EDITORIAL: The US dollar hegemony over world trade was established during the Bretton Woods conference of 1944 when 44 countries agreed to establish an international monetary system whereby their currencies would be pegged to the US dollar and the dollar was pegged at 35 dollars to one ounce of gold – an acceptance based on the US emerging as the only major creditor nation during and in the aftermath of the World War II.
There has been a growing disenchantment with the US dollar as the international currency of choice for trade due to recent major changes in geopolitical considerations that have visibly strengthened during the past several months as the US relations with Russia and more recently China have visibly deteriorated.
In February this year after the Russian invasion of Ukraine the US, with its European allies, sanctioned the Russian central bank and froze its reserves of 630 billion dollars, thereby taking away its ability to exchange dollars for roubles with the objective of stabilising roubles.
The Russian government retaliated by insisting that European nations pay for its fuel purchases from Russia in roubles. And no doubt a painful lesson learned by Russia as well as other sanctioned countries, including Iran, is the need to challenge the US dollar’s hegemony and diversify their reserves into other currencies. China too has developed serious differences with the US over Taiwan in recent months.
Talk of an alternate currency is not new. In 2009 the governor of the Central Bank of China proposed a commodity-backed currency, an idea backed by the five BRICS countries.
It is, however, significant that even the US allies notably the European Union established the euro to protect the EU economy from foreign exchange shocks and after the dollar has emerged with the second largest share of global currency reserves at nearly 21 percent. And in March this year the Eurasian Economic Union (Russia, Armenia, Kazakhstan, Kyrgyzstan and Belarus) agreed to develop a new international currency.
India has begun talks with Saudi Arabia to start a rupee-riyal trade and central bank of India has asked exporters to Bangladesh to avoid settling deals in major currencies and to instead use Indian rupee or the Bangladeshi taka.
Foreign exchange reserves held in dollars have allowed countries like Pakistan to not only meet foreign liabilities (debt as well as payment for imports) but also to prop up the rupee. In the event of a fall in the rupee value as witnessed in recent months the usual remedial measure is for the central bank to inject dollars into the market to raise the value of the local currency.
Disturbingly, however, while this was the preferred policy during the tenure of Ishaq Dar as the country’s Finance Minister, accounting for massive borrowing of dollars either directly from foreign commercial banks at high rates of return and/or through debt equity (Eurobonds/sukuk issuances), the current state of the reserves at only 8.7 billion dollars doesn’t warrant such a policy mainly due to inadequacy of forex reserves.
And one may assume it is the country’s indebtedness in dollars that accounts for the International Monetary Fund in its seventh/eighth reviews to stipulate that rollover of around 7 billion dollars and an additional borrowing of 4 billion dollars from friendly countries (China, Saudi Arabia, the UAE and Qatar) is in effect a prior condition for the next tranche release.
However, while Pakistan is at present struggling to strengthen its foreign exchange reserves, the main reason for the country grappling with balance of payment problems prompting the acceptance of politically challenging IMF conditions that have seriously eroded the purchasing power of the general public yet perhaps it is time to begin to proactively negotiate for an alternate currency of trade with friendly countries as a start to lowering dependence on the dollar for trade and propping up the local currency.
Copyright Business Recorder, 2022
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