The influence of the United States Dollar (USD) in global trade has been substantial, serving as a hallmark of the West’s economic power. Its prevalence has long epitomised the strength of the West, a supremacy established post World War 2. This supremacy of the dollar has been paramount since then, solidifying the dominance of West hegemony and the financial institutions they founded. Consequently, developing nations found themselves compelled to embrace the dollar, apprehensive of the potential leverage that Western powers could exert.
The ascendancy of the Dollar sparked discussions between the nations straddling divergent economic spectra, encapsulated within the NORTH – SOUTH discourse or NORTH – SOUTH debate. Developing nations voiced apprehensions over the disparities that the Dollar’s dominance accentured, and the compulsion to interface with dollars rendered these nations susceptible to the economic decisions of Western powers, prompting dialogues on reshaping the Global Monetary framework to engender inclusivity and equity.
While the prospect of conducting global trade in native currencies holds allure, practical impediments persist. The talk around dealing in National currencies has been in talks for almost every BRICS summit, but it just remains to that. One needs to look at the complexities the IMF’s SDR system possesses.
The Special Drawing Rights system plays a pivotal role in the international monetary framework. It is a composite international reserve asset created by the IMF to supplement its member countries’ official reserves. While the SDR system itself doesn’t directly prevent global trade in local currencies, it introduces complexities that make conducting international trade solely in national currencies challenging. The IMF uses a basket of five currencies to define SDR, which consists of Dollar, Euro, Yen, Pound and Yuan. These currencies are determined by taking two factors into account, whether the currency’s parent country is among the top five exporters in the world and its ease of convertibility. Subsequently, these five currencies are called the HARD CURRENCIES. Such currencies are easily convertible and acceptable in world trade, and currencies like Indian Rupee, Rubles are not fully convertible due to the restrictions on current account convertibility by the central bank, to keep a balance between extreme market fluctuations.
Even though trade in national currencies poses practical challenges to it, developing nations are figuring out other alternatives to level the playing field. The recent BRICS Summit 2023 commanded global attention for the same, raising anticipations for deliberations surrounding a potential BRICS currency as a potential alternative to the dollar. However, the focal point of the summit orbited around the BRICS expansion, inviting Iran, Argentina, Saudi Arabia, Egypt, Ethiopia and UAE. The inclusion of six new members showcased the burgeoning influence of the consortium and its resolve to cultivate collaboration beyond its original composition. The inclusion, interestingly, shows a heavy participation from the Gulf and the Middle East – regions that play a pivotal role in oil exports, including the West.
As the dialogue on reshaping the international monetary landscape continues, the BRICS expansion sends a subtle reminder that while the direct trade in national currencies may currently pose intricate challenges, endeavours like these represent strides toward a more diversified financial landscape. In other words, maybe trade in local currencies is not practically possible for now, but this coalition is a step towards it.
Divyh Mishra
31/08/2023 at 12:54 PM
No doubt India made it’s economic growth a leverage by promoting trade in local currency with other countries thus enhancing it’s relationship with them which includes Russia and Iran. So how the India’s posture on this coalition will affect it’s international relations?
Nitika
15/09/2023 at 2:54 PM
Pros:
1. Dependency on US dollar will reduce, which in turn, appreciates the INR.
2. The Indian Economy when trading in local currency, the fluctuations in the deficit be it of current account or capital account, will reduce.
3. India’s position as a strong market leader will emerge, not dependent upon the mercy of dollar’s exchange rate.
4. Now given that the world order is multi-polar, International Relations should not be dominated by single currency or even a country and trading in local currencies ensures that no one country gets a hegemony over the global market.
Cons :
It is not practically possible given the current scenario where 90% of world trade happens in US Dollar. And changing it overnight is not feasible at all.