Malaysia’s Prime Minister Dato’ Seri Anwar Ibrahim has recently revived the proposal for an Asian Monetary Fund (AMF) in a bid to promote regional financial stability and reduce dependency on the US dollar. The idea of an AMF was first proposed in the aftermath of the 1997 Asian Financial Crisis, but the proposal was met with resistance from the International Monetary Fund (IMF) and the United States, who saw it as a challenge to their dominance in the global financial system.
According to the IMF, the USD accounts for around 62.3% of global foreign exchange reserves as of Q4 2020. In East Asia, for example, a significant portion of the region’s trade is denominated in USD. According to the Bank of Japan, around 80% of Japan’s trade is invoiced in USD, while in China, around 70% of imports and exports are settled in USD.
Many Asian central banks hold significant amounts of USD reserves. According to the IMF, as of Q4 2020, China has the largest foreign exchange reserves in the world, at around $3.2 trillion, with a significant portion held in USD. Other Asian countries with significant USD reserves include Japan, South Korea, and Taiwan. The USD is also widely used in Asia for financial transactions. For example, in 2020, around 70% of all international debt issuances in Asia were denominated in USD, according to Refinitiv data.
The revival of the proposal for an AMF comes at a time of increasing geopolitical tensions and economic uncertainties in the region, with the ongoing US-China trade war and the Covid-19 pandemic disrupting economic growth and stability. The AMF is seen as a potential solution to these challenges, providing a regional financial safety net and reducing the reliance on the US dollar in international trade and finance.
The proposed AMF would function as a multilateral institution that would provide financial assistance to member countries in times of crisis, like the IMF. However, the AMF would be run and funded by Asian countries, providing a regional alternative to the IMF, which is dominated by Western countries. The AMF would also promote the use of local currencies in international trade and finance, reducing the reliance on the US dollar and increasing financial integration in the region.
The proposal has been met with mixed reactions from other countries in the region. Some countries, such as China and South Korea, have expressed support for the idea, seeing it as a way to promote regional economic cooperation and reduce the risks associated with the US dollar. Other countries, such as Japan and the Philippines, have expressed reservations about the proposal, citing concerns about the potential for increased regional competition and the need for careful coordination with existing regional financial institutions.
The initiatives and funds aimed at reducing US dollar dependency in Asia have significant implications for the region and the global economy.
One of the primary implications of these initiatives is the reduced currency risk in Asia. The region has traditionally relied heavily on the US dollar as the dominant currency for international trade and finance, which has created significant currency risk and vulnerability. By promoting the use of local currencies in international transactions, these initiatives could reduce currency risk and the likelihoods of financial crises and help stabilise financial markets in Asia.
Another important implication of these initiatives is the potential for increased regional financial integration in Asia. By increasing the use of local currencies in international trade and finance, these initiatives could facilitate cross-border investment and trade, which could boost economic growth and stability in the region.
The shift away from the US dollar as the dominant currency could also change the global financial landscape, increasing the prominence of other currencies, such as the Chinese yuan. This shifts the balance of power in the global financial system and could lead to greater competition among currencies.
Furthermore, the initiatives aimed at reducing US dollar dependency in Asia could have broader implications for the international monetary system. Some experts have argued that a more multipolar international monetary system could promote greater stability and reduce the risks associated with a single dominant currency. The initiatives in Asia could be seen as a step towards this more multipolar system, which could have significant implications for the future of the global economy.
In conclusion, the initiatives and funds aimed at reducing US dollar dependency in Asia have far-reaching implications for the region and the global economy. As such, they are an important development to watch in the coming years as the global economy continues to evolve. In addition, the proposal for an AMF is a significant development in the ongoing efforts to promote regional financial stability. While the proposal still faces significant challenges and opposition, it represents an important step towards greater regional economic integration and cooperation in Asia.
Dr Paul Anthony Mariadas and Dr Uma Murthy are lecturers for the School of Accounting and Finance at Taylor’s Business School, Faculty of Business and Law, Taylor’s University. Taylor’s Business School is the leading private business school in Southeast Asia for Business and Management Studies based on the 2023 QS World University Rankings by Subject.
