Editor's note: He Weiwen is a senior fellow of the Center for China and Globalization. The article reflects the author's opinions and not necessarily the views of CGTN.

The move towards non-U.S. dollar payment and settlement arrangements has been gaining momentum recently. On March 28, 2023, central bank governors and finance ministers of the Association of Southeast Asian Nations (ASEAN) discussed action plans for currency settlements among member nations. On April 1, the Bank of Indonesia confirmed that it is preparing to phase out the use of Visa and Mastercard while introducing its own domestic payment system, and India and Malaysia agreed to settle trade-related payments in Indian rupees .

Anwar Ibrahim, the Malaysian Prime Minister, told parliament on April 5 that he had proposed setting up an Asian Monetary Fund at the recent Boao Forum in China, as a base for local currency settlements. Alexander Babakov, Vice Chairman of the State of Duma, Russia said on March 31 that BRICS countries are creating a new digital currency for members, to reduce dependence on the U.S. dollar and the euro. Brazil and Argentina, the two largest countries in South America, are in early talks to create a new common currency, which Brazil suggests calling the sur (south), replacing the U.S. dollar, which now accounts for 96 percent of bilateral settlements. India has also prepared a framework for settling trade with Russia in rupees.

The latest developments show a clear trend that a growing number of countries in the Global South are seeking to reduce dependance on the U.S. dollar, auguring a significant change in world monetary order. This trend has also caused concern in Washington. Former Treasury assistant minister Monica Crowley said that many countries are talking about reducing reliance on the U.S. dollar, and if it happens, the U.S. will lose its economic dominance and hence its position as a superpower.

Local currency settlement arrangements, and even common currencies used by two or more neighboring countries are nothing new. Several West African countries use the same currency, the West African franc, for payment and settlement among member states. Similarly, eight Caribbean countries and territories share the East Caribbean dollar. Before the existence of the euro, European Economic Community member countries used the ECU, or European Currency Unit. Likewise, many countries involved in the Belt and Road Initiative (BRI) accept the renminbi. In the late 1990s, the Malaysian Prime Minister Mohamad Mahathir proposed the Asian Monetary Fund (AMF), as the Asian version of the International Monetary Fund (IMF). During the Asia-Pacific Economic Cooperation (APEC) Summit in 2001 in Shanghai, Robert Mundell, father of the euro, proposed the introduction of an Asian currency, as an alternative to the U.S. dollar and euro.

These developments are not only inevitable, but also logical. Trade and investment payments and settlements, occurring in bilateral or sub-regional situations, should be in one of the parties’ own currency using their own means of settlement because it offers the lowest cost (removing the need for currency exchange to U.S. dollars), and the lowest risk (avoiding exchange rate fluctuations).

This trend has gained momentum since the start of 2023 for two fundamental reasons.

The first is economics. The U.S. Federal Reserve’s rate hikes and the surge in the value of the dollar since the start of 2022 have aggravated the balance of payment difficulties and sovereign debt distress in vast numbers of developing countries. In May 2022, the sharp fall of the Sri Lankan rupee to the dollar caused Sri Lankan official exchange reserves to plummet, dropping to a meagre $1.9 billion, against its sovereign external debt of $51 billion. The Sri Lankan government immediately applied for an IMF bailout. The Argentine peso also nosedived in relation to the U.S. dollar and the nation was forced to ask to defer payment on its $500 million debt service. By the end of March 2022, developing countries’ total outstanding debt reached $98.6 trillion, double its level 10 years ago. A total of 60 developing countries, especially low-income developing countries (LIDCs), are in debt distress, according to an IMF report. Inevitably, payments and settlements or government arrangements in currencies other than the U.S. dollar, and to a lesser extent the euro, are set to increase.

The second reason is politics. Since the outbreak of the Russia-Ukraine conflict, the United States and the European Union have imposed numerous sanctions on Russia, freezing its foreign currency reserves and excluding Russian banks and businesses from SWIFT. Iran was also subject to U.S. sanctions to curb its access to U.S. dollars. The world has been taught repeatedly that payment and settlement in U.S. dollars is dangerous. The dollar is being used not only as a means of payment, settlement and reserve, but also as a means of political sanction and economic segmentation. Today, the U.S. dollar is less a world currency and more a global weapon.

As such, the rise of non-dollar payment and settlement is not only justified, but also inevitable.

The growing trend of non-dollar payment, settlement, reserve arrangements and plans will certainly continue. However, it remains limited so far. Current arrangements only apply to transactions between the two relevant countries, or a group of countries, not to their transactions with other countries or regions. An Asian currency unit will need a long test period of exchange with existing national currencies in Asia and acceptance by the rest of the world. Renminbi internationalization has progressed significantly over the past few years. Yet, it still lags far behind the U.S. dollar and euro as a world payment and reserve currency. By January 2023, the U.S. dollar accounted for 40.12 percent of world payments, and the euro accounted for 37.88 percent. The renminbi accounted for 1.91 percent, or the fifth largest, behind the British pound (6.57 percent) and Japanese yen (3.15 percent). By Q4, 2022, the U.S. dollar accounted for 58.36 percent of world reserves, and the euro accounted for 20.47 percent, followed by the yen (5.51 percent), the pound (4.95 percent) and the renminbi (2.69 percent).

Nonetheless, the current moves to reduce reliance on the U.S. dollar are to be encouraged as they represent a step in the right direction. The ultimate purpose is a world monetary system with multi-pillar currencies, with more leading hard currencies, and a world settlement mechanism with diversified tools, so as to build a new world economic order, fair for both the Global North and Global South, and safe and helpful to all countries of the world.