‘SDRs can’t replace dollar as reserve currency’

Author: 
Shaheen Nazar I Arab News
Publication Date: 
Mon, 2010-02-15 03:00

JEDDAH: “The dollar is still pre-eminent in its role as a reserve currency, although in official reserves the euro is gaining in importance,” said Muhammed Al-Jasser, governor of the Saudi Arabian Monetary Agency (SAMA).

Speaking at the Jeddah Economic Forum (JEF) on Sunday, Al-Jasser called for a “natural evolution of reserve currencies for a multi-polar reserve system rather than an imposed solution.”

The SAMA governor was one of the panelists of the second plenary session of the forum’s second day. Jassim Al-Mannai, director-general and chairman of the Board of Arab Monetary Fund (AMF), and Prof. Christopher Allsopp, director of the Institute of Energy Studies at University of Oxford, were the other panelists deliberating on the topic, “The way forward for reserve currencies.”

Moderating the session, professor Hamid Sabourian, chairman of the Faculty of Economics at the University of Cambridge, threw light on various issues concerning reserve currencies, especially the demand from emerging economies including China and Russia to reform and the status of Gulf economies in the present scenario.

The topic generated keen interest in the audience forcing Hamid to increase the timing of the question and answer session using his “right” as moderator.

Al-Jasser rejected the call for using IMF’s (International Monetary Agency’s) special drawing rights (SDR) as a new global currency to replace the dollar. He said SDRs are not a currency but represent potential claims on the currencies of IMF members. “The SDRs’ current role is not in line with the characteristics of a prime reserve currency,” he maintained.

The SAMA governor said even if the “technical and political” problems involved in the SDRs are solved, it would take many years before it could offer central banks a range of investments comparable to those in its constituent currencies. “So, my conclusion about the SDR is that while its role should be enhanced, it is unrealistic to presume it can provide a solution,” he said.

Al-Jasser said that since the dollar is a medium of exchange in international trade, commodity exporting economies will naturally continue to price using the dollar, if only for the reason that the bulk of their imports are also priced in dollars. “The dollar is not only a medium of exchange, it is also a unit of account,” he added.

Echoing Al-Jasser’s assertions, Jassim Al-Mannai of the AMF also talked of “serious limitations” of SDRs, saying it still does not serve as a medium of exchange.

He referred to the demands of emerging countries, particularly China and Russia, adding that reforming the financial system seems inevitable as a consequence of the current financial crisis.

He said the Gulf countries’ reserves are mainly in dollar because the income generated from oil is priced in this currency. Therefore, the current status of the reserve currencies has serious and crucial implications for the economies of the Gulf Cooperation Council, he opined.

But Al-Mannai said it was not advisable for Gulf economies to tackle the issue of currency revaluation “individually and independently.”

Christopher Allsopp of the University of Oxford called for a “domestic solution” to problems affecting countries. He said each country has its own needs and, therefore, there cannot be one solution for everyone. He warned against the implications of imposing a solution from outside.

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