Asian economic giants China and India have launched separate programmes in an attempt to reduce the dominance of the US dollar in international transactions and allow them settle business in their own currencies.
The strengthening and scarcity of the dollar has sent shock waves in global foreign exchange markets leading to a surge in inflation and interest rates.
The Reserve Bank of India (RBI) last week approved central banks from 18 countries including Tanzania, Kenya and Uganda to open special Vostro Rupee Accounts (SVRAs) that will allow them to settle payments in Indian rupees as part of a massive move to de-dollarize trade.
Data from the East Africa Trade and Investment Report (2020) shows that EAC’s exports to India stood at $978.6 million and those to China at $422.6 million.
On the other hand, the region’s imports from India are estimated at $4.21 billion while those from China and China stood at $7.7 billion.
Moscow in tow
India’s SVRAs process began in 2022, after the RBI announced that it had decided to put in place an additional arrangement for invoicing, payment and settlement of exports/imports in Indian rupees.
Russia has also been vocal in using the Indian rupee for trade and for de-dollarization. Moscow, in response to sanctions imposed to it by the West for invading Ukraine, also started asking Western countries to pay in the Ruble.
Other countries approved by RBI to open SVRAs include Botswana, Fiji, Germany, Guyana, Israel, Malaysia, Mauritius, Myanmar, New Zealand, Oman, Russia, Seychelles, Singapore, Sri Lanka and the UK.
Indian Union Minister of State for Finance Bhagwat Kishanrao Karad said that 60 such approvals have been given by the RBI.
Under this arrangement, when an Indian importer makes a payment to a foreign trader in rupees, the amount gets credited to the Vostro account. Similarly, when an Indian exporter needs to be paid for his goods and services in rupees, money will get deducted from this account. It will then be credited to the exporter’s regular account.
Last week Russian President Vladimir Putin endorsed the Chinese yuan as the currency of choice on the second day of Chinese president Xi Jinping’s state visit to Moscow.
According to Quartz, the two world leaders signed 14 economic agreements on March 21, covering everything from scientific cooperation to joint production of television programs, as they look to counterbalance the US dollar’s worldwide dominance.
Putin specifically mentioned the Chinese currency in the context of Russian investments in the developing world.
“We are in favour of using the Chinese yuan for settlements between Russia and the countries of Asia, Africa, and Latin America,” Putin said.
“I am confident that these forms of settlement in yuan will develop between Russian partners and their counterparts in third countries,” he added.
The global usage of the yuan is gaining traction as Beijing pushes for the worldwide acceptance of its money as a reserve currency and as a means of global payments.
This has prompted even African monetary authorities to rethink their forex reserve positions as the dollar comes under attack.
It is argued that the Chinese Yuan currency also known as the renminbi (RMB), could gain more ground globally this year as the People’s Bank of China (PBOC) implements the government’s plan to promote the currency’s use overseas.
According to the Atlantic Council, a non-partisan organisation that galvanises US leadership and engagement in the world, Beijing has opened offshore Yuan settlement centres in markets including London, Singapore, Hong Kong as well as North America and entered into currency swaps with 41 countries, with the total amount in excess of $554 billion.
Deteriorating bilateral relations between Beijing and Washington are compelling China to cut its reliance on the US dollar in an attempt to become self-reliant and lower the cost of its exports.
The US dollar is currently going through a period of strength, the third secular bull market since it began floating freely in 1971, leading to a collapse of other currencies.
In March 2022, Saudi Arabia said it was considering a proposal to start pricing its oil sales to China in Chinese Renminbi in a move aimed at taming the influence of the dollar in the global financial system.
Currently, about 80 percent of global oil sales are done in the US dollar.