By: Dr. Abdullah A Dewan
The ongoing de-dollarisation campaign reminds me of Edward Hickson’s Moral Song (1857): “If at first you don’t succeed, try, try again.”
For many years, many countries around the globe were getting concerned over Washington’s impositions of economic and trade sanctions as a form of weaponisation of the dollar, prompting them to diversify their portfolio of foreign currency reserves. Besides, years of brewing exasperations of sovereign countries were piling up for being subjected to US banking jurisdiction while making transactions in dollar. More recently (February 24, 2022), Russian invasion of Ukraine and the near-choking sanctions regime that followed have triggered the resurrection of de-dollarisation campaign (DDC) to weaken the dollar’s hegemony with more fury and fire than ever before.
On bilateral front, China and Brazil recently agreed to settle mutual trade transactions directly in local currency, bypassing the US dollar; ASEAN members meeting in Indonesia recently deliberated how to lessen their dependence of financial transactions on the dollar, the euro, the yen, and the pound sterling and use domestic currency more for settlements; India and Malaysia agreed to use rupees, amongst other developments.
Past sporadic hiccups of DDC by euro, yuan, and rubble notwithstanding, the dollar has been steering its global hegemony nearly undeterred. However, the ongoing DDC seems to be gaining fresh momentum under the banner of BRICS (acronym for Brazil, Russia, India, China and South Africa) led by China. The campaign got further boost by Saudi Arabia, Iran and Egypt’s readiness to ride on BRICS bandwagon. Two more weak economies struggling with hyperinflation, Turkey (58.5 per cent) and Argentina (100.2 per cent) have also lined up to join.
The dollar as reserve currency had its ups and downs, declining from around 85 per cent in the 1970’s to bottom at 47 per cent in 1990 but then steered a U-turn, reaching 71 per cent in the early 2000’s - now havering around 60 per cent. However, unlike any other currency, the dollar upheld its resiliency and retained its anti-fragile attributes during the 2008 financial crisis and the Covid-19 pandemic.
The advent of the euro in 1999, a currency of a monetary union comprising of 20 Eurozone countries, each with its own independent fiscal policy gained a mere 20 per cent share of the dollarised global reserve currency (GRC) after 23 years of uphill battle. China’s yuan, after decades of unrelenting contentious campaign against the dollar, gained an insignificant 3 per cent of GRC behind the Yen (5.2 per cent) and the Pound Sterling (4.9 per cent). Referring to the lackluster success of the euro, the 1999 Nobel Laureate economist Robert Mundell theorised that in order for a consortium of countries to espouse a common currency, they must meet some prerequisites such as similar business cycles, near frictionless labour and capital mobility and risk sharing mechanism.
What about the DDC led by BRICS? The campaign may have triggered the debut of a seemingly much stronger nudge yet in the trend of de-dollarisation. The question is: How likely and how soon would DDC succeed? I argue that the dominance of the dollar to be a history of “bygone days” will not happen so soon and so easily.
First of all, BRICS is just a collection of countries which don’t have much in common with each other – essentially a cocktail of countries with free market capitalism (democracies) and mixed economies (autocracies). Most of these countries trade more with the US and Europe, than they do together. China and India were mutually at daggers drawn recently with border disputes. Russia is in economic and financial self-destruct mode (forcing Bangladesh to make Nuclear Reactor loan installment payment in Yuan, if not in Ruble); Brazil has fallen a decade behind in economic growth; while South Africa got stuck in a recessionary ditch even before the pandemic. Besides, BRICS countries lack the necessary level of trust and institutions to actually create a currency viable enough to serve as a GRC. Even China has baggage of some deficiencies — highly centralised and doesn’t have free, liquid, and deregulated capital markets to challenge the US dollar.
http://infobrics.org/post/38532/