The US dollar has dominated international trade for nearly eighty years. Since the currency is accepted as the world reserve currency, the USA enjoys the privilege of controlling the global financial system and running federal deficits without having to worry much about the consequences. However, with global sanctions and new Global South alliances, the United States’ hegemony is slipping. As a consequence countries are seeking global currency alternatives. The shift towards de-dollarisation reflects a critical change with significant implications for global trade, investment, and monetary policy.
The de-dollarisation movement has been one of 2023’s more intriguing financial trends. A growing number of nations are making such efforts to lessen the influence of the US dollar in world trade. It primarily began after the 2008 financial crisis, when China complained about how the United States was devaluing the dollar through massive debt accumulation and excessive money printing and began to express its desire to introduce a new global financial system. The idea of a new monetary system was met with skepticism, with the notable exception of countries subject to US sanctions (e.g., Russia, Venezuela, Iran, and North Korea). The idea of anything superseding the dollar was considered unthinkable by the majority of the developed world.
But everything changed when Russia invaded Ukraine. The United States and the West not only imposed sanctions on Russia but also froze its US dollar reserves and barred it from using the SWIFT dollar transfer system.
In recent years, a significant number of nations and regions have started the de-dollarisation process, driven by a combination of geopolitical, economic, and strategic factors. In particular, many nations around the world are actively looking for alternative currencies for international trade in light of the sanctions imposed on Russia. China, Russia, and the European Union are notable examples of countries that have taken concrete steps to reduce their reliance on the US dollar in international transactions and financial markets. The dominance of Washington’s power has led several influential world leaders and business figures to express concerns and emphasise the need for backup currencies. In December, China asked Middle Eastern suppliers to accept its own currency rather than the dollar in oil trades. Meanwhile, Russia has increased its de-dollarisation efforts in recent years, with Putin signing an executive order in March 2022 prohibiting “unfriendly” countries from settling natural gas contracts in any currency other than the ruble. Others, particularly those in the Eurozone, have pursued de-dollarisation in order to promote the international use of their currency, the euro, in order to improve their global economic standing and secure greater financialautonomy.
As the world becomes more interconnected, it is crucial to have a secure and fair financial system. In some cases, excessive reliance on the US dollar as a reserve currency has made the world economy vulnerable and unbalanced. These elements have fueled interest in de-dollarisation, along with the rising economic power of emerging markets and the need for a more diverse and robust financial architecture. Understanding the factors driving this phenomenon, as well as its potential consequences, is critical for economists, policymakers, and market participants. The desire to promote a more diverse and robust global financial system, one that is less susceptible to the peculiarities of a single dominant reserve currency, is another driving force. De-dollarisation is viewed as a way to promote stability and lessen the risk of economic contagion while lowering the risks connected with an excessive reliance on the US dollar.
The US-led sanctions that target some Russian banks’ access to SWIFT are said to have made it easier for China to promote the yuan, its own currency. The change occurred as developing countries stepped up their efforts to de-dollarize their economies and BRICS [Brazil, Russia, India, China, and South Africa] nation members called for the creation of a single BRICS currency. Vladimir Putin, the president of Russia, stated at the conclusion of a three-day bilateral summit with Xi Jinping in late March that, They are in favor of using the Chinese yuan for settlements between Russia and the countries of Asia, Africa, and Latin America.
Brazil and China are promoting the Chinese yuan as a viable alternative to the dollar. Countries like India and China, which are willing to continue trading with Russia, are starting to do so in rupees and yuan. Along with the members of the group, other countries already under their influence may hold reserves in the BRICS basket currency. States in the Middle East and South Asia are among them. The Eurasian Economic Union came to an understanding of the need to create a new global currency at the beginning of March. 25 nations are now prepared to join BRICS and agree to a new currency for international trade. This obliquely suggests that the dollar’s hegemony in the multifaceted world is waning.
What are the implications for Bangladesh?
Bangladesh’s foreign exchange reserves, like those of other developing countries, have been declining since the beginning of the Russia-Ukraine war. Higher import costs lead to an inflationary crisis putting pressure on forex reserves. Like many other countries, Bangladesh is interested in conducting business in a different currency. Following Western sanctions against Russia, Bangladesh had been searching for ways to pay the $110 million required for the construction of the Rooppur power plant. Due to Russia’s exclusion from the SWIFT gateway, Bangladesh and Russia decided last month to make payments for the first installment of the Rooppur nuclear power plant, which is equal to about $320 million, in Chinese currency yuan. The Chinese currency is replacing the dollar more quickly on international markets, so the Bangladesh Bank has been increasing the share of the yuan. Bangladesh has also made use of Indian rupees to settle bilateral trade with India, making it the 19th country to do so. Both nations had been in discussions for months about switching from the dollar to their domestic currencies for transaction clearing. Before Bangladesh, 18 nations began paying for their international trade with India in INR.
It is important to realise that Bangladesh’s decision to accept payments in yuan or Indian rupee is not a one-off decision. Rather, it is a reflection of more general changes in the global economy, where nations are increasingly seeking ways to diversify their economic ties and lessen their dependency on the US dollar. Policymakers and analysts are working to keep a sharp focus on these shifts and carefully assessing the effects these shifts have on all geopolitical relations. Bangladesh’s top trading partners are China and India, two of the world’s biggest economies. The two nations have also emerged as significant players in geopolitics, aside from the economy.
Relying heavily on the dollar can create vulnerability to fluctuations in its value. By diversifying its currency reserves and adopting alternative currencies like the yuan or rupee, Bangladesh can reduce dependence on the dollar and potentially increase its resilience to currency shocks. While diversifying currency options can offer potential benefits, maintaining a diverse forex currency in place of the dollar, will not be simple for a developing economy like Bangladesh. Although the U.S. dollar has long been providing stability and liquidity in international transactions, Bangladesh’s choice to use the yuan or Indian rupee rather than the dollar represents a significant departure from the previous use of dollar.
Shifting to a different currency could expose Bangladesh to currency exchange risks, as fluctuations in the value of the rupee or yuan may impact the country’s competitiveness and trade balance. Moreover, the dollar’s wide acceptance facilitates smoother transactions, as it is readily convertible in most global markets. It is also crucial for Bangladesh to assess the geopolitical implications of de-dollarisation. The dominance of the US dollar in international trade and finance has given the United States significant influence over global economic affairs. While de-dollarisation may offer potential benefits to Bangladesh, such as reducing dependency on a single currency and diversifying its international trade relations, careful consideration of the risks and challenges is essential. A comprehensive analysis, strategic planning, and close collaboration with international partners will be crucial to successfully navigate the implications of de-dollarisation and ensure a smooth transition that safeguards Bangladesh’s economic stability and competitiveness in the global market.
Author-Rafiul Karim
