De–dollarisation: The Governments of India and Bangladesh are amidst talks of doing away with the US dollar (USD) as the agreed currency to carry out trade and commercial activities between the two nations. The de-dollarisation move is not only expected to save huge amounts of money spent on conversion charges but will also bring the trade costs down and help the common people and businesses of both countries.
What is de-dollarisation and how can both countries benefit by agreeing upon a parallel currency for trade and commerce is essential.
The global shift towards De–dollarisation
According to the research paper, de-dollarisation of the world economy as an objective reality, by A.V. Kievich of the Polessky State University, for the major part of the last century, the USD has been the world’s dominant reserve currency. The dollar’s dominance has been a byproduct of America’s status as a global superpower and its economic prowess. However, in recent years, the days of the dollar’s dominance as a reserve currency seem to be numbered. This shift has significant implications for the global economy.
Rise of China and its role in de-dollarisation
One significant factor, according to the paper is the rise of China. As China’s economy has grown in recent years, so has its global influence. China has been gradually moving away from the dollar and promoting its currency, the yuan, as an alternative global reserve currency. Several other countries have started to conduct trade in yuan, and China has signed agreements with other countries to settle trade in yuan.
Another factor is the declining trust in the US government and the dollar itself. The US government’s massive debt and inability to address its structural problems have eroded the world’s confidence in the dollar as a reliable store of value. This lack of trust has been further compounded by the US’s use of economic sanctions as a tool of foreign policy. Many countries have started to view the dollar as a political weapon rather than a neutral reserve currency.
Can De–dollarisation help control inflation?
According to the International Monetary Fund’s working paper, De-dollarisation, by Annamaria Kokenyne, Jeremy Ley, and Romain Veyrune, the first step towards de-dollarisation is macroeconomic stabilization, focusing on reducing and stabilizing inflation. Fiscal consolidation and appropriately tight monetary policy are two key policies in macroeconomic stabilization that can reduce inflation rates. Fiscal consolidation lessens the need for government borrowing from the central bank, and tighter monetary policy reduces credit growth. Both policies restrain aggregate demand, resulting in a drop in inflation rates and, eventually, the appreciation of the actual and/or nominal exchange rate.
Furthermore, policymakers need to take account of risks, including capital outflow between countries, disintermediation, and banking sector instability. A durable de-dollarisation requires credible macroeconomic stabilization, exchange rate variability, and public debt management that shifts away from foreign currency denomination.
From the perspective of India and its trade relations with Bangladesh and other South Asian countries, the de-dollarisation process would require a lot of deliberations before it is actually applied. Another factor which would impact the policy’s success is the willingness of trading partners to trade in the parallel currency; Indian Rupee.