DE-DOLLARIZATION

Facts

(Central bank of the US is the federal reserve bank. The US is maintaining its economy by
taking loans but it has debt ceiling ( i.e. it can take debts according to the criteria set)

But that criteria has been increased 78 times since 1960. Due to debt ceiling, american
stock market will fall, investors will panic and withdraw money from other countries. This
will impact global financing markets. If americas money get over, it will not be able to pay
and will give first preference to debt holders. Employees, retired people will have a
financial strain. Military pensions will be stopped and military personnels will not give
salaries and benefits.

*Most debt was taken in the Obama’s presidency,i.e. $7.6 tri

*Donald trump has taken $7.6 tri loan

*Biden in his 1 year presidency period borrowed $2.5 tri

(US govt spends $17bn everyday to keep its government functioning and it has the ability
to borrow unlimited money because US dollar is the reserve currency of the world and
printed by USA’s federal reserve)

(US finance ministey is called treasury department and national debt ceiling of USA is
$31tri in 2023)

*Almost 90% of trade of the world done in US dollar.

*According to data in January 2023 Japan is the largest debt holder of the USA worth
$1.1tri.

*2nd largest is china holds Treasury bonds worth $860bn

*India holds Treasury bonds worth $232bn

*In 2020 during covid US printed $3 tri and distributed among people but resources were
limited and lead to skyroketed inflation afterwards.

*Budget deficit of the US is quite high. In 2019 it was 4.6% of gdp. In 2020, it turned 15%.
In 2021, it reached 16.7%

*subsidies and free benefits are not the solution but increase economic challenges)

De-dollarization is the process by which a country reduces its reliance on the U.S. dollar (USD) in
its economy, trade, and financial transactions.

Factors behind DE-DOLLARIZATION

Economic Stability: A stable domestic economy can reduce the need for holding USD assets or
denominating transactions in USD. Confidence in the national currency can lead to de-
dollarization efforts.

Example: China's stable economic growth and its efforts to internationalize the Chinese yuan
(Renminbi) have led to a gradual reduction in the reliance on the USD. China has promoted the
use of its currency in international trade and investment.

Exchange Rate Volatility: Concerns about the volatility of the USD exchange rate can motivate
countries to seek alternatives to mitigate the risks associated with currency fluctuations.

Example: Russia has actively pursued de-dollarization due to concerns about the volatility of the
USD and its impact on the Russian economy. The Russian government has encouraged the use
of the ruble in trade and financial transactions.

Geopolitical Factors: Political tensions or disagreements with the United States can prompt
countries to reduce their reliance on the USD to assert independence and reduce exposure to
potential sanctions.

Example: Iran, facing U.S. sanctions, has actively sought alternatives to the USD in its
international trade. It has entered into agreements like brics to use other currencies like the euro
and Chinese yuan.

Currency Swap Agreements: Market dynamics, including changes in investor preferences and
global economic conditions, can influence de-dollarization trends. During periods of global
economic uncertainty, some investors seek alternatives to the USD as a safe-haven currency,

Example: Countries can enter into currency swap agreements with their trading partners. For
instance, Russia and China have established currency swap agreements that allow them to
conduct trade in their own currencies (the ruble and the yuan) rather than using the USD

Internationalization of National Currency: Actively promoting the use of the national currency
in international trade and finance can contribute to de-dollarization.

Example: Japan’s yen has long been a major international currency used in global trade and
finance, often seen as a safe-haven asset. Many international transactions, especially in Asia, are
denominated in yen.

*India has signed currency swap agreements with countries like Japan and the United Arab
Emirates, allowing trade to be settled in rupees. The International Finance Corporation (IFC) has
issued “Masala Bonds” denominated in rupees, attracting international investors.

*Brazil has established bilateral agreements with several countries to conduct trade in reais.
Additionally, some international bonds have been issued in Brazilian reais.
Financial Sector Development: Expanding domestic financial markets and providing access to
alternative financing options can reduce the need for USD-denominated financing.

Example: Governments can develop domestic currency bond markets, allowing them to issue
bonds denominated in their own currencies like India has developed a significant domestic
corporate bond market, offering bonds denominated in Indian Rupees (INR) as an alternative to
USD bonds.

Monetary Policy Autonomy: Reducing reliance on the USD can provide central banks with
greater flexibility to conduct independent monetary policy.

Example: Turkey, at times, has faced challenges due to a high level of foreign currency-
denominated debt. To regain control over its monetary policy, the Turkish government has
taken steps to reduce this reliance on the USD.

Trade Agreements: Bilateral or regional trade agreements that facilitate the use of national
currencies or other currencies for trade can drive de-dollarization efforts and can reduce the
reliance on the USD.

Example: The BRICS countries (Brazil, Russia, India, China, and South Africa) have explored using
their national currencies for intra-BRICS trade, reducing the reliance on the USD.

Foreign Exchange Reserves: Diversifying foreign exchange reserves into other currencies or
assets can reduce dependence on the USD.

Example: In recent years, some central banks, including the Russian Central Bank and the
People's Bank of China and central bank of India Efforts to promote regional economic
integration can lead to the development of regional currencies and financial arrangements that
reduce dependence on the USD.

Regional Integration: Efforts to promote regional economic integration can lead to the
development of regional currencies and financial arrangements that reduce dependence on the
USD.

Example: The European Union’s euro is used by many of its member states, reducing their
reliance on the USD for international trade within the EU.

Economic Multipolarity: The growing influence of multiple economic powers, including China,
India, and the European Union, has led to a more multipolar world economy, with a broader
range of currencies playing significant roles in international transactions.

Rise of Digital Currencies: The emergence of digital currencies, such as cryptocurrencies like
Bitcoin or central bank digital currencies (CBDCs), has raised questions about their potential to
disrupt the traditional role of the USD in international finance.

Ways to minimize the DE-DOLLARIZATION

Strengthen the USD’s Appeal: Maintain a stable macroeconomic environment, low inflation,
and fiscal discipline to make the USD an attractive currency for global trade and investment.

International Cooperation: Collaborate with other countries to maintain confidence in the USD
and promote its use in international trade and finance.

Trade Agreements: Negotiate trade agreements that encourage the use of the USD in
international transactions, ensuring that USD remains the preferred currency for trade
settlements.

Address Geopolitical Issues: Resolve geopolitical tensions and disputes that may encourage
countries to seek alternatives to the USD due to concerns about sanctions or economic pressure.

Support Dollarization in Certain Regions: In regions where dollarization (the use of USD as an
official currency) is already prevalent, work to maintain stability and confidence in the USD as
the primary currency.

Economic and Financial Stability: As THE USA is expending more than it is gaining the money
therefore it has to Promote financial and economic stability in the United States to instill
confidence in the USD’s value and its role in the global economy. Growth is very high which lead
to skyroketed inflation

IMPLICATIONS OF DE-DOLLARIZATION ON PAKISTAN

Monetary Policy Independence: De-dollarization can enhance Pakistan’s monetary policy

independence. Reducing reliance on the U.S. dollar allows the State Bank of Pakistan (the central
bank) more flexibility to set domestic interest rates and manage inflation. This strategic shift
would allow a buffer against the financial crises and allow for more effective monetary policy
implementations

Financial Stability: Lowering dependence on the USD can enhance financial stability, especially
if Pakistan has a high level of USD-denominated debt. De-dollarization can reduce the risk of
currency mismatches and vulnerabilities during global economic downturns.

Trade Diversification: Promoting the use of the Pakistani Rupee (PKR) in international trade can
encourage trade diversification and potentially open up new markets. Pakistan may find it easier
to negotiate trade agreements with countries that share an interest in reducing USD reliance.

Example: Pakistan has been also facing multiple external shocks like oil price shocks, BOP
problems, and exchange rate fluctuation which have seriously hampered growth.

Lower Transaction Costs: De-dollarization can lead to lower transaction costs for businesses
and individuals, as they may no longer need to convert USD for everyday transactions or
international trade.
Example: 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.

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).

Enhanced Confidence: Successful de-dollarization can enhance confidence in Pakistan’s

economic and financial stability, both domestically and internationally, potentially attracting
more foreign investment and trade partners. A shift toward the use of the PKR in international
trade can potentially lead to an improvement in Pakistan’s balance of payments, as it reduces
the outflow of USD for imports.

Reduced External Vulnerabilities: Lower dependence on the USD can reduce external
vulnerabilities, making Pakistan less susceptible to external shocks, such as changes in U.S.
economic policy or global financial crises.