The world economy has once again begun to reshape. The de-dollarization across the globe, especially in South Asia, has become the talk of the town as its consequential effects are being debated over big minds of economists and analysts. A striking feature of the recent downfall of the hegemonic dollar is the pleasures and strengths enjoyed by big economies like China, Russia, and India who have gradually shifted their trade payments into Yuan and other local currencies. Since the onset of the 2018 US-China trade war, Russia has already been moving away from the dollar dependency and now, more than fifty percent of its trade with China is done in yuan.
The greenback’s attenuation in global trade has significantly been spread and felt in other corners of the world. Where US treasury still denies the loss in the hegemonic role of the dollar on one side saying it won’t be sustainable for long, On the contrary to this, there are some eyebrows raised on the declining role of dollar in the global trade. Believing or not, the world is becoming, once again, polarized and segmented. Every nation is striving to live on possible domestic resources and trying to catch up with inflated imports like fuel (gas and oil) and food products like wheat, etc. While, compromising over its foreign policies.
Notwithstanding the role of the dollar in the global market, its hegemony is being challenged across the globe due to multiple factors. Among them, one factor leading to de-dollarization is the continuous inflation of the dollar. Since 1980, the US has diligently afforded to maintain low and steady inflation rates. Giving the investors and savers a safer haven to hold their assets in dollars. But over the past year, inflation has soared to unimaginable levels that it has become questionable as to how and why one should go for investment and savings in dollars. What next if the dollar gradually loses its value? The US has in the past, used to run larger fiscal deficits through huge investments in dollars at the back. However, once the value of the dollar gets eroded, the US would be less likely to access world capital and borrowing cost will increase, and would become a second or third-tier currency in the world like the British pound..
A striking feature of the recent downfall of the hegemonic dollar is the pleasures and strengths enjoyed by big economies
In the case of Pakistan, a strategic move towards De-dollarization could have significant implications on its economy, fostering greater stability and independence in the long term. The dollar dominance forces countries to conduct their trade in the dollar while bringing unnecessary exchange rate risks. Pakistan has been also facing multiple external shocks like oil price shocks, BOP problems, and exchange rate fluctuation which have seriously hampered growth. Through currency diversification, Pakistan can minimize such economic losses. This strategic shift would allow a buffer against the financial crises and allow for more effective monetary policy implementations.
Moreover, De-dollarization can foster trade and investment opportunities for Pakistan. By allowing trade in local and regional alternatives, Pakistan can strengthen ties with its trade partners and attract more FDI. This promotes growth and other economic prosperities. Among all, most central to the heart of Pakistan is the boosting of sovereignty and autonomy. Reliance on the economy can subject a country’s economy to the monetary policy decisions and geopolitical interests of the US. By diversifying its currency reserves, Pakistan can exert greater control over its economic policies and can reduce pressures from outside the country.
Pakistan has yet, to complete one trade consignment under the Chinese Yuan in 2023. It has paid for its first discounted Russian crude oil. It is a big shift in South Asian countries’ payments in currency other than the dollar. Before this, in November 2022, the State Bank of Pakistan (SBP) and the People’s Bank of China (PBoC) signed a memorandum of understanding (MoU) on establishing RMB (Interchangeable Chinese Currency). In the year 2020-2021, Pakistan already saw a cut down of $ 4.5 billion on the greenback as of goods imported of 30 billion RMB from China.
However, thinking is easier than doing. It is important to acknowledge that de-dollarization along with its brighter prospects brings challenges too. Exchange rate volatility and liquidity constraints are potential risks attached to de-dollarization for countries with poor economic and financial systems. Shifting away from the dollar requires careful planning, coordination with international partners, and most importantly the development of robust financial infrastructure that Pakistan lacks at all.
De-dollarization holds significant promise and brighter prospects for Pakistan’s economic stability, trade expansion, economic integration, and overall autonomy. By reducing its dependence on the dollar, Pakistan can insulate itself from external shocks, attract foreign investment, and exercise greater control over its monetary policy. Embracing de-dollarization with diligent planning is proactive and will position Pakistan on a path toward economic independence, resilience, and long-term prosperity.
The writer is a researcher of Economics at Quaid-e-Azam University, Islamabad.