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.”
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.
Economic sovereignty
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.
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.
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 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.
Basic conditions for the leading currency
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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