De-dollarisation refers to reducing dependence on the United States Dollar (USD) as a medium of exchange, reserve currency, or standard for international trade. It involves replacing the USD with other currencies, certain alternative systems, or digital currencies like cryptos.
Since World II, the US dollar has been the world’s leading reserve currency for international trade and settlement.
Central banks hold a major chunk of their forex reserves in USD due to its advantages over other currencies of the world viz. liquidity, low-risk, trust, and stability.
The sovereign’s external debts and the Special Drawing Rights (SDRs) of IMF are also mostly in dollar-denominated instruments. Both governments and corporations continue to borrow in USD and more than 80 per cent of the global transactions are in greenbacks.
The emergence of de-dollarisation:
The emergence of de-dollarisation has significant implications globally viz in the commodity market, payment and settlements, banking and finance, tourism, oil and gas, and forex markets.
The Emerging Markets (EM) have been actively exploring substitutes to the US dollar for international trade and settlements as a remedy for the growing dominance of the US dollar and the frequent threats of US sanctions and tariffs. The lessons of Russia-Ukraine have also played a significant role in the de-dollarisation efforts.
The BRICS, an economic bloc of five major countries viz Brazil, China India, Russia, and South Africa have proposed creating a unified BRICS Currency to facilitate trade within BRICS nations to reduce the dependence on the USD. The BRICS and four recent joiners viz Egypt, Ethiopia, Iran, and UAE account for about 37 per cent of the global GDP and about 40 per cent of world trade.
This justifies the trade settlements among the member nations and allies in the national or regional currencies avoiding the US dollar.
De-dollarisation is a complex and challenging endeavour for a host of reasons. There are many hurdles in the process of de-dollarisation.
As described earlier, the US dollar is the largest, most trusted, and most liquid medium of international settlement currency making it extremely difficult to substitute all of a sudden due to the reasons aforesaid. The other potential currencies like the euro and yuan lack adequate circulation and inherent monetary instability exists in their respective regions.
The lack of a robust institutional framework, regulatory challenges like KYC-AML requirements, and financial structure for clearing mechanisms, are the bottlenecks. Geopolitical reasons, inadequate digital payment infrastructure, sound interoperability in payment mechanisms, and cyber security concerns are also blocks.
The recently concluded BRICS summit in Kazan, Russia, mooted the idea of establishing a new international payment system ‘the BRICS Bridge’, a complementary system aimed at reducing the dependence on SWIFT. This alternative to the dollar-based trading system would use digital money issued by central banks, which have to confront the above concerns.
Lastly, Donald Trump has threatened a 100 per cent tariff on products of BRICS nations and their allies if they develop their currency to replace the US dollar in global trade.
During the first week of December 2024, the then Reserve Bank of India (RBI) Governor made it clear that India, a strong member in the BRICS, has no plans for de-dollarisation, making a common currency a distant reality for BRICS.
While progress has been made in the de-dollarisation move, erosion of dollar dominance may take more time. The collective commitment between the BRICS bloc and EM economies, strategic planning, and digital transformations are crucial in overcoming the hurdles.
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