KUALA LUMPUR: Bilateral and regional agreements are the best starting points for Malaysia and other developing countries to pursue dedollarisation by undertaking non-dollar denominated transactions, economists say.
They said that by doing so, developing economies could move away from risks arising from over-dependence on the greenback.
The economists also noted that traction for dedollarisation is gaining greater momentum as the US dollar continues to appreciate sharply vis-a-vis regional currencies within a short period of time, leading to adverse macroeconomic implications on almost all economies.
In view of this predicament and the growing polemics on dedollarisation, economist Dr Nungsari Ahmad Radhi told Bernama that dedollarisation was possible via bilateral and regional agreements.
He cited that if an oil producer exports to a consuming country, which in turn exports other products to the oil-producing country, there might be scope to dedollarise the trade via whatever mutually agreed mechanism.
This means they could trade in each other’s currencies or any other currency that they have mutually agreed upon and not the dollar.
”That’s why bilateral agreements are the starting point,” he said.
However, he said what’s possible for a particular country might not be possible with another country given the dominance of the dollar and the US being the world’s largest economic powerhouse, and the greenback regarded as a safe haven currency.
Echoing a similar sentiment, Professor Geoffrey Williams, Dean of the Institute of Postgraduate Studies at the Malaysia University of Science and Technology, acknowledged that reducing dependency on the US dollar was not new and has happened in the past.
“But it appears to be more serious now with a growing group of international leaders questioning the role of the dollar and US/EU systems and that actual changes are taking place as there is a change of tone and possible action points,” he said.
Nevertheless, amid the polemics over dedollarisation, Nungsari cautioned small trading economies like Malaysia to remain somewhat neutral while always acting cleverly to protect their own interests.
In sharing his thoughts on currency diversification and reducing dollar autonomy, he said it could lead to stronger bilateral relations.
As an example of increasing non-dollar transactions globally, the Indian High Commission in Malaysia earlier this month said trade between India and Malaysia could now be settled in Indian rupee (INR).
This is in addition to the current modes of settlement in other currencies, following the decision by the Reserve Bank of India (India’s central bank) in July 2022 to allow the settlement of International trade in rupee.
The initiative was aimed at facilitating the growth of global trade and supporting the interests of the global trading community in rupee.
Trading in foreign currencies in line with FEP
Trading in other foreign currencies is also in line with Malaysia’s foreign exchange policies (FEP).
Malaysian banks are allowed to undertake the settlement of international trade in goods or services in any foreign currency, subject to the rules and regulations of Bank Negara Malaysia (BNM).
While the polemics over dedollarisation mainly due to the dollar’s dominance in international trade and finance continues, Nungsari pointed out that non-dollar transactions among nations in larger groupings might prove challenging, especially if members hold dear to the greenback.
Against such a background where the dollar is the currency of choice for international trading, developing countries including Malaysia are struggling to lower the effects of imported inflation due to the greenback’s steep appreciation.
The situation has worsened the countries’ ability to recover after the COVID-19 pandemic as their currencies decline relative to the dollar.
The ringgit has depreciated by a significant 8.43 per cent in more than three years against the dollar from 4.0580 on Jan 25, 2020, at the onset of COVID-19 compared with 4.4000 last Friday.
The situation was more acute among emerging economies, which reflected their higher import dependency and greater share of dollar-invoiced imports.
Basically, imports have become more expensive due to the higher exchange rate with the dollar,
According to data by CEIC (Census and Economic Information Centre), Malaysia’s imports totalled US$21.8 billion in January 2023 and US$23.2 billion in December 2022.
Therefore, any upside of the dollar could have significant ramifications on what Malaysia has to pay for its imports.
The BRICS effect
The move by the five leading emerging economies — Brazil, Russia, India, China and South Africa or the BRICS economies, to mull setting up a new reserve currency to better serve their economic interests, has further sparked the idea of dedollarisation.
Most international money and security transfers are powered by the Society for Worldwide Interbank Financial Telecommunications (SWIFT) system, and because each bank has its own code, it identifies specific banks worldwide when sending money internationally.
In a deeper discussion of dedollarisation, Putra Business School economic analyst Dr Ahmed Razman Abdul Latiff said the concept of dedollarisation must be accompanied by a reduction in reliance on SWIFT code for money transfers.
“It is the right strategy for the country to not overly rely on the dollar as the medium of exchange for global trading as well as dependency on SWIFT code for the transfer of money.
“This is because there is only one country controlling both mechanisms at the moment and as we are all aware, geopolitically, the US is increasingly in conflict with Russia and China, which are part of the increasingly powerful economic block BRICS,” he said.
Williams said: “New arrangements such as the Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which now includes the United Kingdom, show that there are shifts in global economic arrangements which do not necessarily rely on the US or other developed economies like the European Union.
Both Nungsari and Williams agreed that there were also challenges to dedollarisaion, among which are the fact that the US economy was still a large economy.
While China might have overtaken the US in purchasing power parity terms, in real Gross Domestic Product terms, the US was still the largest economy globally.
Nungsari said: “More than that, and given that the yuan is not a totally floating currency and China’s capital market is still controlled, the US dollar is by far the preferred reserve currency, which is held by many economies.
“It is the gold of currencies and is partly a substitute for gold,” he said.
Williams added that moving to bilateral currencies for trade and investment is feasible but more at risk to exchange rate fluctuations and liquidity issues.
“So actually, it should be a move to multiple currency options not just one,” he said. – BERNAMA
