What is the fate of the dollar in the Middle East? Very important report!

However, Christy On, a Schwarzman researcher at Tsinghua University, said in her article on the National Interest website that the yuan will not become a reliable alternative in the near future, even if it forms part of a set of financial tools that Middle Eastern and North African countries use to protect their interests. long-term economic.

Accelerated Chinese efforts

The writer continued: Despite the accelerated Chinese efforts in the fields of trade, investment, and digitization that encourage the adoption of the renminbi, the dollar still plays an important international role within the framework of the three functions of money as a “unit of account,” “means of exchange,” and “store of value.”

The dollar accounts for about 90% of foreign exchange transactions, half of global trade invoices, and half of cross-border loans and international debt securities. The dollar is a widely accepted medium of exchange, which reduces international transaction costs.

When adopted in unstable economic and financial environments, the dollar can also provide greater currency stability compared to the country’s own currency.

Most importantly, pegging the currency to the dollar stabilizes exchange rates between trading partners and maintains the competitiveness of export prices to the United States.

However, the proportion of global dollar reserves fell from 73% in 2001 to 58% in the last quarter of 2022. The weaponization of the dollar through the CHIPS and SWIFT systems raises concerns about manipulation, as Iranian banks, for example, have been blocked Since the United States withdrew from the Iran nuclear deal in 2018, it has been unable to use the SWIFT system, but Iran has increasingly resorted to using the renminbi to conduct commercial transactions.

Economic sovereignty

The author explained that adopting the dollar also limits the economic sovereignty of the countries of the Middle East and North Africa, by increasing their exposure to the fluctuations of the American economy.

For countries in debt distress, US interest rate increases and the appreciation of the dollar have led to higher borrowing costs, more expensive debt payments, and inflated import prices, constraining their ability to cope with slow economic growth.

As of 2021, external debt to private lenders has risen to 42% in the Arab region.

At the same time, the economic focus of the Gulf states is shifting eastward, and it is estimated that GCC trade with emerging Asia – including China – will overtake trade with the West by 2026.

The attractiveness of the renminbi increases significantly across the three main functions of money in the MENA region. Regarding the unit of account in international trade, the Central Bank of Iraq will use the renminbi to conduct trade with China, to compensate for the domestic shortage of the dollar.

As a medium of exchange, the renminbi was promoted in a $6.93 billion currency swap arrangement between the Chinese and Saudi central banks in November 2023.

As for the store of value in the reserve system, the renminbi was added to Israel’s foreign exchange reserves amounting to 206 billion US dollars to reduce its allocations to the dollar and the euro.

The renminbi enjoys relative stability as its exchange rate formation mechanism becomes more mature. In contrast to dollar-denominated loans, the relatively low interest rates of the renminbi have increased Chinese demand for debt issuance.

Egypt is the first country

Interest rates on the Chinese currency recently reached record lows, dethroning the euro as the second largest currency in financing global trade.

With financing needs exceeding a third of its GDP, Egypt is vulnerable to rising interest rates and will see high refinancing costs as its bonds mature next year.

Egypt became the first country in the region to issue bonds denominated in renminbi to reduce debt costs last October.

The author pointed out that these measures contribute to supporting the use of the renminbi in the fields of trade and finance.

The importance of the Middle East and North Africa region is highlighted within the Chinese Belt and Road Initiative, and the volume of Gulf trade and China is currently close to the total trade of the Gulf countries with the United Kingdom, the United States, and Western Europe combined.

In fact, the value of RMB-denominated transactions of countries participating in the Belt and Road Initiative increased by 90% year on year.

The writer said that the Gulf countries are open to energy trade denominated in renminbi, and the large demand for energy in China and the position of the Middle East as a major exporter of oil to China make oil trade in renminbi promising.

China is distinguished by its global leadership in developing its digital currency, which allows commercial transactions to be carried out independently of the SWIFT system, as the digital renminbi is equivalent to the value of the tangible renminbi, provides faster and more cost-effective bank transfers between banks, ensures the possibility of integration with international credit cards, and allows foreigners access. For currency.

Basic conditions for the leading currency

The researcher pointed out that there are three basic conditions for the currency to become a leader in the world: stability, liquidity, and global acceptance, which are factors that the renminbi currently lacks.

The dollar still maintains its leadership, as it is supported by a strong financial market, and its share of foreign exchange transactions and debt issuance has not decreased.

The strict restrictions imposed by China and weaknesses in capital transfer make the Chinese currency ineligible to become a liquid investment currency, as a continuous decline in the share of foreign investment in China’s internal markets is observed. Despite efforts to stabilize the RMB exchange rate, there are still restrictions on the financial derivatives market in China that prevent it from hedging against its fluctuations.

The author concluded her article by saying, “Building a network of external factors as an alternative to the dollar requires comprehensive efforts in the Middle East region to overthrow dollarization,” and added: ““Achieving this is uncertain due to the costs of moving away from the dollar and the complex ties between Middle Eastern and North African countries and the United States.” (24)

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