DE-DOLLARIZATION – ECONOMY
News: India,
Malaysia move beyond dollar to settle trade in Indian Rupees (INR)
What's in the news?
● India
and Malaysia have agreed to settle trade in the Indian rupees, the Ministry of
External Affairs announced on April 1, 2023.
Key takeaways:
● The
announcement came in the backdrop of ongoing official efforts to Safeguard
Indian trade from the impact of the Ukraine crisis.
● The
shift away from The U.S. dollar which has been the dominant reserve currency
for international trade so far has added significance as it indicates India is
willing to take concrete steps towards de-dollarization of its international
trade.
India-Malaysia MoU:
● Trade
between India and Malaysia can now be settled in Indian Rupee (INR) in addition
to the current modes of settlement in other currencies.
● This
follows the decision by the Reserve Bank of India in July 2022 to allow the
settlement of international trade in the Indian Rupee (INR). This initiative by
RBI is aimed at facilitating the growth of global trade and to support the
interests of the global trading community in Indian rupees.
Countries got approval from RBI:
● The
RBI had granted approval to domestic and
foreign AD Banks in 60 cases for opening SRVAs of banks from 18 nations
such as Botswana, Fiji, Germany, Guyana, Israel, Kenya, Malaysia, Mauritius,
Myanmar, New Zealand, Oman, Russia, Seychelles, Singapore, Sri Lanka, Tanzania,
Uganda and the United Kingdom.
De-dollarization:
● De-dollarization
is a process of substituting the US dollars with another agreed currency to
carry out international trade transactions. It is a method of reducing the
dollar’s dominance of global markets.
● It
is a way to reduce the effects of weaponization of the US dollar.
How is it done?
It
is a process of substituting US dollar as the currency used for
● Trading
oil and/ or other commodities
● Buying
US dollars for the forex reserves
● Bilateral
trade agreements
● Dollar-denominated
assets
● The
dominant role of the dollar in the global economy provides the US a
disproportionate amount of influence over other economies.
Significance of De-dollarization:
1. Reduce Monopolistic dependence of US dollars:
● Currently,
about 60 per cent of foreign exchange reserves of central banks and about 70
percent of global trade are conducted using USD.
● Thus,
a de-dollarized market may reduce such kinds of monopolies.
2. Contain leverage of foreign policy:
● The
status of the reserve currency allows the US government to refinance its debt
at low costs in addition to providing foreign policy leverage.
● Example:
US dollar has been repetitively used as an economic weapon against adversaries
of western countries for a long time such as sanctions on Iran, sanctions on
Russia, etc.
● Thus,
de-dollarization aims to contain the foreign policy of the US.
3. Improving Economic Stability:
● By
diversifying their reserves, countries can reduce their exposure to currency
fluctuations and interest rate changes, which can help to improve economic
stability and reduce the risk of financial crises.
4. Increasing Trade and Investment:
● By
using other currencies, countries can increase trade and investment with other
countries that may not have a strong relationship with the US, which can open
up new markets and opportunities for growth.
5. Prevent global crisis:
● Dollar
supply changes and any impact on the US banking system create ripples around
the globe. For example, the 2008 global financial crisis. De-Dollarization will
reduce the global impact of the US financial market.
6. Advantages for developing nations:
● Direct
Trade in a country's national currency leads to saving on currency conversion
spreads.
● The
notion of de-dollarization can be instrumental in creating a multipolar world.
Each country will look to enjoy economic autonomy in the sphere of monetary
policy.
Negative Impacts of De-dollarization:
1. Financial Instability:
● The
dollar's dominance in the international financial system can contribute to
financial instability in other countries, as they may be more susceptible to
financial crises.
2. Economic wars:
● The
US might see the move as a challenge, which may lead to an eruption of economic
war between world powers such as trade wars between US-China which happened in
the near past.
3. Limited use of national currencies:
● The
dollar is widely used in international trade, making it difficult for national
currencies to compete. This can make it harder for countries to conduct trade
with one another and for businesses to expand internationally.
4. Vulnerability of developing nations:
● Many
countries are heavily dependent on the dollar for trade and financial
transactions, which can make them vulnerable to changes in the value of the
dollar and to the policies of the US government.
5. National currencies not fully convertible:
● The
challenge for national currencies is that these are not fully convertible.
● Thus,
despite the rise of alternate systems of trade, and multiple currency
circulation systems, the dollar still dominates.
Global efforts:
Bilateral Currency Swaps:
● Bilateral
currency swaps among ASEAN countries, China, Japan, South Korea are USD380
billion and rising.
● Similarly,
the South African rand is used by several African countries.
● The
Latin American countries are moving towards greater inter-regional trade.
Initiation of Trade in National Currencies:
● Asian
central banks have over USD 400 billion of local currency swap lines and trade
amongst themselves.
● The
BRICS’s New Development Bank encourages trade and investment in national
currencies by disbursing up to 50% of its loans in national currencies since
2015.
● China
developed the Renminbi in 2015 and offers clearing and settlement services for
participants in cross-border yuan payments and trade.
● Russian
banks have started using the China-based Cross-Border Interbank Payment System
for international payments, as they are debarred from the SWIFT international
system.
WAY FORWARD:
1. Diversifying foreign exchange reserves:
● Governments
can reduce their dependence on the dollar by holding a greater proportion of
their foreign exchange reserves in other currencies, such as the Euro or the
Chinese Yuan.
2. Encouraging the use of domestic currencies in
international trade:
● Governments
can promote the use of their own currencies in international trade by providing
incentives for businesses to use them.
● Since
2019, India has been paying Russia for fuel, oil, minerals and specific defence
imports in rupees on an informal basis.
3. Developing alternative payment systems:
● Governments
can work to develop alternative payment systems, such as the Chinese-led Asian
Infrastructure Investment Bank, that are not dependent on the dollar.
4. Building economic alliances:
● Governments
can form economic alliances with other countries to reduce their dependence on
the dollar.
5. Investing in other currencies:
● Governments
may invest in other currencies to reduce the risk of currency fluctuations or
to counter the hegemony of the dollar.
De-dollarization
is vital for providing a level playing field for the developing economies. It
will not only offer monetary autonomy to the countries but also decrease the
vulnerabilities of foreign influence.