Sunday 01 Oct 2023
By /
main news image

KUALA LUMPUR (April 6): The world is feeling the pain of a strong US dollar. And that seems to have prompted countries, whose local currencies have depreciated sharply against the greenback, to visit the idea of using an alternative currency for international trade.

Prime Minister Datuk Seri Anwar Ibrahim, who is also the finance minister, recently said in Parliament that business negotiations between Malaysia and other countries should use the currencies of both countries.

According to him, Bank Negara Malaysia (BNM) has also made a proposal to pioneer the method in matters of trade using ringgit and renminbi during his official visit to China.

A significant currency shift such as dethroning the US dollar may not be a short-term affair for an emerging economy like Malaysia, said economist Pankaj C Kumar. However for Malaysia the alternatives to the greenback look good, adding that less Malaysian demand for the dollar will aid in stabilisation of the ringgit.

“Even if you look at the world’s central banks' holdings of international reserves, the dominance of the dollar has only reduced by 12 percentage points (PP) over 20 years from 71% down to 59%. It will take time for this to happen,” he told The Edge.

“By exploring other currencies for trade, the demand for US dollars will be reduced for businesses when they do international trade. The spread between US dollar and ringgit won’t matter that much (in that circumstance) because there is no real demand there,” he said.

The possibility of reducing the use of the dollar is not a new proposition, but it appears to be more serious now and actual changes are taking place, Malaysia University of Science and Technology economist Dr Geoffrey Williams told The Edge.

Western sanctions, particularly US sanctions against Russia for its conflict with Ukraine, opened the floodgate for China’s yuan to be the most actively traded currency in Russia.

As Beijing is strategically increasing the amount of international trade settlement in yuan, it is possible for Malaysia to explore that option, he said.

“Bilateral currencies to finance trade and investment rather than the US dollar as the primary trade currency is feasible. It is also increasingly popular as changes in such arrangements are showing.

“Most commodities are priced and traded in US dollars but direct sale of oil between Russia and China as well as India is circumventing that arrangement. There is an increasing probability that this will extend to more countries and more commodities,” he told The Edge.

To-date some of the major economies that have gradually used yuan for trade settlements include Russia, the UAE, Brazil, Venezuela and Indonesia.

“Overall what PM Anwar is saying is in line with a growing group of international leaders seriously questioning the role of the US dollar and US/EU systems. So this is a change of tone and possible action points,” he said.

However, Williams said to completely chip away from dollar, stronger alternatives to US-dominated cross-border payment mechanisms such as the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network are needed.

“To replace US or EU-based systems like SWIFT, for example, there has to be a viable and reliable alternative for interbank transfers and e-payments.

“Although these systems are contestable and replaceable by new and local providers the truth is that only stable, reliable and secure financial systems will survive. The US dollar still provides this,” he added.

UOB economist Julia Goh said although China's influence on trade has risen significantly and the renminbi has made marked progress in the past decade, it remains a minor currency in terms of global use in trade payments, FX trading, and central bank reserves.

“At this juncture, the US dollar is still the most widely used currency for trade and investment purposes, while almost 60% of global FX reserves are still held in the dollar,” she added.

BNM and other regional central banks have operationalized Local Currency Settlement Frameworks (LCSF) as part of continuous efforts to promote the use of local currencies for bilateral trade as well as increase efficiency and manage FX risks.

“Hence PM Anwar's comments on US dollar reliance should be taken in a broader context and as part of ongoing efforts to improve and diversify,” Goh commented.

On April 1, the Indian High Commission to Malaysia said trade between India and Malaysia is allowed to be settled in Indian rupee (INR) in addition to the current modes of settlement in other currencies.

This follows the decision by the Reserve Bank of India (India's Central Bank) in July 2022 to allow settlement of international trade in INR.

As part of the strengthening regional financial integration with countries in the ASEAN region, BNM has already established the Ringgit-Baht Local Currency Settlement Framework (LCSF) with the Bank of Thailand (BOT) and Ringgit-Rupiah LCSF with Bank Indonesia (BI) in March 2016 and December 2017, respectively.

The frameworks aim to encourage the use of local currencies for settlement of trade and investment among the three countries, hence reducing reliance on major currencies, according to BNM’s website.

“In effect, Malaysian entities can access financial services that offer products denominated in rupiah and baht in Malaysia to manage their FX risk better, and vice versa,” the central bank said.

Edited ByKathy Fong
      Text Size