The Global Shift Towards De-dollarization and Its Impact on Inflation

Feranmi Olaseinde

Feranmi Olaseinde

Sep 24, 20233 min read

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The Global Shift Towards De-dollarization and Its Impact on Inflation

Introduction:

In recent years, there has been a growing trend among nations to reduce their reliance on the US dollar. This shift, commonly referred to as de-dollarization, is driven by various factors, including the desire to cut transaction costs, eliminate the need for dollar conversions, and reduce vulnerability to aggressive US sanctions and foreign policy plays. In this article, we will explore the implications of de-dollarization on inflation and how governments are taking measures to curb rising inflation rates.

The Federal Government's Approach to Inflation:

The Nigerian Federal Government, led by Minister of Finance and Coordinating Minister for the Economy, Mr. Wale Edun, has recognized the need to rein in inflation. One of the proposed strategies is to cut the cash in circulation, thereby controlling the growth of money supply. This can be achieved through measures such as adjusting interest rates, implementing open market operations, or setting reserve requirements for banks. Additionally, caution will be exercised in the disbursement of funds by federal, state, and local governments to strike a balance between supporting economic growth and preventing excessive inflation.

India and UAE's Efforts in De-dollarization:

India, the world's third-largest oil importer and consumer, has taken significant steps towards reducing its reliance on the US dollar. Last year, the Reserve Bank of India introduced a framework for settling global trade in rupees. This framework materialized when India signed two agreements with the United Arab Emirates (UAE). The first agreement aims to settle trade between the two countries in their local currencies, eliminating the need for dollar conversions and reducing transaction costs. The second agreement establishes a real-time payment link to simplify cross-border money transfers.

The Global Impact of De-dollarization:

India and the UAE are not alone in their pursuit of de-dollarization. Powerful nations like China and Russia are also actively seeking to reduce their dependence on the US dollar. This trend has far-reaching implications for the global economy. As more countries diversify their currency holdings and opt for alternative settlement methods, the influence of the US dollar may diminish. This shift could potentially lead to a reconfiguration of the global financial landscape and impact inflation rates worldwide.

Connecting the Dots:

The common thread running through these developments is the recognition of the need to reduce reliance on the US dollar. Both the Nigerian Federal Government and India are taking measures to control inflation by addressing monetary policies and exploring alternative currency arrangements. By curbing the growth of money supply and minimizing the need for dollar conversions, these countries aim to strike a balance between supporting economic growth and preventing excessive inflation.

Actionable Advice for Governments:

  • 1. Implement comprehensive monetary policies: Governments should adopt a holistic approach to monetary policies, combining measures such as adjusting interest rates, open market operations, and reserve requirements for banks. By controlling the growth of money supply, they can effectively manage inflation rates.
  • 2. Foster bilateral currency agreements: Governments can explore opportunities for bilateral currency agreements with trading partners. By settling trade in local currencies, transaction costs can be reduced, and the reliance on the US dollar can be minimized.
  • 3. Strengthen cross-border payment systems: Governments should prioritize the establishment of efficient and secure cross-border payment systems. Real-time payment links, similar to the one set up by India and the UAE, can simplify money transfers and facilitate smoother trade transactions.

Conclusion:

As nations worldwide embrace de-dollarization, the implications for inflation and the global financial landscape become increasingly apparent. Governments must strike a delicate balance between supporting economic growth and curbing rising inflation rates. By implementing comprehensive monetary policies, fostering bilateral currency agreements, and strengthening cross-border payment systems, governments can navigate the shifting dynamics of a de-dollarized world successfully.

Resource:

  1. "Wale Edun: FG To Curb Rising Inflation With ‘Cut In Money Supply’ - Politics - Nigeria", https://www.nairaland.com/7813555/wale-edun-fg-curb-rising (Glasp)
  2. "Dollar Dumped? India Bought 1m Barrels Of Oil From UAE Using Rupees Instead Of $ - Foreign Affairs - Nigeria", https://www.nairaland.com/7818240/dollar-dumped-india-bought-1m (Glasp)

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