CHALLENGING THE DE-FACTO RULE OF DOLLAR

TARIQ AHMED SAEEDI
(feedback@pgeconomist.com)

Feb 27 - Mar 4, 20
12

Recently, a number of currency swap deals surfaced on the predominantly dollar-driven global financial market. Gathering to challenge what it is called 'de facto' rule of the dollar are economies pre-empting freefall of their holdings linked to the greenback and subsequent weak economic fundamentals by promoting switchover to alternative foreign currency resources

China has been more vocal in replacement of US dollar with not one but a significant number of substitutes. It has suggested kinda special drawing rights, a unit of exchange that is used by the international monetary funds (IMF).

The Asian economic behemoth has been signing currency swap agreements with its treading partners since the global financial crisis 2008. So far, it has reached swap arrangements worth 1.3 trillion yuan to encourage external trade, investments, and financial cooperation with 15 countries including South Korea, Malaysia, Hong Kong, Belarus, Argentina, UAE, Turkey etc., according to a press statement by People's Bank of China.

Experts believe that Asian economies should relinquish their overreliance on US dollar reserves in order to save them from the negative impacts of the U.S. economy undergoing corrections and Euro debt crisis.

The world's No.1 economy is reeling from massive fiscal deficits. The fiscal year 2012 ending September is expected to have deficit of $1.33 trillion showing an increment from $1.29 trillion in 2011. However, next year's budget has projected deficit of $901 billion, around 5.5 per cent of the country's gross domestic product (GDP). Export-driven economies in Asia such as Japan, China, and Singapore are suffering from the U.S. economic slowdown and Euro debt crisis. Economies like Pakistan with relatively small exports showed resilience to the global recession.

Asian economies should go for currency swaps to stave off dramatic fluctuations, advise the analysts. Movements of dollar value unleash impacts not only the U.S. economy, its monetary policy, external trade, and investments, but also almost entire world. Import bills increase if local currency value of a country decreases against the dollar.

Pakistan import bills are increasing sharply as rupee continues to depreciate against dollar. Imports rose to $35.87 billion in 2010-11 from $31.2 billion in 2009-10 and $31.74 billion in 2008-09.

Foods and petroleum products were the major imports last fiscal year. To make only payments of imported petroleum products, the country has been spending more than $10 billion annually since fiscal year 2008-09. Since the prices of commodities are indexed to dollar in international trade, it has to arrange dollar to make payments even if such commodities from exporting country can be purchased at much low cost. For example, Pakistan can import petroleum products from Iran for much cheaper rate provided unit of exchange is not dollar. Similar cost benefits can be gained in importation of a variety of products. Replacement of dollar, however, can be disadvantageous for exporting sector that leverages benefits on increment of dollar value.

Clearly, China wants to cash in on the weakening condition of the U.S. economy and therefore it is promoting me-too dollar.

China is striking swap accords even with the economies like Belarus and Iceland that have little benefits for the enterprising Chinese commercial ventures. The motive is obvious and that is to provide these economies with dollar substitute so that they could buy Chinese goods in yuan/ renminbi in whatever little quantity.

Generally, foreign media are vocal about the U.S. economy healing itself, gathering courage to sound optimistic as the economy generated 243,000 jobs in January this year. The creation of jobs is being considered as a precursor to recovery from the chronic subprime loan crisis that continues to batter the economy.

Financial Times reported economists as saying they are content about the sustainability in saving and debt rates. Savings rate has gained traction at four per cent.

"In several parts of the economy hit by the financial crisis - the credit, housing and labour markets - there are signs of a return to health," wrote Robin Harding in an article. Easy access to finance is likely to spur the housing credit off-take that will revive the construction sector. "Housing looks more likely to boost the economy in 2012 than to slow it down," he maintained. At the same time, Harding has conditioned this recovery process to the composed eurozone. Euro debt crisis has been upsetting its growth since the financial crisis 2008.

Last year, Pakistan and China reached a currency swap arrangement of $1.6 billion (10 billion yuan and Rs140 billion) for three years to improve bilateral trade. The arrangement would be extended further on mutual understanding.

At present, the benefits of bilateral trade incline liberally to Chinese side with exports from Pakistan standing at $$2.1 billion and imports at $4.1 billion during last fiscal 2010-11.

Earlier, Pakistan also signed a currency swap agreement with Turkey for three years. The worth of rupee/lira accord is calculated at one billion dollars. The volume of bilateral trade is low. Business communities are eager to increase the existing annual trade volume from $997 million to two billion dollars.

With Sri Lanka, such an agreement is awaited. State bank of Pakistan was said to initiate discussion on the agreement with the Sri Lankan central bank. The issue was discussed during a meeting between Sri Lankan President, Mahinda Rajapkasa, and Prime Minister Yousuf Raza Gilani this month in Islamabad. The present Pak-Sri Lanka bilateral trade is paltry $375 million.