De-dollarization and Bangladesh

BTJ Desk Report
De-dollarization and Bangladesh

The recent global economy is showing a major shift from the US dollar as the currency reserve and an increasing focus on bilateral currency swaps for trade.

A move, which was unthinkable just a few years ago, is becoming normal day by day.

As Saudi Arabia has expressed interest in hedging and diversifying its security by normalizing relations with neighboring countries, the importance of the petrodollar is beginning to show some cracks.

Moreover, China has recently agreed to settle some portions of the oil transaction in Yuan in a bid to diversify away from the dollar. China presently buys 25% of Saudi Arabia’s oil exports.

The dollar is frequently being used as a weapon or as a sanctioning tool more countries are becoming wary of US hegemony and are slowly but surely moving away from the US dollar reserve. The US has frozen $600 billion worth of Russian reserve.

Moreover, the weaponization of the dollar is not sustainable in the long run, as it only compels foreign governments to find alternative assets.

Till 1971, the US dollar was pegged to the gold standard and then they parted away.

Since then, the US government has been managing its economy and currency through monetary policy. Political considerations play a role in how fiscal policy is handled.

However, during the past few years, a growing number of nations have added gold to their reserves.

Recently, to diminish reliance on the US dollar, governments are beginning to trade with one another and accept each other’s currencies as the new standard.

For instance, 18 countries have consented to trade in Indian Rupee, including Germany, Kenya, Sri Lanka, Singapore, the UK, and Malaysia.

Moreover, China has inked agreements for Yuan clearing of bilateral trade with 41 nations so far where Brazil is the latest.

BRICS is expanding as Saudi Arabia, Iran, and Argentina have shown interest to join the bloc.

China has initiated RCEP 2020, the world’s largest trade bloc, 14 countries agreed to join there, and 149 countries so far affiliated with China’s Belt and Road Initiative (BRI) which was adopted in 2013.

In December 2022, US debt reached an all-time high, to 123.4% of the country’s nominal GDP.

The US borrows $2-3 trillion every year to sustain its economy, and every day, it spends $1.3 billion in interest. With this current borrowing trend, the dollar will surely face a crisis in the near future, and the world anticipates it.

Moreover, the US banking industry, which serves as the backbone for global trade, is showing an increased risk.

In the de-dollarization, Bangladesh faces two main risks: internal ones related to fiscal policy and financial sector supervision, and external shocks brought on by changes in trading blocs, and the dissociating of economies in response to geopolitics.

In this regard, to face internal shocks, and to lessen its vulnerability on the US dollar, Bangladesh should focus on bilateral currency swaps for trade and join regional trade organizations like ASEAN.

Moreover, Bangladesh must diversify its energy sources to include nuclear and green energy.

The country needs to shift investments from energy production to energy distribution to address the imbalance.

Bangladesh should continue to invest in infrastructure development in order to focus on a domestic demand-driven economy and increase connectivity so that people and products can move more quickly.

The largest threat to Bangladesh is its overreliance on exporting clothing, which urgently has to be diversified.

In facing external shocks, as it will become more and more challenging to maintain neutrality, Bangladesh requires a strong and compelling foreign policy to negotiate between powers like China, India, Russia, Japan, and the collective West.

Moreover, Bangladesh should delay its graduation from the LDC by at least a decade as it may fall into a middle-income trap as the world is going through uncertainty.


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