Why the dollar's dominance is declining in the Middle East?

Why the dollar's dominance is declining in the Middle East?

| Sunday 21 May 2023

DW- Iraq has just banned US-dollar transactions, the Saudis and Emiratis plan to sell oil without it and there are plans to establish a whole new currency to bypass it. To know why, first have a look at the war in Ukraine.

Anyone in Iraq who wanted to buy a car or a house this week got a nasty shock. Last Sunday, the Iraqi government announced a ban on doing personal or business deals in US dollars.

Ordinary Iraqis usually make big-ticket purchases using dollars. Because of the ongoing devaluation of their own dinar, they'd need several large rubbish bags filled with paper dinar notes to buy a car or house. So they usually use a wallet full of dollars instead.

For decades, the US dollar has been the best currency to have in the Middle East if you don't have enough dirhams, dinars, riyals or pounds on hand. But that may be starting to change. Over the past few months, senior politicians in a number of Middle East nations have made statements that suggest the dollar's dominance in the region may fade.

In Iraq, US authorities had been making it harder to get dollars into the country — they were apparently worried that too much American cash was being smuggled to the neighboring Iranian government, which is under sanctions, but is tacitly supported by many Iraqi politicians. This shortage of dollars has led to volatility in the value of the Iraqi dinar, which is pegged to the US currency.

Iraqi people stage a protest against the depreciation of the local currency, the dinar, against the US dollar, at Tahrir square in Baghdad.Iraqi people stage a protest against the depreciation of the local currency, the dinar, against the US dollar.

This volatility brought about last weekend's ban. In February, also thanks partially to the US currency crunch, Iraq said it would do business with China using the yuan, instead of dollars.

Earlier this year, Saudi Arabia's finance minister said his country was also "open" to selling oil using different currencies, including the euro and the Chinese yuan. The United Arab Emirates has said it will work with India, using the Indian rupee. Last year, Egypt announced plans to issue bonds — financial securities that help governments raise money — in Chinese yuan. It had already issued bonds in Japanese yen.

Additionally, several Middle Eastern nations — Egypt, Saudi Arabia, the UAE, Algeria and Bahrain — have said they want to join the geopolitical bloc known as BRICS, an acronym for Brazil, Russia, India, China and South Africa. Russia has already said that at an upcoming June meeting, the alliance will discuss the creation of a new kind of currency for cross-border trade between members.

Since 2021, the UAE has also been part of a pilot project run by the Switzerland-based Bank for International Settlements, a kind of central bank for central banks. This project looks at digital, cross-border payments that might bypass the dollar. Other participants are Thailand, Hong Kong and China.

These alternatives to the US dollar have led to a recent raft of alarmed headlines. "Is the dollar's dominance under threat?," The New York Times asked in February. "Prepare for a multipolar currency world," the Financial Times warned in March. "De-dollarization is happening at a 'stunning' pace," Bloomberg wrote late last month.

US dollars now make up about 58% of official foreign reserves globally, Bloomberg reported in its story, a fall from 73% in 2001. In the late 1970s, it was 85%.

However, most experts insist the move away from the dollar is going far more slowly than recent headlines suggest. 

Since the 1970s, oil-producing Gulf states have had a partnership with the US, where America provides security and countries like Saudi Arabia and the UAE export oil. Most Gulf countries, with the exception of Kuwait, have pegged their own currencies to the US dollar.

"One of the biggest indicators of a serious shift away from the dollar would be a de-pegging of those currencies," noted Hasan Alhasan, a research fellow on Middle East policy for the London-based International Institute for Strategic Studies. "But as of now, we haven't seen that."

"The key words here are 'statements' and 'potentially'," said Daniel McDowell, a political science professor at Syracuse University in New York, when asked whether assertions made by Arab leaders signal the dollar's demise in the Middle East.

"Statements are easy, action is more difficult," he told DW. "For oil-producing states, like Saudi Arabia, these sorts of statements and agitations are also a way to get America's attention. Flirting with the Chinese may make American policymakers focus more attention on the interests of the Gulf states." 

McDowell doesn't rule out the possibility that the dollar's dominance will one day fade. "All empires eventually collapse," he quipped. But right now, "much of this talk is symbolic and political. Any change we see will be marginal and slow." 

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