De-dollarization dominates ACU Summit

De-dollarization dominates ACU Summit

Expert says Local Currency Trade (LCT) could be a window towards de-dollarization for Bhutan

At the 51st Asian Clearing Union (ACU) Summit held at the Central Bank of Iran, Tehran, recently, leaders from member countries of the ACU deliberated on several issues, one of which was de-dollarization. De-dollarization is the process of reducing the dominance of the US dollar in global trade and financing activities, which a Bhutanese financial expert can be done in some ways. 

According to local Tehran media, Governor of the State Bank of Pakistan, Jameel Ahmed, who currently chairs the Union, addressed the event, stating that the Union can present new ideas and it is hoped that substituted currencies would be used instead of the US dollar, which can facilitate the conditions for importers and exporters optimally .Iran’s First Vice President, Mohammad Mokhber, painted the move towards de-dollarization as an essential step in response to the ‘weaponization project of the dollar.’

Meanwhile, Bhutanese experts in this field say that while “de-dollarization” is like a proxy trade war between the United States, China and other giants of the World’s economy, there are benefits that Bhutan could accrue, including risks. The International Monetary Fund (IMF) has written a comprehensive paper on this issue, one expert said, adding that IMF has mentioned that dollarization of financial systems in developing countries presents both advantages and risks. The IMF has said that on the one hand, allowing Fully Convertible Debenture (FCD) in the domestic financial system provides the opportunity to allow greater domestic intermediation. On the other hand, because of currency risk and potential balance of payments problems, the systemic risks are high, and dollarization could increase the potential for financial and banking crises. These considerations imply that the speed with which it would be advisable to advance toward a fully convertible financial system and the proper timing for the liberalization of FCD and loans will be determined by the conditions prevailing in specific cases.

A fully convertible debenture (FCD) is a type of debt security in which the entire value is convertible into equity shares at the issuer’s notice. The ratio of conversion is decided by the issuer when the debenture is issued. Upon conversion, the investors enjoy the same status as ordinary shareholders of the company.

Speaking about approaches, he said that local currency trade, or LCT, is a popular de-dollarization approach. LCT refers to cross-border local currency trade, where currencies are converted directly based on their exchange rates. The rupee-based trade agreement between Bangladesh and India is an example of LCT. “As we trade with Bangladesh, there is a possibility of the two nation’s central banks coming together and agree on LCT. Currently, we pay USD to Bangladesh. However, the currency to be used in such cases will depend on the trade volume. If Bangladesh has an advantage, we have to use the taka,” he said, adding that the same could be done with other trading partners.  Aside from LCT, trade-in third currency is currently another aspect, which could be explored, he said, adding that in addition to geopolitical and trust issues, the de-dollarization process is also driven by high exchange rates and decreasing foreign exchange reserves in developing nations. 

Meanwhile, BRICS countries (Brazil, Russia, India, China, and South Africa) have also pushed to reduce their reliance on the U.S. dollar and is discussing creating a common currency that is set to be discussed at its upcoming leaders’ summit. Ten Southeast Asian countries, members of the Association of Southeast Asian Nations (ASEAN), also recently agreed to encourage the use of national currencies instead of the U.S. dollar.

The ACU meet at Tehran saw leaders from nine Asian nations coming together under the umbrella of the Asian Clearing Union (ACU) to discuss issues on reducing the influence of the US dollar on their economies. Representatives from Bangladesh, Bhutan, India, Iran, Maldives, Myanmar, Nepal, Pakistan, and Sri Lanka initiated a crucial dialogue on how to reduce their economic reliance on the dollar during the meeting.

“The Asian Clearing Union (ACU) will reportedly launch a new cross-border financial messaging system in June as an alternative to SWIFT, marking another major move from global economies and organizations opting for new payment mechanisms amid the accelerated global de-dollarization push,” Global Times reported.

The paper also reported that the deputy governor of Central Bank of Iran Mohsen Karimi said that the payment system is capable of completely replacing SWIFT and could facilitate the global de-dollarization push, RT reported on Thursday, citing the Iranian newspaper Kayhan.

It was also reported by teleSUR that to facilitate regional economic integration, leaders of the Association of Southeast Asian Nations (ASEAN) made a declaration on advancing regional payment connectivity and promoting local currency transaction on during the two-day ASEAN Summit.

The news agency also reported that the declaration said leaders recognized the potential benefits of local currency usage in strengthening financial resilience, deepening regional financial integration by improving intra-ASEAN trade and investment, and bolstering regional value chains.

Notably, figures from non-ACU nations such as Russia, Belarus, and Afghanistan also lent their voices to the two-day gathering, which was coordinated by Iran’s central bank.

The ACU was established in 1974 as a payment arrangement through which participants settle payments for intra-regional transactions among the participating central banks on a net multilateral basis, according to ACU’s official website. It is a payment arrangement whereby the participants settle payments for intra-regional transactions among the participating central banks on a net multilateral basis. The main objectives of the clearing union are to facilitate payments among member countries for eligible transactions, thereby economizing on the use of foreign exchange reserves and transfer costs, as well as promoting trade and banking relations among the participating countries.

Sangay Rabten from Thimphu