Reshaping the global monetary stage

MD Shiyan Sadik :

The usage of the dollar as a widely used form of payment is beyond any doubt whenever a tourist decides to travel abroad.

This is applicable to both personal use and is quite successful in terms of international trade.

BRICS (Brazil, Russia, India, China and South Africa) nations recently declared the introduction of a new currency that will be a suitable replacement for the dollar, which stirred discussions.

A new currency is now being developed, according to Alexander Babakov, the deputy chairman of the Russian State Duma.

Brazil’s president, Luiz Inàcio Lula da Silva, accelerated this narrative by asserting that he frequently asks himself, “Why do all countries have to base their trade on the dollar?” So, is now the time for the de-dollarization process to begin? Or the US Dollar will continue to dominate the world market? Does the world need to address the proper alternative? Questions are on the roll since the recent dollar crisis debacle which has been reported worldwide.

Technically speaking, the term “de-dollarization” refers to the process through which a nation’s monetary system departs from using the US dollar as a reserve currency, medium of exchange, and unit of account.

Geopolitical, economic, and strategic concerns have driven a number of nations and areas to begin the de-dollarization process in recent years. China, Russia, Brazil, and the European Union are notable examples of countries that have altered their monetary policies to reduce their reliance on the US dollar in international trade and financial markets.

The implementation of the Bretton Woods system increased the US dollar’s acceptance after World War II.

The dollar established various benefits due to its dominance in international trade, banking, and investment, including decreased transaction costs, declining exchange rate risk, and the ability to finance deficits at relatively lower costs.

It also anticipates a more intimate connection between the power dynamics of an economy under US control, including the scope and scale of US trade, the liquidity attributes of the US financial system, and consistency over the span of time.

As an important economic bloc, BRICS chose to implement a few policy changes to help de-dollarize the world.

But there are a number of difficulties to be aware of.

The conversions from the different currencies to the BRICS currency would require periodic review and recalculation.

Additionally, the exchange rate would need to be agreed upon by all the BRICS nations.

The practice can initially cause currency exchange rates to fluctuate, which may gradually skew the stability of the financial market.

Some economists claim that this significantly increases the issue of exchange rate fluctuation.

Trade, investment, and capital movements may be impacted as a result, especially in nations with underdeveloped financial markets or few mechanisms for managing exchange rate volatility.

On a different note, the idea of introducing a new currency is not actually supported by empirical data about the Euro and Chinese Yuan.

The Chinese Renminbi and the Euro are two options, however, neither of them can be utilized as reserves due to significant problems.

For instance, central banks that hold the Euro are unable to invest in European debt due to the lack of a single bond market on the continent.

However, Euro had a slight advantage.

The euro is a fully convertible foreign currency recognized by the International Monetary Fund (IMF) on its list of SDR (Special Drawing Rights) currencies.

The BRICS currency wouldn’t be as well accepted outside of its member countries and would frequently experience issues with exchange rates inside them.

Because of the sanctions, the idea of a new currency may be harmful to Russia.

War is yet another factor that makes implementation less likely.

Another point of disagreement is the disparity in wealth between these countries.

In China, the second-largest economy in the world, the average annual income is $12,500, which is more than five times the average annual income in India.

This demonstrates the prospect of Chinese dominance in financial transactions. A currency calculation error could lead to the risk of arbitrage.

Arbitrage is the practice of purchasing a security in one market, then selling it at a higher price in a different market.

They are able to keep a profit margin thanks to the brief price gap between the two markets for the same asset.

The New Development Bank cannot meet BRICS’s requirement for a central bank because it does not operate like one; rather, it functions more like a development bank like the Asian Development Bank.

The discussion makes it necessary to assert that the new BRICS currency can drive the de-dollarization narrative. Major formulations are necessary.

(The writer is Lecturer, Department of Environmental Science and Management, North South University).