THE recent sanctions imposed by the West on Iran seems to have intensified the search for dollar-free modes of trade transactions already going on in Asia and other parts of the world.

After the global financial crisis and Great Recession of 2008-09, the non-Western nations had realised the need for reducing dependence on the US dollar as medium of international trade. Between 2008 and 2011 China is reported to have signed local currency swap agreements (CSAs) with 14 countries including Pakistan, Argentina, Belarus, Hong Kong, Indonesia, Japan, Kazakhstan, Malaysia, New Zealand, Singapore, South Korea, Thailand, Turkey and Uzbekistan.

Now the US and EU sanctions on Iran have resulted in more currency swap agreements in Asian region. Last month China and Australia signed CSA worth $31 billion thereby agreeing to trade in their local currencies for next three years. Besides, the Iranian move to initiate barter deals with neighbours is expected to be replicated elsewhere in the world wherever there is room for it.

Pakistan is finalising a barter deal with Iran to sell up to one million tones of wheat for Iranian fertiliser. Pakistani sugar millers have proposed that 200, 000 tones of surplus sugar can also be bartered for Iranian fertiliser. The two countries are also working on currency swap arrangement but a final decision is yet to be taken.

Pakistan signed its first currency swap agreement with Turkey in November 2011 when President Zardari met Turkish President Abdullah Gul in Istanbul. The State Bank officials say the currency swap agreement with Turkey is for three years and worth equivalent to $1 billion in Pakistani rupee and Turkish lira.

Then by end of December 2011, the SBP and the central bank of China signed another three-year currency swap agreement equivalent to around $1.6 billion in Islamabad.

The SBP officials say that at the central bank level, the agreements with Turkey and China have become operational but Pakistani commercial banks are now coordinating with the commercial banks in these two countries to work out modalities for financing bilateral trade.

Ministry of Finance officials say that signing of a CSA with Iran is on the cards adding that later Pakistan is also expected to sign CSAs with Malaysia and Russia and some Central Asian states. The Union of Small and Medium Enterprises has already requested the authorities to sign CSA with the Central Asian states as it believes that such a move would help boost bilateral trade within the region.

Iran has already been exporting fuel oil to China and India (two of its largest oil buyers) for Indian and Chinese currencies as well as goods including wheat, soybean meal and consumer products. India has set up a rupee account at a state-owned bank to settle up to 45 per cent of its Iranian oil import bill. China already settles some of its Iranian oil debts through barter. Now the sanctions-hit nation is trying to trade its oil with Pakistan and Russia for their wheat. But Pakistan is more interested in selling wheat to Iran for its fertilisers and not oil.

During the recent BRICS summit in New Delhi, Brazil, Russia, India, China and South Africa said they had asked their finance ministers to study the possibility of setting up a BRICS development bank that “could offer an alternative to the US-dominated World Bank.”

The outgoing World Bank President Robert Zoellick welcomed the idea and said WB would go to the extent of cooperating with the proposed regional development bank.

He, however, also identified some issues that would have to be resolved before such a bank could be set up. He said that the World Bank, already a partner of regional development banks, would be open to sharing its knowledge on global operations and even pursuing opportunities for joint financing with the proposed BRICS bank.

It was during the same summit that development banks of five BRICS nations signed a master agreement in extending credit in local currencies. They also signed BRICS multilateral letter of credit confirmation facility agreement. Both agreements aim at reducing the cost of intra-BRICS trade by allowing currency swaps between the five nations of the bloc and reducing over-dependence on the dollar as the currency of international trade.

Dollar accounts for 40 per cent of global foreign exchange trading and about 66 per cent of the international trade settlements even though the US economy contributes a little over 10 per cent of the global trade. “This means that the strength of dollar is because it is being over-used as a medium of international foreign exchange trading and not because of the size or strength of the US economy,” argued a Shariah scholar associated with a large local Islamic bank.

“That is why you still see 61 per cent of world’s foreign exchange reserves held in dollars,” he said quoting the latest IMF data. “If sizable economies like the BRICS move aggressively to trade in their own local currencies, the use of dollar for settlement of global trade would eventually become less frequent and more realistic,” he insisted.

Senior bankers say that after the 2008 global financial crisis which was kicked up by gross misuse of financial derivatives in America, the world has been looking for limiting the role of dollar both as a medium of international trade settlement and as a reserve currency. “And we have seen some progress on both fronts,” said head of a local commercial banks. “It is good to see that 39 per cent of global foreign exchange reserves are now held in, euro, yen, British pound sterling and other currencies. Prior to the 2008 financial crisis around 35 per cent of international foreign exchange was held in non-dollar currencies. So, dependence on dollars has begun to decline though so far it has been only symbolic.”

Senior bankers point out that on the one hand China, Russia, India, Turkey, Thailand, Malaysia and some other countries are moving aggressively towards currency swaps with their respective neighbours. And on the other, the world (minus the US and the Europe) has come out in support for continuation of Iranian external trade despite imposition of sanctions by the Western countries. (Japan, for example, agreed recently for insertion of a sanction clause in Iranian oil sale contracts whereby Iranian buyers would not be bound to honour delivery deadlines in case their shipments to Japan are hit by the sanctions).

“All this indicates that in future it would become too difficult for any country to use global trading platforms to settle its own political disputes with another country,” remarked head of another local commercial bank. He said that the ongoing search for settlement of external trade through non-dollar currencies “is still weak in terms of volumes but the direction is well set and it is going to grow fast.”