Rafia Ashar
In an era marked by the perpetual evolution of global finance, the concept of ‘de-dollarization’ is gaining prominence. This term refers to countries diversifying their financial reserves and reducing their reliance on the US Dollar (USD). Pursuing monetary sovereignty, concerns about the USD’s stability, and the aggressive ‘weaponisation’ of the USD are some factors driving this trend. The USD, the dominant world currency since the 1944 Bretton Woods Agreement, is the primary currency used by International Financial Institutions (IFIs) to fund developing nations.
However, the de-dollarisation drive gained momentum with the revival of the Russian economy and the rise of China with new alternative currencies like the Chinese Yuan and the Russian Ruble. The governments of China and Russia, which have been working to lessen their reliance on the USD for the past ten years, have increased their cooperation by fostering collaboration between their financial systems, as shown in Graph 1. This effort was recently highlighted at the St. Petersburg International Economic Forum (SPIEF), a significant global economic event in Russia, where 132 countries worldwide, including BRICS nations, also aimed to create a financial independent payment system and use national currencies in international trade.
In this regard, several countries and regional trade organisations have adopted different de-dollarisation models, driven by the desire to reduce reliance on USD. China, Russia, India, Southeast Asian countries, African countries, and large trade organisations such as BRICS, ASEAN, and SCO are some key players.
Regarding trade and reserve holdings, the BRICS forum has been at the forefront of de-dollarization efforts. By creating currency swap agreements, promoting trade in local currencies and & investigating alternative settlement systems, these countries have made significant progress towards reducing their reliance on USD. The graph 2 shows that the total GDP of BRICS has surpassed the economically influential group of G7 countries.
At a global level, de-dollarization has the prospect of disrupting and destabilising current financial systems. It can weaken USD dominance and transfer it to currencies such as the Euro, Chinese Yuan, or even a basket of currencies. It could challenge the US’s ability to impose sanctions, as countries might circumvent US-controlled financial channels and trade using alternative currencies. De-dollarization can stabilise regional currencies at the regional level depending on trade and connectivity between regional countries. Local currencies will face less pressure as alternative payment methods become more widely accepted and advanced.
The global reserve currency composition is almost 60%, as shown in graph 4. This graph also indicates the level of USD integration in the global market share compared to alternative currencies, which only make up 40%. Lastly, the shift from the USD faces challenges due to divergent economic agendas, geopolitical interests, and a varied state of development. The strength and reliability of USD are trusted by foreign companies, investors, and people, necessitating the establishment of trust in new systems to encourage currency conversion.
In the case of Pakistan, de-dollarization has several economic, geopolitical, and strategic outcomes. It allows Pakistan to engage more actively with neighbouring countries like China, Afghanistan and Iran by reducing its dependency on USD and trading in Yuan, specifically under the China-Pakistan Economic Corridor framework or entering into currency swap settlements to facilitate trade in local currencies. Moreover, diversifying foreign exchange reserves allows Pakistan to include Euro, Yuan, Yen, and other currencies rather than relying on USD. In addition, developing onshore financial markets to support the trade in local currencies also decreases the necessity for dollar-denominated debt.
Besides this, de-dollarization can increase Pakistan’s vulnerability to US sanctions, and it might strain Pakistan’s diplomatic relations with the US, potentially impacting foreign aid, trade and military assistance that currently benefits Pakistan. Moreover, Pakistan’s economic stability could be at risk during the transition period as USD is deeply entrenched in global financial systems, and moving away from it might lead to volatility in exchange rates and financial markets, given that the vast majority of international trade from the 1990s to 2023 has been conducted in USD compared to non-dollar currencies as shown in the graph 5.
