Chitral Today
Latest Updates and Breaking News

Barter trade reality

Dr Hafiz Muhammad Usman Rana
Pakistan’s economy is under immense pressure due to low foreign reserves, a falling currency, political unrest, and stagflation.

In response, the government of Pakistan has recently announced a barter trading arrangement with Iran, Afghanistan, and Russia, allowing qualifying Pakistani firms to trade goods without using dollars or foreign currencies.

They also intend to have a similar kind of arrangement with China. Before we take any side – China or the US — we must comprehend dedollarization, its origins, and its implications for Pakistan’s economy. In 2014, Russia prioritized dedollarization in response to Western sanctions that curtailed state enterprises’ and banks’ access to Western markets. As part of their growing economic cooperation, Moscow found an early ally in Beijing to help its de-dollarization initiative. Chinese Premier Li Keqiang visited Moscow the same year and inked 38 agreements, including a 150-billion-yuan (approximately $24.5 billion) currency swap deal and energy cooperation. This agreement was extended for an additional three years in 2017.

As a result of the US imposition of significant tariffs on Chinese imports and the beginning of the trade war between the US and China in 2018, Russia and China moved further away from utilizing the dollar in their bilateral trade. Last year, the Chinese and Russian presidents announced their determination to use their currencies for bilateral trade settlement. Even though Russia and China have been able to work together on dedollarization trade, the fact that their goals are not aligned is likely to cause further dedollarization to be slower.

Russia is aggressively launching new measures with the goal of dedollarization commerce and transactions, but China is reluctant to do so for several reasons. The government of Russia is being compelled to explore new avenues to get paid for its exports and imports. In 2022, authorities and enterprises tried converting to transactions using the national currency, engaging in barter deals, making payments in cash, and using various other systems. However, they were still looking for a comprehensive solution.

Since it is now abundantly evident that efforts are being redirected towards cryptocurrencies and payments in yuan, this indicates that the Russian economy will become increasingly dependent on China’s currency. As a result of the divergent objectives of the two nations, the relationship between them will continue to deteriorate, and Russia may see both a loss in its reserve holdings and problems in its payment systems. Pakistan should learn from these two nations’ trade ambitions and create its own economic and foreign strategy to fit its unique circumstances.

Pakistan’s relationship with China and the US has been well-managed. So, Pakistan is not in a place to choose a side now because we are still dealing with the fallout from the recent visit of former prime minister Imran Khan to Russia. At this crucial juncture in the nation’s history, those in positions of power are being called upon to make astute economic and foreign policy decisions so that we can prevent Pakistan from becoming entangled in the war between China and the US.

Policymakers need to understand that the trade volume with our neighbouring countries is too small, approximately less than $5 billion per annum compared to the Western trade partners. Barter trade agreements have the potential to reduce reliance on the US dollar. However, complete dedollarization is not achievable through this means. Before engaging in barter trade deals, Pakistan needs to broaden and diversify its export base, invest in its infrastructure to strengthen its transportation networks and ports and construct energy infrastructure that is both more dependable and more cost-effective. This will result in lower production costs for products destined for export, increasing such goods’ competitiveness in global markets.

To overcome stagflation, the State Bank of Pakistan needs to implement a contractionary monetary policy by reducing the money supply and raising interest rates to combat stagflation in the short term. At the same time, the government needs to implement an expansionary fiscal policy by reducing spending and expanding the tax base to combat unemployment and invest in infrastructure, human capital, public works, and other such projects.

In addition, the SBP must create its digital currency, as major central banks worldwide are actively exploring new currency systems. It is also extremely important for the government and the SBP to keep public opinion on their side, since the people are the ultimate source of the government’s power and the independence it enjoys. Considering this, the SBP must convey the reasoning behind its actions to maintain public support, mainly since the fiscal policy contributes to stagflation.In the end, the government and the central bank will need to collaborate to confront the issues the country is facing with its fiscal and monetary policies, and offer a common framework when dealing with allies and partners on the international stage. 


You might also like

Leave a comment

error: Content is protected!!