New Delhi: In an exclusive interview to ThePrint, the South African High Commissioner to India spoke out against the “domination” of the US Dollar (USD) in the world economy. He was not the first to question the USD being used as the world’s reserve currency for global trade.
According to media reports earlier this month, the President of Kenya, William Ruto, has called for African leaders to move away from using the USD for intra-Africa trade, and to support the pan-African payments and settlement system, launched in 2022.
The reason for the movement gaining recent steam is the economic sanctions enforced by the US-European Union (EU), due to Russia’s operations in Ukraine.
Not just Africa, other global leaders from developing countries have also joined the call for the ‘de-dollarisation’ of trade — which means trade to be carried out between two countries in currencies other than the USD.
In April this year, Brazilian President, Luiz Inácio Lula da Silva, while on a state visit to China, reportedly made an impassioned plea for nations to trade in local currencies stating, “Why can’t we do trade based on our own currencies?” This came after Brazil and China reportedly agreed to ditch the dollar for bilateral trade.
Argentina, another South American country, has also reportedly decided to pay for Chinese imports using renminbi yuan (RMB or Yuan), China’s official currency.
Meanwhile, the Indian government announced in the Rajya Sabha in March that the Reserve Bank of India (RBI), has permitted the invoicing and payments for international trade in Indian Rupees (INR) across 18 countries, including Botswana, Fiji, Israel, Myanmar, Malaysia, Russia and Singapore.
Though the call for “de-dollarisation” is gaining momentum, Sanjay Kumar Pandey, a professor with the Centre for Russian and Central Asian Studies at Jawaharlal Nehru University, told ThePrint that the idea is not new.
“De-dollarisation is not new. India and the Union of Soviet Socialist Republics (USSR) have conducted trade in the ruble in the past,” he said.
India and Russia, after Russia’s special operation in Ukraine in 2022, had established a rupee-ruble trade system to avoid the purview of the Western sanctions on Russia. In May this year, however, the system was suspended.
Russian Foreign Minister, Sergey Lavrov, had explained that this was due to Russia having “billions” of rupees that were causing a problem for the country, ThePrint reported.
The US dollar has been the world’s reserve currency since the end of World War II and the establishment of the Bretton Woods system — named after the United Nations Monetary and Financial Conference, that took place in Bretton Woods, USA.
Under this system, the dollar was pegged (fixed exchange rate) to gold and most other currencies were linked to the dollar. Thus, USD replaced gold as the world’s reserve currency and has remained so for over 75 years.
According to data from the International Monetary Fund (IMF) in quarter four (Q4) of 2022, 58.36 per cent of the reported foreign currency reserves in the world were in the USD, 20.47 per cent in Euro (EUR) and the renminbi accounted for just 2.69 per cent of global forex reserves.
While ‘de-dollarisation’ could help reduce trade costs, the introduction of any new common currency will require for it to get the acceptance and trust enjoyed by the USD. Meanwhile, the movement to ditch the dollar could become beneficial for China, if the yuan is accepted as an alternative to the USD.
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What is ‘de-dollarisation?’
Simply put, “de-dollarisation’ is the trade between two countries in any currency other than the USD.
Explaining the significance, Biswajit Nag, a professor at the Indian Institute of Foreign Trade said, such trade would reduce the costs for the players involved, as they would not require to convert local currencies to USD for trade.
“If country A buys goods from country B and pays for it in a local currency, the cost of a double exchange rate — that is the cost of converting country A’s local currency to USD and then converting USD to country B’s local currency to complete the transaction — would be saved,” he added.
Nag further explained that such trade could occur only if there wer sufficient reserves of the local currency available. “Currently, there’s more USD outside the US than within the country,” he added.
According to a 2017 study by Ruth Judson, a researcher from the Federal Reserve System, it is estimated that 60 per cent of all the US currency, and about 75 per cent of $100 notes in circulation, were held outside of the US.
Nag highlighted that the global circulation and trust in the dollar will see it difficult for countries to “de-dollarise”.
China vs US: Fight for domination
One country that could stand to gain from the push to ditch the dollar is China.
Economic and foreign policy experts speaking to ThePrint explained how any move to replace the dollar with the yuan is another avenue of competition between China and the US.
Jabin T. Jacob, an associate professor at the Department of International Relations and Governance Studies, Shiv Nadar Institution of Eminence, said, this is another step in the larger picture of China trying to compete with the US.
“The Chinese government recognises US’ primary powers are military and economic. The US gains economic influence due to global trade conducted in the dollar and the trust nations have in its currency,” he said.
He also explained how replacing the dollar is crucial to reducing the sway the US holds in the world.
“When I say sway, I mean political sway, such as its push for democracy and human rights across economies and trade being conducted in dollar terms helps build this power of the US,” he added.
Jacob also described how using the yuan as a reserve currency would be appealing to nations as China does not push democracy or human rights. China’s trade with Russia for example is in yuan, and last year, even an Indian company, Ultratech Cement, reportedly paid for coal from Russia in yuan.
“If China wants to grow from this ad-hoc case-by-case basis in yuan trade, it needs institutions like BRICS [Brazil, Russia, India, China and South Africa] to adopt such measures to get rid of the old world [Bretton Woods] order,” Jacob added.
Echoing his thoughts, Pandey said, “There is a push for new banking institutions by the Chinese government, to move away from the Bretton Woods institutions like the World Bank and IMF. Growing the usage of yuan in global trade is another step in that direction.”
However, according to Nag, any change from the USD as the global reserve currency to the yuan would not be a reality in the medium term at least.
“It is more likely that China is looking to de-dollarise segments of the global economy, not all of it, but just enough to cut the US out,” added Jacob.
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Creation of new global trading currency
As reported by ThePrint, a common currency is likely to be discussed at the BRICS summit to be held in August in Johannesburg.
Earlier this month, the BRICS countries requested the New Development Bank (NDB), the organisation’s development bank, to advise on a new “shared currency”, Bloomberg reported.
“The BRICS would also be poised to achieve a level of self-sufficiency in international trade that has eluded the world’s other currency unions,” Joseph W. Sullivan, a senior adviser at Lindsey Group, a Washington DC-based economic advisory firm, wrote in Foreign Policy, a news publication, in April.
He went on to describe how a BRICS currency would challenge the dollar’s dominance as the global reserve currency.
Talking about the possibility of such a challenge to the dollar, Nag said, theoretically, trade in a new currency like a ‘bric’ created by BRICS is possible.
“But it needs to be internationally accepted like the USD. The USD still holds its position [as the world’s reserve currency] due to the trust and confidence and the transparency of the Federal Reserve with monetary policy,” he added.
Jacob, too, agreed and said, “The Federal Reserve System [US’ Central Bank] is transparent and that builds trust in the system. How much of the renminbi is printed? The People’s Bank of China [China’s Central Bank] is not transparent and this is the problem.”
In the aftermath of the Russia-Ukraine war, the economic sanctions enforced by the US-EU have forced the countries to find ways to challenge the dominance of USD.
“Sanctions have given a new lease of life to these discussions on de-dollarisation,” said Pandey. “For example, looking at Chinese trade, it trades heavily with the EU and the US. How would trade between China and these partners work with a change in system?”, he added.
According to Bloomberg, Naledi Pandor, South Africa’s Minister of International Relations, after the BRICS foreign ministers meeting earlier this month, had even said that BRICS were looking, “ensure that we do not become victims to sanctions that have secondary effects on countries that have no involvement in issues that have led to those unilateral sanctions.”
But, according to Nag, “de-dollarisation” would also fragment global trade.
“What happens if every country wants to trade in its own local currency? What stops India from trading with another country in the Rupee and the other country requesting instead for the trade to happen in its local currency?” he remarked, adding that it would only lead to a sort of fragmentation of the global markets and complicates trade negotiations.
(Edited by Richa Mishra)
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