The Future of the US Dollar As a World Reserve Currency

Particularly now as China, India, and Russia are looking at alternate currencies for international trade, the US dollar’s position as the world reserve currency has been the subject of conjecture. It seems unlikely that the dollar will ever stop serving as the global reserve currency, nevertheless.

Dollar’s Ascent: Historical Background

The growth of the US as one of the strongest economies in the world with a solid financial system and an established government coincides with the rise of the dollar as the favoured currency of the globe.

The British pound, the euro, and other currencies have all challenged the dollar’s position over time, but the dollar has remained the dominant currency.

Though the position of the dollar has been challenged over time by the Great Britain Pound, the euro, and other currencies, the dollar has maintained its dominance.

What is the current status of Dollar as forex reserve?

According to reports from the International Monetary Fund, the dollar’s share of foreign exchange reserves has fallen over time from 80% in the 1970s to about 60% in 2022.

The euro has made up for about 20% of the remaining 40% room created by this fall.

Smaller currencies such as the Australian and Canadian dollars, Swedish krona, and South Korean won have claimed their share in the portfolios of various countries’ foreign exchange reserves making up most of the remaining gap of 20%, with Chinese currency taking up the rest.

How Dollar maintained its dominance as a reserve currency?

The strength of the U.S. economy: The U.S. has one of the world’s strongest economies, with a deep financial system and a stable government. This has contributed to the popularity of the dollar as a preferred currency for international trade and as a reserve currency.

Demand for dollar-denominated assets: Many countries hold U.S. government debt as a hedge against currency fluctuations affecting the valuation of their reserves. Additionally, many currencies are pegged to the U.S. dollar and some countries use the dollar as their own currency. This has meant that a huge proportion of U.S. dollars reside outside the U.S.

The dollar premium: The U.S. government debt is in high demand worldwide, which allows it to issue debt at the lowest interest rate. This relaxes the fiscal constraint substantially, boosting the debt-issuing government’s capacity to borrow more without having to deal with the negative effects of such borrowing on the domestic economy. This phenomenon is often referred to as the dollar premium.

No serious competition: Although the position of the dollar as the world currency has been challenged from time to time by other currencies, no currency has emerged as a serious contender. The only serious competitor at this point is the euro, which stands second but at quite a distance.

What are the Factors supporting the US Dollar?

Status as Reserve Currency: The US Dollar is still the world’s most dominant reserve currency, which means that central banks and governments around the world hold significant quantities of it as part of their foreign exchange reserves.

Large Financial Market: The US has one of the largest and most liquid financial markets in the world, which makes it an attractive destination for foreign investment.

Safe Haven Status: The US Dollar is often seen as a safe haven during times of global economic uncertainty, due to the perceived stability of the US economy and political system.

Demand for US Treasury Bonds: The US government issues Treasury bonds, which are widely held by foreign governments and investors as a low-risk investment.

Petrodollars: The US Dollar is used as the currency of choice for global oil trading, which means that countries that buy oil from the OPEC countries must hold US Dollars to pay for it. This leads to a constant demand for US Dollars.

Military and Political Influence: The US has a significant military and political influence on the world stage, which gives it leverage in global trade negotiations and financial institutions such as the IMF and World Bank.

Challenges facing the US Dollar

Increased global competition: As more countries try to shift away from the US dollar, there is increased competition from other currencies such as the euro, the Chinese renminbi, and even cryptocurrencies. This could potentially reduce the demand for the US dollar.

Rising US debt levels: The US has been running persistent budget deficits and adding to its national debt for many years. This could lead to inflation and a loss of confidence in the US dollar, particularly if investors begin to worry about the US government’s ability to service its debt.

Geopolitical risks: Political tensions and instability around the world could also undermine the US dollar’s status as the world’s reserve currency. For example, sanctions imposed by the US on other countries could prompt them to look for alternatives to the US dollar in international trade.

Emerging technologies: The rise of digital currencies and blockchain technology could challenge the dominance of traditional currencies, including the US dollar. If cryptocurrencies become more widely accepted, they could potentially weaken demand for the US dollar as a global reserve currency.

Future of the US Dollar

Despite the challenges, the US dollar is likely to remain the dominant reserve currency for the foreseeable future due to its widespread use in international trade, its deep and liquid financial markets, and its historical stability.

The euro and other currencies may continue to gain ground, but are unlikely to displace the dollar anytime soon.

The growing use of digital currencies, such as Bitcoin, may also pose a challenge to the traditional reserve currency system in the future, but it remains to be seen how this will play out.

The Maoist Insurgency: Challenges and The Way Forward

The recent assault of the convoy in Chhattisgarh’s Dantewada area, which resulted in the deaths of 10 area Reserve Guards (DRG) members, shows how serious a threat the Maoist insurgency still is to India. The Home Minister has often suggested that the Maoist issue is about to come to an end, but history has demonstrated that this is not the case.

What does insurgency mean?

An insurgency is a violent rebellion against a nation’s established authorities, usually led by a group of people or an organisation that wants to overthrow the status quo in terms of politics, the economy, or society.

The ultimate goal of an insurgency is to overthrow the existing government and establish a new political system that is more in line with the insurgents’ ideology or goals

Rise of Insurgency India

The Communist Party of India (Marxist) split in 1967, with a section of the party rejecting the electoral path and advocating for armed struggle to overthrow the Indian state.

The Naxalbari uprising in West Bengal in 1967, where a group of peasants led by Charu Majumdar and Kanu Sanyal revolted against the local landlords and police. The uprising was brutally crushed by the state, but it gave birth to the Naxalite movement.

The formation of the Communist Party of India (Marxist-Leninist) in 1969, which became the political front of the Naxalite movement.

The formation of the People’s War Group in Andhra Pradesh in 1980, which became one of the most active Naxalite groups in the country.

The merger of the People’s War Group with the Maoist Communist Centre in 2004, to form the Communist Party of India (Maoist), which is the largest Naxalite group in India today.

The expansion of the Naxalite movement from West Bengal and Andhra Pradesh to other states, including Chhattisgarh, Jharkhand, Bihar, Odisha, and Maharashtra, among others.

The violent attacks by Naxalites on the state and central police forces, government officials, politicians, and civilians, resulting in the loss of thousands of lives over the years.

What are the flaws in the anti-Naxal strategy?

Outsourcing operations to central armed police forces:

In most states, there is a tendency to outsource the operations against Naxals to the central armed police forces.

This strategy is flawed because unless the local police, who know the language and terrain, take the lead in anti-Naxal operations, the problem would linger.

Imposed development paradigm:

The development paradigm pursued since independence has always been imposed on the tribal communities and has been insensitive to their needs and concerns. As a result, government plans have ended up in destroying their social organization, cultural identity, and resource base and generated multiple conflicts.

The tribals want schools and hospitals, but they neither need nor want capital-intensive plants or factories, which are inevitably accompanied by deforestation and displacement.

Insensitivity towards tribal communities:

The development paradigm pursued since independence has always been imposed on the tribal communities and has been insensitive to their needs and concerns. As a result, government plans have ended up destroying their social organization, cultural identity, and resource base and generated multiple conflicts.

Lack of an overall strategic plan:

There is no overall strategic plan against the Naxals. States have been carrying out anti-Naxal drives according to their individual understanding.

Territorial domination is essential, and security forces are able to achieve that, but that should be followed by the administrative apparatus establishing its network in the affected areas.

Absence of peace talks:

The government should seriously think of applying the healing touch. If it can have peace talks with the Nagas and several other insurgent outfits in the Northeast, there is no reason why it should not take the initiative to have a dialogue with the Maoist leadership. This would not be seen as a sign of weakness on the contrary, it would be taken as a magnanimous gesture.

The way ahead to address the Naxal insurgency in India

Multi-pronged approach: The government should adopt a multi-pronged approach to address the Naxal problem that includes development initiatives, security measures, and dialogue with the Naxal leadership.

Focus on development: The government should focus on development initiatives in Naxal-affected areas that are tailored to meet the needs of the local population. This includes building infrastructure like schools, hospitals, and roads, creating employment opportunities, and addressing land rights issues.

Empowering local police: The state police should be empowered to take the lead in anti-Naxal operations as they have a better understanding of the local language and terrain.

Humanitarian approach: The government should adopt a humanitarian approach in dealing with the problem. The use of excessive force should be avoided, and care should be taken to ensure that the local population is not adversely affected.

Dialogue with Naxal leadership: The government should initiate a dialogue with the Naxal leadership to address their grievances and concerns. This would help in building trust and confidence between the two sides and pave the way for a peaceful resolution of the problem.

Coordination among states: The states should coordinate their efforts to address the Naxal problem. The sharing of intelligence, resources, and best practices would go a long way in addressing the issue.

Strengthening of institutions: The government should strengthen institutions like the police, judiciary, and administrative machinery to ensure that they are better equipped to deal with the problem.

Long-term vision: A long-term vision should be adopted to address the Naxal problem. This requires sustained efforts over a period of time to ensure that the problem is effectively tackled.

UTF (Uthuru Thila Falhu- Island) Harbour Project

The article describes the recent commissioning of the Maldives’ coastal surveillance radar system, which is part of the Indian grant-in-aid UTF (Uthuru Thila Falhu-Island) Harbour Project. The undertaking marks a critical turning point in the expanding defence ties between the two nations.

The UTF Project is what?

During the visit of External Affairs Minister S. Jaishankar in February 2021, the UTF project was disclosed.

It ranks high among the Maldives grant-in-aid initiatives funded by India.

It aims to create a naval vessel maintenance and repair hub and will assist the Maldives in becoming self-sufficient.

Importance of the Project

The project marked a major step in growing defence cooperation between India and Maldives.

The facility will strengthen the capability of the Maldivian Coast Guard and facilitate regional humanitarian assistance and disaster relief efforts.

Controversy Surrounding the Project

There were allegations that the project was a cover for Indian military presence in the Maldives.

An “India Out” campaign was launched in the island nation backed by its opposition leader Abdulla Yameen.

Maldives President Ibrahim Solih banned anti-India protests as a threat to national security.

Defence Cooperation and Other Projects

India has gifted a Dornier aircraft and a patrol vessel to Maldives in the past.

India has provided 24 vehicles and a naval boat and will build police facilities on 61 islands in the country.

The joint statement released by India and Maldives after Defence Minister Singh’s visit highlighted ongoing defence cooperation between the two neighbours.

The countries have agreed to explore additional avenues for cooperation, including in areas of defence trade, capacity building, and joint exercises.

Both the countries are working closely to address challenges, including those on maritime security, terrorism, radicalisation, piracy, trafficking, organised crime, and natural disasters.

India has financed the Greater Male Connectivity Project (GMCP), a $500 million project, to build a 6.74 km bridge and causeway linking the capital of Maldives, Male, with neighboring islands.

India-Maldives Relations: A backgrounder

India and Maldives are neighbors sharing a maritime border.

Both nations established diplomatic relations after the independence of Maldives from British rule in 1966.

India was one of the first nations to recognize Maldives’ independence.

Since then, India and Maldives have developed close strategic, military, economic and cultural relations.

Maldivians generally regard Indians and India as a friend and trusted neighbor in the field economic, social and political.

Causes for the anti-India sentiments

Political instability: The anti-India sentiment is nearly a decade old and can be traced back to when Abdulla Gayoom became president in 2013. He used anti-India sentiments for his political mobilization and started tilting China.

Controversy over helicopter gift: Two Dhruv Advanced Light Helicopters (ALF) that were given by India to the Maldives for ocean search-and-rescue operations. Opposition tried to portray this as military presence in the country.

Confidential agreements: Most agreements being signed between the Ibrahim Solih government and India are backdoor and has not been publicly discussed in the Maldives Parliament.

Alleged interference in domestic politics: India being a big neighbour, there are unsubstantiated perceptions & allegations on Indian Diplomats stationed in Maldives interfering in Domestic affairs.

Restoration of ties

Ibrahim Mohamed Solih who became President in 2018 has restored Maldives close ties with India.

Major irritants in ties

Political Instability: India’s major concern has been the impact of political instability in the neighborhood on its security and development.

Increasing radicalization: In the past decade or so, the number of Maldivians drawn towards terrorist groups like the Islamic State (IS) and Pakistan-based jihadist groups has been increasing.

Inclination towards terror: Radicalism in the island nation has increased the possibility of Pakistan based terror groups using remote Maldivian islands as a launch pad for terror attacks against India and Indian interests.

Chinese affinity: China’s strategic footprint in India’s neighborhood has increased. The Maldives has emerged as an important ‘pearl’ in China’s “String of Pearls” construct in South Asia.

Recent gestures by India

[1] 2014 Male drinking-water crisis

In the wake of a drinking water crisis in Malé in December 2014, following collapse of the island’s only water treatment plant, Maldives urged India for immediate help.

India came to rescue by sending its heavy lift transporters like C-17 Globemaster III, Il-76 carrying bottled water.

[2] 2020 Covid-19 crisis

During the COVID-19 crisis of 2020, India extended help to Maldives in the form of financial, material and logistical support.

Also, the IAF airlifted 6.2 tonnes of essential medicines and hospital consumables to Maldives, as part of ‘Operation Sanjeevani’.

[3] Greater Male Connectivity Project

India has recently announced the signing of a $500-million infrastructure project for the construction of the Greater Malé Connectivity Project (GMCP).

This infrastructure project, the largest-ever by India in the Maldives, involves the construction of a 6.74-km-long bridge and causeway link.

Maldives’ significance for India

Increasing maritime cooperation: As maritime economic activity in the Indian Ocean has risen dramatically in recent decades, the geopolitical competition too in the Indian Ocean has intensified.

Toll Gate in Indian Ocean: It is situated at the hub of commercial sea-lanes running through the Indian Ocean. More than 97% of India’s international trade by volume and 75% by value passes through the region.

Naval cooperation: Maldives is an important partner in India’s role as the net security provider in the Indian Ocean Region.

Important SAARC member: Besides, Maldives is a member of the South Asian Association for Regional Cooperation (SAARC) and the South Asia Subregional Economic Cooperation (SASEC).

People To People Contact: There is a significant population of Maldivian students in India. They are aided by a liberal visa-free regime extended by India. There is also medical tourism.

Major destination for Tourists: Tourism is the mainstay of the Maldivian economy. The country is now a major tourist destination for some Indians and a job destination for others.