By Dr Paul Anthony Mariadas and Dr Uma Murthy

The global financial landscape has seen a significant shift in recent years, with an increasing number of countries seeking to reduce their dependence on the United States dollar (USD) in international trade and financial transactions.

As one of the nations actively pursuing a strategy of de-dollarisation, Malaysia is aiming to promote the use of its local currency, the Malaysian Ringgit (MYR), in international trade. This endeavour is motivated by several factors, including the desire to enhance economic sovereignty, minimise currency exchange risks, and encourage regional economic integration.

De-dollarisation is a multifaceted process that involves reducing a country’s reliance on the USD in both domestic and international economic transactions. This strategy arises from concerns about the vulnerabilities of the USD and the extent of influence it wields over national economies.

Enhancement of economic sovereignty

One of the primary benefits of de-dollarisation is the enhancement of a country’s economic sovereignty. Over-reliance on a foreign currency, such as the USD, can render a nation vulnerable to external economic pressures and political decisions beyond its control. By promoting the use of its own currency, a country can assert greater control over its economic destiny.

De-dollarisation substantially reduces the currency exchange risks associated with international trade. When transactions are denominated in a foreign currency, businesses are exposed to exchange rate fluctuations, which can lead to unpredictable costs and financial uncertainty. Utilising the local currency mitigates these risks, providing stability to businesses and reducing the likelihood of trade disruptions.

De-dollarisation also promotes fiscal and monetary autonomy. A nation that conducts international trade in its local currency can tailor its monetary and fiscal policies to its specific economic needs. This flexibility enables a more precise response to economic challenges and opportunities, without being constrained by external factors.

Vulnerable to sanctions

In a global landscape where economic sanctions are sometimes used as a political tool, de-dollarisation can offer protection from such measures. When a country’s financial system is heavily reliant on the USD, it becomes vulnerable to sanctions that can impede its access to global financial markets. The use of a local currency can circumvent these vulnerabilities.

Promoting the local currency in international trade and finance necessitates the development of a robust financial ecosystem. This investment in domestic financial markets and institutions not only increases the liquidity and stability of the local currency but also spurs the growth of the financial sector, attracting foreign investment and fostering economic development.

For countries engaged in regional trade and economic organisations, such as ASEAN, de-dollarisation can facilitate regional economic integration. By promoting the use of the local currency, these nations can simplify trade transactions with neighbouring countries, reducing the need for USD intermediation, and fostering stronger regional ties.

Malaysia excellent case study

Malaysia’s proactive pursuit of de-dollarisation provides an excellent case study to understand these benefits in action. The nation’s efforts to reduce reliance on the USD align with its goal of achieving economic sovereignty and reducing currency exchange risks in international trade.

Malaysia has initiated bilateral trade agreements that stipulate the use of its local currency, the MYR in trade transactions, and it has entered currency swap arrangements with other countries. The country also encourages the use of MYR in trade settlements and has embarked on the internationalisation of the MYR by issuing MYR-denominated bonds and expanding its use in international trade finance.

Despite its potential benefits, including enhanced economic sovereignty and stability, de-dollarisation is a complex process that demands careful consideration. The foremost challenge in de-dollarisation is the USD’s global dominance. It is the primary reserve currency and the most widely used currency for international trade and finance. Most international transactions are conducted in USD, and changing this deeply entrenched system is an arduous task. Convincing the international community to shift to alternative currencies is a monumental challenge.

Another significant challenge revolves around the liquidity of alternative currencies, such as the MYR. The USD benefits from immense liquidity due to its extensive use in global trade and financial markets. In contrast, MYR and other alternatives may not be as liquid or widely traded, making it difficult for them to effectively replace the USD in international transactions.

Building and maintaining investor confidence in the local currency is crucial for successful de-dollarisation. Investors are naturally risk-averse, and they tend to be cautious when dealing with emerging or less-established currencies. Demonstrating strong economic fundamentals, political stability, and effective regulatory frameworks is essential to attract international investors.

De-dollarisation is most effective when a country’s trading partners are willing to cooperate. However, not all nations may be enthusiastic about moving away from the USD. They may have their own economic interests tied to the USD or concerns about the stability of the alternative currency. Lack of cooperation can slow down de-dollarisation efforts and necessitate diplomatic negotiations and compromises.

Investment in transitioning financial infrastructure

The process of de-dollarisation often requires substantial investments in transitioning financial infrastructure. Developing domestic financial markets, institutions, and systems that can support the use of the local currency in international transactions is a complex and time-consuming task. These transitions need to be carried out without causing financial disruptions or systemic risks.

While de-dollarisation aims to reduce exchange rate risks, it introduces new complexities related to exchange rate management. Countries must effectively manage their exchange rates to prevent volatility, safeguarding the interests of domestic businesses and international partners alike.

De-dollarisation, while fraught with challenges, offers the prospect of enhanced economic sovereignty and stability. The complexities arise from the deeply entrenched position of the USD in the global financial system and the intricate dynamics of international trade. Yet, the pursuit of de-dollarisation remains a valid strategy for nations seeking to reduce vulnerabilities to external economic pressures and assert greater control over their financial destinies.

Bold steps

Countries like Malaysia are taking bold steps to navigate these challenges, promoting their local currencies, and diversifying the international financial landscape.

De-dollarisation is a dynamic response to an evolving global economy, and its path is not without hurdles. It is a journey toward a more balanced and resilient international financial system, with countries navigating the complexities to achieve greater autonomy and stability in an interconnected world.

-- BERNAMA

Dr Paul Anthony Mariadas and Dr Uma Murthy are lecturers with the School of Accounting and Finance at Taylor’s Business School, Faculty of Business and Law, Taylor’s University.