International reports show that reliance on the dollar for trade is decreasing; more and more countries from Brazil to Asian countries are calling for trade to be carried out in other currencies besides the dollar, and the share of dollars in global foreign exchange reserves are decreasing. De-dollarization is a term that is frequently used in the world and Iranian politicians are taking advantage of this concept. A group's interpretation of de-dollarization as a tool to control inflation has been put forth.
decrese of foreign exchange reserves and international trading
A decrease in foreign exchange reserves and an increase in international trading with currencies other than the US dollar have been observed recently. According to IMF data, the share of the US dollar in global foreign exchange reserves decreased to 58.6% in the fourth quarter of last year. This is due to the Federal Reserve's efforts to control domestic inflation by raising interest rates, which has caused other central banks to raise their interest rates to prevent capital outflows and the depreciation of their currencies. Additionally, China, the world's second largest economy, has become a more dominant presence in global trading, with it being the largest trading partner to 61 countries, compared to the US's 30. This has led to a push for more transactions to be done in other currencies, allowing exporters and importers to mitigate risks, diversify their investments, and increase their profits. China is also creating yuan swap lines with other central banks, and developing its own international payments infrastructure, encouraging other nations such as Saudi Arabia and Brazil to finance more of their trade using the yuan.
weaponization of the dollar
The U.S. and its western allies have utilized the weaponization of the dollar to freeze more than $300 billion of Russia's foreign currency reserves in response to Moscow's invasion of Ukraine in February 2022. This has led to Russia and other countries searching for alternative currencies to trade in and increase gold in their reserves.
The Dollar Network Is The Main Basis Of Financial Sanctions And During These Sanctions, Iran faced many complexities in selling oil and petroleum products in the markets. There is no doubt that the weaponization of the dollar, as part of the establishment of a structure of restraint aimed at Russia, China, and Iran, has made them apprehensive, and eager to attempt to sanction-proof themselves financially - if such a thing is even possible.
De-dollarization, in the world
The IMF has demonstrated that reserve diversification is possible, yet, with no realistic substitute to the US dollar, the notion that the yuan could become an internationalised currency is unconvincing. In order for this to happen, China would need to permit the rest of the world to accumulate extensive liabilities in yuan, meaning either a sustained large external deficit or the option for capital to move outwards freely. These measures, however, would not be enough to make the yuan a reserve currency without the trust and other characteristics connected with full internationalisation. With the US dollar making up 88% of all international transactions, and the euro at 31%, and the yuan at 7%, it appears that de-dollarisation is unlikely to progress very far.
Whats happening in Iran?
Recently, Ebrahim Raisi, the President of Iran, has declared that Iran is cutting the "umbilical cord" of the US dollar from it’s economy. Before him, a member of Parliament had talked too about cutting the umbilical cord of the dollar!
After Donald Trump withdrew the US from the Joint Comprehensive Plan of Action (JCPOA) and imposed new sanctions on Iran, the concept of de-dollarization has become a frequent words for Iranian politicians. The severe financial sanctions have put great strain on the Iranian economy, causing the Iranian Rial to lose value drastically; Since Ebrahim Raisi was chosen as president, the value of the Iranian rial has fallen by 147%, and the current exchange rate is 0.000024 rial to the dollar. At the same time, inflation in Iran is rising; the current annual inflation rate has reached 47.7%, the highest it has been in the last 25 years.
In these circumstances, a new literature of economic thought is emerging. It is underpinned by an ideological approach to economic policies. The weaponization of the US dollar and its use in sanctions against Iran, the war between Russia and Ukraine, and the imposition of sanctions against Russia, have all enabled the rise of an extremist group that has gained considerable power and decision-making authority.
Yaser Jabraili, a new theorist of the concept of de-dollarization in Iran, has proposed a different solution to controlling inflation. He believes that the main cause of inflation is the increasing rate of the US dollar, and the increasing price of oil in the domestic market. His proposed solution is to fix the price of the US dollar and provide free oil to both consumers and domestic industries. He calls this economic policy package "de-dollarization of Iran's economy".
Chief, Centre for Strategic Assessment of Implementing the macropolicies of I.R.R. is critical of the neoliberal approach, asserting that inflation is not a monetary phenomenon and the rate of inflation has nothing to do with the growth of liquidity. He is seeking to implement his package in order to rid Iran's economy of the US dollar.
Dollar and inflation cycle
In the latest official reports, the point-to-point inflation rate in the past decade has been broken, reaching 58.6% last month. Iran's economy has experienced price shocks and inflationary waves for several years, and the currency price, specifically the dollar price, appears to be the driving force of these shocks. Negative political events, foreign exchange turbulence, and changes in inflationary expectations cause a sharp increase in the dollar price, which is followed by an increase in the price of other assets. This, in turn, leads to a rise in the price of consumer goods and an overall increase in the price level. This has led to some, such as Jabraili and his associates, to consider removing the dollar from the Iranian economy in order to protect it from inflationary shocks. Proposed actions include pricing goods based on the Riyal price of production inputs, stabilizing the dollar price, emphasizing the decline of the dollar in the world, and paying attention to Bilateral Currency Swap Agreements.
A same mistakes
Currency price controls and riyal pricing have been experienced multiple times before, resulting in extensive damage to Iran's economy. Determining the preferred currency and riyal pricing of natural resources used in export industries are two examples of these cases. Before the difference between the price of the preferred currency and the free currency, a large rent accrued to the recipients of this preferred currency every year, and this subsidy did not reach the consumers. On the other hand, the riyal pricing of the country's natural resources brought about strange and unfortunate consequences. For instance, providing cheap riyal gas to petrochemical companies led them to attempt to produce and sell urea, resulting in one of the products with the lowest added value. The development of petrochemicals is limited to upstream industries with less efficient products due to the policy of requiring pricing of inputs. It can be said that despite the widespread damage caused by policies such as fixing the currency price and riyal pricing of production inputs, their support is either due to ignorance of their effects or groups benefiting from them.
Bilateral Currency Swap Agreements
The discussion surrounding dollarization has highlighted the need to reduce the reliance on the US dollar in trade through bilateral currency swap agreements. These agreements are characterized by the parties being able to transact without the need for sanctions and the settlement of trade surpluses through international currencies. In doing this, the two countries involved in the agreement strive to reduce the use of the universal currency, rather than eliminate it entirely. Furthermore, this action is taken in unsanctioned conditions. It is important to note that trading with currencies other than international ones requires the consent of both trading partners, and the insistence on a bilateral currency agreement may limit or discourage trading partners. As such, we must acknowledge the limitations of bilateral currency agreements. Iranian economist Hashem Pesaran has argued that the share of these currencies in transactions is very small and limited, and, even with the possibility of limited utilization of these instruments, the entirety of a country’s foreign transactions cannot be entrusted to them.
De-dollarization, from dream to reality
The concept of de-dollarization has been used by new groups in Iran as a tool to reduce inflation. This term usually refers to reducing the use of the US dollar in international trade transactions. Although its share of these transactions has decreased, it still holds more than 58% of the world's foreign exchange reserves and is used in approximately 90% of international transactions. This is due to its wide global network for instant exchange, its markets offering a variety of tools, its new monetary and financial standards, and its freedom to enter and exit. Additionally, the US is the leading trade economy with an open capital account, stable security, privileged political position, and relative goodwill, making its decline unlikely in the near future.
