

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