**This is the first of a two-part series on de-dollarisation. An exclusive report carried by Business Recorder revealed that during a meeting of Pakistan China seventh Joint Working Group on Gwadar (held sometime in May this year though the draft minutes were prepared recently thought they have yet to be finalized) noted that China suggested establishing a renminbi (the name of the Chinese currency while yuan is the primary unit of renminbi) internationalization pilot project in Gwadar Free Zone.
Pakistan reportedly also paid Russia for discounted crude oil imports in yuan.
This was to be accomplished by encouraging the banks of the two countries to conduct business in the free zone, jointly carry out renminbi (RMB) counter listing, exchange and cash services and fully realize the pricing, circulation and settlement of RMB in the Free Zone.
Pakistan keeps reserves largely in dollars, our trade with the rest of the world is conducted mainly in dollars and our borrowings from multilaterals/bilaterals are in dollars.
On a facetious note capital flight from the country is largely in dollars (that no doubt enabled Pakistani nationals to reportedly purchase 23000 properties in Dubai at an estimated price of over 12 billion dollars from 2020 to 2022).
In terms of foreign exchange volumes the dollar’s share is 88 percent, near record high, and its share of trade invoicing, cross border liabilities and foreign currency debt issuance has held steady over the last two decades, or in other words the dollar’s transactional dominance remains top-of-class despite secular declines in U.S. trade shares, as per J. P. Morgan so the question is: Is China’s request specific to Pakistan or is it reflective of a larger though very gradual global movement towards de-dollarization?
Two observations made by J. P. Morgan’s Meera Chandan, Co-Head of the Global FX Strategy, are noteworthy. First, “de-dollarization is evident in foreign exchange reserves, where the dollar’s share has declined to a record low of 58 percent.” And second, Chandan argues that “in terms of competitors, China has been attempting to internationalize the renminbi.
However, the renminbi’s global footprint is still small despite growing every year, and this will be a long process requiring reform. For instance, the renminbi makes up just 2.3% of SWIFT (Society for Worldwide Interbank Financial Telecommu nications) payments, versus the dollar’s share of 43% and the euro’s share of 32%.“ SWIFT gives inordinate powers to the US to monitor and stop all payments, and this system too will be under threat as countries move away from the dollar.
To put it in a historical perspective the dollar gained prominence after World War II subsequent to the US emerging as the largest ever creditor nation which led to the recognition, within the 1944 Bretton Woods system, of the dollar’s role as a key reserve currency of the international monetary system - a role premised on the country’s strong economic fundamentals. Those fundamentals are now in question.
Laffer, of the Laffer curve that linked rates of taxation to government revenue, argued that “we’re in a new period of collapse of the U.S. dollar, and it’s quite frightening. What will take its place is still up for grabs. People are moving into all sorts of alternatives to the U.S. dollar … Maybe Bitcoin, maybe gold, maybe some other set of currencies, but that is the direction we’re headed.”
Yuefen Li, Economist and Special Advisor on South-South Cooperation and Development Finance, South Centre, Geneva wrote on 2 January 2024 in the International Banker that “it is mind-boggling to think about the potential risks of one country, with its share of global GDP reduced from around 45 percent to approximately 25 percent since World War II, still shouldering an oversized burden or responsibility for the performance of the world’s economy.
Such a concentration of power in one country seems frightening to the rest of the world. Many scholars also believe the current dollar-dominated international financial system is skewed in the United States’ favour and is unsustainable.“
Li then proceeds to highlight the advantages of dollarization to the US economy: “the supremacy of the US dollar gives rise to global demand for it as a safe asset for foreign reserves and investments. This exorbitant dollar advantage allows the US to import foreign goods and services more often than not at low rate when compared to the sizeable excess return on US backed capital exported back to the rest of the world, including interest income, portfolio equity positions and other capital exports in dollars.”
She cites a study carried out by Gourinchas and Rey “that concluded that US foreign liabilities are almost entirely in dollars, with 70 percent US foreign assets in foreign currencies implying thereby that a 10 percent dollar depreciation represents a transfer of around 5.9 percent of US GDP from the rest of the world to the US.
And during 1952 to 2004 indirect capital transfer from the world to the US owing to dollar’s special status was 0.3 in 1952 and 1.34 in 2004.“
Today there is evidence that several central banks are purchasing more gold than ever since the 1950s which is pushing up gold prices to record highs, 50 percent higher than what models based on real interest rates suggest. Ruchir Sharma, Rockefeller International, pointed out in an article in the Financial Times that “Clearly, something new is driving gold prices.
Look closer at the central bank buyers, and nine of the top 10 are in the developing world, including Russia, India and China (three of the five BRICS member countries). Not coincidentally, these three countries are in talks with the other two members - Brazil and South Africa - on creating a new currency to challenge the dollar. Their immediate goal; to trade with one another directly in their own coin.“
The economic factors notwithstanding, there are also powerful political factors that are almost certainly at play in global moves towards de-dollarization, very slow but inexorable.
Referred increasingly as the weaponization of the dollar, a not so oblique reference to the increasing use by the US foreign policy establishment to sanction countries that deviate from its narrative, and in many instances proceed to freeze the accounts of their central banks and individuals, the US dollar is under threat as a global currency.
Copyright Business Recorder, 2024
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