International Finance International Finance
Published in Financial Express, Sunday, 20th December 2009.
New Delhi: The world is showing a major shift in currency alignments. The dollar’s dismal run post September 15, 2008 has added fuel to the call for a new global reserve currency. To check currency-value uncertainty and dollar’s hegemony, countries are increasingly exploring an alternative that is less prone to volatility and also seeking ways to diversify portfolios.
With the demand for a new currency order getting shriller, particularly from the BRIC stable, the idea has also found favour with Nobel Prize-winning economist Joseph Stiglitz, who heads a UN expert panel analysing the global financial crisis and recommending reforms. The dollar’s role as a good store of value is “questionable” and the currency has a high degree of risk... “there is a need for a global reserve system,” Stiglitz has been quoted as saying.
Not many days back, the UN Conference on Trade and Development (Unctad), in a report, had called for the creation of a new global reserve currency. While calling the dollar-based system a “confidence game” of financial speculation, the UN called for a new global reserve bank to manage the new currency.
According to reports this week, India is contemplating to invest $10 billion for increasing the special drawing rights (SDR) quota with the International Monetary Fund. Earlier, India’s gold buy of 200 tonne from the IMF was another step in its diversification drive.
IMF’s quasi-currency, the SDR, an idea first mooted in 1969, is slowly but surely getting back in business. In a run-up to the recent G-20 meet, Zhou Xiaochuan, Governor of People’s Bank of China, had suggested that “replacing the dollar with the SDRs’ as the dominant reserve currency would bring greater stability to the global financial system”. The G-20 decision to create $250 billion in new SDRs for some observers marks a significant step towards establishing the SDR as a global reserve currency.
The idea of a new global currency is gaining ground as well. The IMF suggests, “This would have to be issued by a new global monetary institution disconnected from the economic problems of any one country. This currency could serve as a risk-free global asset.”
However, experts back home remain divided about the future of the new global currency, Jamal Mecklai, CEO, Mecklai Financial, affirms that national currencies will continue to exist.
He cites the example of the euro, which was “quite an adventure and, as we see, it is taking years — decades — to come to fruition. A currency needs to have a central bank that owns it/prints it. No country can politically afford to give over its monetary life to another and I do not believe countries will give over their monetary lives to the IMF.”
According to Niru Yadav, a senior research associate with the Jaipur-based Centre for International Trade, Economics & Environment, introducing a new global currency would add more complexity into the global financial system. “Given that SDRs are not currencies and only potential claims on freely useable currencies, they have quite limited use. All market transactions involving the private sector take place via convertible currencies such as the dollar and euro; SDRs may not play a bigger role in the world financial systems.”
However Dr. D. R. Agarwal, Director, Institute of International Trade, Kolkata, is optimistic that the world is moving towards an alternate reserve currency. “The currency cannot be a single currency but only can be a mix of several hot currencies on the basis of three cardinal principles: the size of the economy, the value of international trade and the amount of foreign investment. The yuan and the rupee can join basket of currencies in future when they improve their status as per the above three criteria, and meanwhile a process can start by downsizing the importance of dollar so that in the eventuality of its collapse an alternate can be resolved by the world.”
Agarwal reasons that the demand for an alternate currency to dollar in the form of SDR by China, Russia and India is not baseless as the time for the end of dollar diplomacy is likely to end. “It is high time that a genuine effort is made to look for an alternative currency of international reserve, whereby the fallacious system of the US consuming by borrowing can be replaced by a more rational system, wherein developing countries, which hitherto are deploying their entire surpluses in dollar, can work out a system to recycle their surpluses. The present financial architecture, the root cause of the financial crisis, can be replaced by a sound global financial system.”
Ajit Dayal, President, Quantum Asset Management Company cautions, “The problem with paper currencies — whether one single currency, or a basket such as an SDR — is that they continue to remain hostage to the ability of politicians to print money to fulfil the promises made to voters like us. So finding the right ‘currency’ that suits politicians and voters is a work-in-evolution.”
Source: Financial Express