The US dollar has long held a dominant position in the global economy, utilized in international trade, investments, and as a reserve currency by numerous nations. However, the State Bank of Pakistan (SBP) is actively pursuing measures to diminish the supremacy of the US dollar. This article explores the strategy regulators should look into to erode the dominance of the US dollar and its implications for Pakistan. Historical instances reveal the dollar’s depreciation during political or economic crises in the US, causing global financial market fluctuations and potential economic instability.
Primarily, we should aim to encourage the use of the Pakistani rupee and Chinese Yuan in international trade. By entering into currency swap agreements with import-oriented countries, such as trading with Pakistan using the rupee instead of the US dollar, we should seek to reduce dependence on the dollar and enhance the global presence of the rupee.
Furthermore, mostly countries choose to diversify their reserves by holding assets like gold or other commodities, which are not directly tied to the U.S. dollar. We should advocate for the incorporation of gold as a reserve asset. As one of the world’s largest consumers of gold, Pakistan can bolster its reserves by acquiring gold. Gold, being a stable asset immune to geopolitical risks and inflation, offers an alternative to the US dollar as a reserve currency. Worldwide, central banks oversee gold reserves. In Pakistan, the State Bank of Pakistan should similarly govern the import of gold and its reserves. This regulatory measure would uphold the stability of both gold and the USD, eliminating the possibility of speculation that could potentially impact gold prices.
Ultimately, we should actively promote digital currencies. Developing a digital version of the rupee provides a secure and efficient means of money transfer, reducing reliance on physical cash and enhancing transaction transparency. This initiative not only modernizes financial transactions but also decreases dependence on the US dollar for digital transactions.
Maintain economic stability through prudent fiscal and monetary policies to build confidence in the local economy. A stable economic environment is attractive to investors and reduces reliance on external currencies. Pakistanis living abroad should utilize traditional channels for sending their hard-earned money through Money Transfer Organizations (MTOs). This ensures that their remittances are transparent, regarded as legitimate transfers, and enables them to take advantage of tax benefits.
Collaboration with neighboring countries to establish regional financial institutions or mechanisms can facilitate trade using local currencies, reducing reliance on the U.S. dollar for regional transactions.
As of the first quarter of FY 23-24, Pakistan is experiencing a trade deficit of approximately 5.29 billion USD. It is imperative to substantially decrease this trade gap by boosting exports and curbing imports. The import of luxury items, such as high-end cars, premium pet foods, canned goods, bottled beverages, and biscuits, readily available in the local market, ought to be discouraged. Stringent measures must be implemented to curtail the import of these products. The negative impact of Afghan trade on the demand for the USD in the market is noteworthy. Local importers exploit this avenue to bring in items and commodities, circumventing import duties and other taxes, resulting in their prices being considerably lower than locally produced equivalents. Consequently, Afghan trade becomes a source of speculation that adversely affects our local industry, evades proper duties and taxes, and contributes to an increase in the USD’s price in the local market through smuggling to neighboring countries. It is imperative that decisive actions be taken to mitigate the adverse effects of Afghan trade.
It’s important to note that these strategies should be carefully implemented based on the specific economic and political conditions of the country in question. Additionally, any significant shift away from the U.S. dollar may require international cooperation and careful planning to avoid unintended consequences.
Exchange companies (ECs) can play as significant role in contorting the USD if a level playing field is provided by regulators.
- The driving force behind exchange rates lies in the dynamics of supply and demand within the foreign exchange market. When the demand for the US dollar surpasses its supply, the dollar’s value strengthens in comparison to other currencies. Exchange companies (ECs) commonly engage in the practice of exporting non-USD currencies and substituting them with USD, a routine operation. However, the efficiency of this process could be enhanced if all ECs collectively agree to manage competitive rates. Instead of engaging in price competition by offering higher buying rates to sellers of foreign currencies at over-the-counter (OTC) exchanges, a coordinated effort to maintain reasonable rates can contribute to price stability.
- Companies dealing with imports and whose import bills amount to less than 100,000 USD, can be managed by Exchange companies (ECs). The solution is straightforward: these customers typically engage in negotiations with banks, where they often have lower priority. To address this, bankers can redirect them to ECs for the purchase of their desired USD amount. The bankers after doing due diligence, KYC and compliance checks provide a NOC specifying the required dollar amount and the customer’s USD bank account number. Armed with this NOC, the customer can approach the EC market and secure a more favorable exchange rate. The EC treasury will then transfer the specified amount from EC USD account to the customer’s USD bank account, establishing a transparent mechanism that mitigates the use of HUNDI/HAWALA channels and ensures the stability of USD demand. If you are specifically interested in how exchange companies in Pakistan can influence the US dollar rates, it’s crucial to understand that their influence is limited compared to larger economic factors. Exchange companies typically operate within the broader framework of the foreign exchange market, responding to market dynamics and regulatory guidelines.
The regulators should promote these initiatives and work towards increasing the efficiency of Pakistani financial system. This will increase the confidence of international investors and promote Pakistan as a hub for international trade and investments.
Finally, we should remember that reducing the dominance of the US dollar in the world economy is not just about promoting the Pak rupee. It is about promoting a more stable, transparent, and efficient global financial system that benefits all countries.