Hazrat Hafsa
Pakistan’s gradual shift towards de-dollarization is a response to its economic vulnerabilities and changing geopolitical circumstances. With a shortage of foreign exchange and high external debt ervicing costs, Pakistan is making concerted efforts to lessen its dependence upon the US dollar as this currency is used in huge quantities for imports and remittances as a result of which Pakistan is facing serious problems with foreign exchange. The main measures involve enhancing RMB settlement of trade with China through the China-Pakistan Economic Corridor (CPEC) and strengthening RMB currency swap with regional countries, and increasing local currency trade with regional countries. It is not a direct attempt to challenge dollar dominance, but a wise approach of minimizing exchange rate risks, transaction cost and creating resiliency through diversified financing. The aim is to establish a more equitable financial system through the cooperation such as CPEC and possible BRICS ties. De-dollarization in the context of Pakistan does not imply complete de-dollarization but rather measures which are incremental and practical. These involve settlement of bilateral trade transactions in local or partner currencies (particularly RMB with China), applying currency swaps to prevent foreign exchange mismatch, and establishing new cross-border payment channels. Further advances have been made in trade with China, with almost one-quarter of bilateral trade now settled in renminbi, and strengthened currency swap facilities (providing liquidity in yuan ). It is about the operational feasibility and about risk reduction, not about replacing the dollar as the global reserve currency. However, Pakistan’s economy is still susceptible to external shocks because of its continued current account deficits, high dollar-denominated debts and repeated rupee depreciations. These can compound costs in times of financial crises, compress reserves and worsen fuel inflation. Having more than one currency for payment is helpful: Currency swaps and RMB financing match revenues and expenses with key trading partners. Many payment options buffer geopolitical tensions, liquidity shocks or sanctions. Local currency settlement reduces transaction fees, speedup settlements and boost the amounts of trade volume with China and other partners. CPEC is playing a major role in this as it allows for the construction of infrastructure and energy projects in RMB, thus reducing the need to convert foreign currencies. The two units are Trade Settlements and Reserve Management. Pakistan will focus on bilateral and Multilateral local currency trade arrangements in those countries in which volumes of trade warrant such arrangements, mainly with China. The plan to convert the dollar to a reserve currency is a much longer term goal. Success lies in slow diversification, such as rising amount of non-dollar trade settlements, development of more effective hedging instruments, and enhancing the interoperability of payment systems. Pakistan is still keeping dollar reserves for IMF obligations, macroeconomic stability and international transactions. Several hurdles are Lack of full convertibility of the rupee and weak markets for hedging in RMB, Volatility in macroeconomic activity and Continued on uncertainty regarding the regulatory framework, which limits private sector involvement, Geopolitical balancing: keeping ties with the US, IMF and Gulf allies while strengthening ties with China and Technical and institutional shortcomings for handling multi-currency systems.
Realistic success means that the rate of trade concluded in local currencies increased, particularly with China and Neighbouring countries,increased currency swaps and non-dollar project financing,enhanced interoperability of payments and less foreign exchange vulnerabilities and appropriate spread of resources.
It is not a dollar elimination strategy, it’s a diversification and resilience strategy. It seeks to enhance the efficiency of trade, the balance of its external payments and the economic
autonomy in a multipolar world.
Pakistan is taking the gradual steps to de-dollarization with proper caution considering the economic realities of the country.
CPEC, RMB trade settlements and currency swaps are making significant alternatives, especially in vulnerable industries. In the current context of liquidity constraints, macroeconomic instability and strong international integration into the global dollar system, these initiatives represent a new policy direction toward financial resilience and policy space. Through this diversification, Pakistan is improving its leverage for regional integration and for a sustainable growth, as a worldwide trend in the diversification of the Global South.
The writer is a student of 5th semester BS international relations at National defence university Islamabad.
