Last year, at the Valdai International Discussion Club meeting attended by hundreds of experts and politicians, Rasigan Maharajh asked Russian President Putin what a democratic alternative to the current international system of payments and settlements might be. Putin responded that the United States established the Bretton Woods system after World War II, which created international institutions in finance and international trade. However, this system has broken down because the US uses the dollar to fight for its political interests, undermining trust in reserve currencies.
Foreign countries are now questioning whether keeping foreign currency reserves in dollars is wise. Still, the US has created a robust system that supports these reserves, making it difficult to get out. Over five days in March 2023, three small- to midsize US banks failed. One can easily question now if it is safe to continue saving money in dollars.
The uncertainty of the global market has heightened the importance of having a diversified portfolio. Gold has traditionally been a haven for investors amidst economic turmoil. However, relying solely on gold is also not advisable.Instead, investors should consider forming a well-rounded portfolio combining traditional and alternative investments. Moreover, the recent developments in international trade and finance have brought about the topic of de-dollarisation.
De-dollarisation refers to reducing the dependence of a country's economy on the US dollar. This can be achieved by diversifying the currency reserves of a nation and promoting the use of alternative currencies.
De-dollarisation has been discussed in many countries worldwide due to the US dollar's dominance in global trade and finance.
De-dollarisation is necessary for many countries to reduce their vulnerability to economic shocks. The dollar's power in worldwide business and finance poses significant risks to governments, particularly those with currencies pegged to it. A sudden US dollar exchange rate fluctuation can severely affect a country's economy.
Every nation has learned a hard lesson from the SriLank and dollar turmoil. Diversifying currency reserves can help mitigate the risk of sudden economic shocks caused by US dollar exchange rate fluctuations.
Promoting alternative currencies can open up new markets and trade opportunities for countries that may have been limited by using the dollar. Iraq has already decided to abandon the US dollar, abold move. Countries like India and Bangladesh are exploring the possibility of using local currencies in their business. At the same time, Russia has billions of rupees in Indian banks due to international sanctions.
However, the situation arises not from a lack of goodwill but due to significant trade imbalances. BRICS countries can only partially liberate their currencies due to their heavy reliance on exports.
The problem is both India and China rely on theUS dollar for their exports, which are pegged to the US dollar. This raises an essential question for those who have savings in dollars. Is it safe to continue saving money in dollars? Would it be wise to contemplate investing in gold in these circumstances? In the case of Nepal, there may be better options than de-dollarisation. Nepal heavily depends on re-mittances from its citizens working overseas; a significant portion of those remittances are sent in US dollars. Additionally, the US dollar is widely accepted and used in international trade, making it a virtual currency for Nepal's economy.
India is looking to diversify and internationalise the Indian rupee. However, the rupee may dive deeply if it becomes a convertible currency. During his addresses at a community programmeorganised in Sydney, Australia Indian Prime Minister Modi talked about the impact of the UPI (United Payment Interface) and expressed hope that digital transactions would surpass cash and go global.
An agreement with UPI and all payment system providers and operators in Nepal will not only boost trade between the two countries but also make it easy to carry out cross-border transactions.
Instead of de-dollarisation, Nepal can explore innovative solutions for diversifying its currency reserves and promoting economic growth. One option could be to explore digital currencies, such as Bitcoin or other cryptocurrencies.
Cryptocurrencies can provide alternative payment solutions and encourage trade between countries without a single dominant money. Another option which many central banks, including the NRB, are currently working on is CBDC — Central Bank Digital Currency. CBDCs give central banks more oversight and control over currency supply and circulation. The government typically backs these currencies, and their value is pegged to a national currency. CBDCs are generally not decentralised, and digital forms of fiat currency are issued and controlled by central banks. In contrast, blockchain is a decentralised currency that records and secures digital transactions.
Many experts argue that there may be some benefits of the CBDC, but the drawback outweighs the benefits. Another option Nepal can explore is promoting its local currency, the Nepali rupee, in international trade. This can be achieved by offering incentives to businesses that conduct transactions in Nepali rupees or by promoting Nepali rupees as an alternative currency for remittances.
The global economic system must avoid being dominated by a single currency.
Diversifying currency reserves and promoting alternative currencies can reduce financial vulnerabilities and encourage economic growth. Despite de-dollarisation's challenges, it is a necessary step for many countries. Countries must reduce their vulnerabilities to economic shocks and promote financial stability and growth. The de-dollarisation process should, therefore, be done gradually.
Published: The Himalayan Times
Nepal's leading daily newspaper