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Advancing local currency settlements for the global resurrection
The beauty of LCS is that by the same token, it serves other purposes to strengthen the economic basis.
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Money talks: A US$100 note and a Rp 100,000 note ($6.97) are on display in Jakarta on Aug. 26, 2005. Indonesia and other Asian economies are promoting local currency settlements to end their dependency on the US dollar. (AFP/Adek Berry)
Just as the C0VID-19 pandemic enters a new phase, arguably toward the end through the Omicron variant, the pandemic-induced economic adversity is also embarking for its next waypoint.
Urgently needed demand-support was (and still is in many countries) vigorously implemented to combat the economic downfall. The rationale was to avoid recession as much as possible. The chronic shortfall is technically a large loss, undeniably causing “scarring effects”.
Monetary-fiscal policy mix, accommodative macroprudential measures, and boosting the digital economy and finance are among the solutions when the coronavirus is still under way. They are prominent tools for a domestic economy. But a lack of global coordination could be suboptimal for a global-wide recovery. Strengthening international strategy is essential not only to safeguard the external position of a domestic economy but also to ensure a smooth transition toward a healthier global economy.
That is why the Group of 20 (G20) in the midst of a global economic resurrection, with Indonesia’s presidency in 2022, has pledged the theme “recover together, recover stronger.” That sets out the storefront that no one should be left behind and that the recovery from the pandemic-induced economic crisis is not a contest.
The unintended consequences of the vigorous demand-support is beginning to rise to the surface. The United States followed by some advanced economies in the EU are feeling inflationary pressures. When there is too much money, as in today’s case as the result of the demand-support pandemic measures, chasing too few goods, inflation occurs. And that so-called “silent thief”, although it is no longer so silent because the root cause is apparent, is likely to lurk until the proportional balance of supply catches up.
Following the standard Taylor rule, central banks that face inflationary heat are inclined to hike policy rates. Aside from its dilemma in today’s macro landscape, namely making money more expensive to overcome the imbalances in demand-supply proportions, raising interest rates in major economies will disrupt recovery progress elsewhere, especially in emerging nations. The solution to recovering together is not as simple as reversing the approach.
The core challenge for developing countries is the sticky US dollar-dependency, which leaves them vulnerable to dollar fluctuations. The most obvious risk is capital flight, which is rationally coherent as investors pursue higher yields. This will force impacted countries to reactively raise their policy rates, which will constrain economies that are not yet fully recovered. Thus, equally vigorous regional measures must be taken.
