Regional push for local currency trade to boost monetary sovereignty

New Straits Times

18-05-2025

KUALA LUMPUR: The move by Malaysia and several of its regional partners to conduct up to 20 per cent of their trade in local currencies could strengthen regional monetary sovereignty and help shield their economies from external shocks, economists said.
Bank Muamalat Malaysia Bhd chief economist Dr Mohd Afzanizam Abdul Rashid said it makes sense for Malaysia and other countries to consider local currencies for international trade settlements.
"This would insulate Malaysia and other nations from the volatility of the US dollar. We have seen how US monetary policy impacted emerging market currencies in 2022 and 2023, with the ringgit among those negatively affected," he said when contacted.
He added that tariff shocks initiated by the administration of former US President Donald Trump had also sent ripple effects across global markets.
"At this point, we are still unsure how future tariff negotiations will unfold. Hence, it makes sense for Malaysia to future-proof itself, and one way is through the use of local currencies for trade settlements," he said.
Afzanizam added that Bank Negara Malaysia had already implemented policies to support this shift, including the Local Currency Settlement Framework (LCSF) with Indonesia and Thailand for trade using the rupiah and baht, respectively.
Prime Minister Datuk Seri Anwar Ibrahim, in an exclusive interview with international broadcaster TV BRICS, said Malaysia and several regional partners are targeting to conduct up to 20 per cent of their trade in local currencies.
The move, Anwar said, signalled a regional push to strengthen monetary autonomy and reduce overdependence on the US dollar.
Anwar added that the move was not intended to replace the US dollar, which remains the dominant global currency, but rather to create financial buffers to safeguard national interests.
Asked if the move could affect ties with the US, Afzanizam said there are always risks involved. However, the government recognises these geopolitical challenges and maintains a non-partisan stance and pointed out that Malaysia is working to resolve US trade concerns without resorting to retaliatory actions.
Williams Business Consultancy Sdn Bhd director Dr Geoffrey Williams said trading in local currencies reduces transaction costs and lessens the need to hold US dollars for trade.
"It also strengthens the demand for and trade liquidity of regional currencies."
He, however, said the main risk is volatility between regional currencies and the need to navigate regional currency rules and capital controls, which might restrict the amount of trade allowed in individual transactions.
As for ties with the US, Williams said they would not be affected.
"It is just a policy to facilitate the easier use of regional currencies, and this would not affect US trades."
On the Asian Monetary Fund, Williams said the idea is feasible but requires buy-in from many countries and involves both economic and geopolitical considerations.
"In principle, it could act as a regional version of the International Monetary Fund, helping to stabilise financial flows and currencies. However, it seems a long way off and is not a priority for discussion at the moment."
Meanwhile, Singapore Institute of International Affairs senior fellow Dr Oh Ei Sun said Trump explicitly voiced his displeasure at any attempt to replace the dollar as the global trade settlement currency.
"With trade negotiations still ongoing as a result of US reciprocal tariff measures, it remains to be seen if such remarks at this critical juncture will strengthen Malaysia's hands at the negotiating table," said Oh.
On April 2, the US imposed a 24 per cent retaliatory tariff on imports from Malaysia as part of a sweeping wave of trade measures announced by Trump.
Among the hardest-hit nations are China, which faces a 34 per cent tariff, the European Union at 20 per cent, Vietnam at 46 per cent, Sri Lanka at 44 per cent, Cambodia at 49 per cent, Laos at 48 per cent, and Myanmar at 44 per cent.
Later on April 9, Trump abruptly paused tariffs on most countries after admitting they made the markets nervous, but doubled down on a brutal trade war with superpower rival China.
On April 24 to 26, the Investment, Trade and Industry Minister Datuk Seri Tengku Zafrul Abdul Aziz led a Malaysian delegation to Washington DC, to engage in discussions with US officials regarding the imposed tariffs.
The delegation met with US officials which included the US Trade Representative Jamieson Greer and Secretary of Commerce Howard Lutnick.
On Thursday (May 15), Tengku Zafrul said discussions between Malaysia and the US regarding reciprocal tariffs have so far proceeded smoothly, with many issues being resolved while some require further scrutiny, particularly those related to the country's strategic sectors.