Field of dreams

Malaysian Prime Minister Mahathir Mohamad’s legacy, if all goes as planned, will be the creation of an Islamic dinar before he leaves office in October, but will the new currency carry its weight in gold?

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By  Massoud Derhally Published  March 30, 2003

|~||~||~|There once existed a gold-based exchange rate mechanism known as the Bretton Woods System, which was eventually abolished and made way for the US dollar as the international currency. Well, no more. At least that’s what Prime Minister Mahathir Mohamad says. Stung by the Asian financial crisis, which he saw as a result of currency manipulation by speculators, Mahathir would like to be the alchemist of a gold Islamic dinar that would unite 54 Muslim countries. His aim is to do this before he leaves office in October 2003.

It may be easy for some to dismiss the idea, but the doctor turned politician has proven that his economic initiatives can work. Unlike some of Malaysia’s neighbours, the Malaysian Prime Minister thumbed his nose at the world and said no to the IMF when the Asian financial crisis threatened the economic livelihood of the Asian tigers. As Indonesia and Thailand’s currencies came under attack and quickly depreciated in value, Mahathir reacted quickly but prudently.
Rather than accept International Monetary Fund recommendations and appear as acquiescing to an institution that most third world countries despise, he recalled foreign holdings of the ringgit and pegged the currency at 3.8 to the US dollar. The Prime minister then put in place legislation that put a ceiling on the outflow of capital and limited the repatriation of profits of foreign entities in Malaysia for up to one year.

Six years on, and after two years of a global economic downturn, Mahathir believes the international community should be encouraged today to use other currencies, including an Islamic gold dinar. The reasoning behind such a venture rests on the premise that the domination of the US dollar in global transactions is distorting the world’s economy. “When we put too much value on a certain currency, it becomes very powerful and that currency works against us,” Mahathir told journalists at the recent Non Aligned Movement Summit. “We should be given the choice to use whatever currency we want,” he added.

Ultimately, Mahathir’s goal is to lessen Islamic countries’ dependence on the US dollar. He believes a gold dinar for the settlement of the international trade balance between Islamic countries will ensure economic stability.

Ironically, the gold dinar was used as a currency in the Muslim world until the collapse of Ottoman Empire in 1924. It’s also worth noting that there is already a gold dinar that exists as the unit of currency for the Islamic Development Bank (IDB) and that is indirectly pegged to the dollar.

“Islamic countries, as the Prime minister believes, should have a single currency, just like the Euro was created to enhance trade and economic relationships between the European countries,” says Mohammed Mustafa Abdul Aziz, Consul General and Trade Commissioner of Malaysia in Dubai. “The dinar would be an alternative for Muslim countries that want to trade among themselves. Small countries like us should not depend heavily on one single currency,” he added.

But setting up the dinar may prove difficult. Trade between Arab countries in 2001 was merely US $30.54 billion, or 7.5% of total Arab trade, which was US $406 billion in 2001, according to ESCWA. The low volume of trade and the little that can be bought and sold between Arab countries, say observers, makes it hard to create enough demand for an Islamic dinar.

“The economies in question seem to be too divergent in order to support such a common currency idea, even if it was for trade only,” says Johnny Abedrabbo, a senior economist at Saudi Arabia’s largest bank, the National Commercial Bank. “Furthermore, the setup and administrative costs associated with the implementation of the Islamic dinar would also be prohibitive.”

Joseph Tan, global markets economist of Standard Chartered Bank in Singapore and Malaysia is equally skeptical. “The question here is what is its role and place in today’s modern financial system,” he says. “Does it [the Islamic gold Dinar] have to have its value in gold? To some degree, this means it will be linked to the value of gold, which itself can be volatile,” adds Tan.

Sophie Lewisohn, a senior economist at the Economist Intelligence Unit and expert on Malaysia says: “Given Malaysia’s dependence on trade, and on trade with the US in particular, I suspect that it will continue to trade principally in US dollars.”

But there is a wild card—oil. “For the purpose of trade, we shouldn’t say that oil should be quoted only in US dollars. Today the price of oil has gone up but the value of the US dollar has gone down, something that people do not point out,” said Mahathir.

The call to price oil in a different currency has gained momentum over the last year. At the height of Israel’s incursions into Palestinian territories and a widespread boycott of American products, there were calls from various quarters in the Muslim and Arab world to price oil in Euros. If Islamic oil producing countries, all of which are members of OPEC, decide to price oil in Islamic dinars then Mahathir’s initiative should be economically viable, at least that’s how it would seem.

The chances of that happening, however, appear slim. “I would be very skeptical that OPEC countries would use that currency in which to price oil,” says Tan at Standard Chartered. “OPEC is not the largest single oil producer in the world today, non-OPEC sources are large as well. It is very difficult to see [oil priced in the dinar] given the complexities that have developed over the years and the financial and risk systems that have been used to hedge the various different countries,” added Tan.

Herman Franssen, president of International Energy Associates and a former senior advisor of Oman’s petroleum minister says, “There are practical reasons for pricing oil in dollars. If a group of countries were to decide to price oil in Gold Dinars, this would add another element of uncertainty in the oil market, which would not help those countries which join such a group.

“Another option for producers is to continue to price oil in dollars but ask buyers to pay in Euros. However, this adds another risk for buyers who will have to hedge against currency fluctuation risks,” explains Franssen.

Leo P. Drollas, deputy director and chief economist of the Centre for Global Energy Studies, which was set up by Shaikh Ahmed Zaki Yamani, Saudi Arabia’s former oil minister, says oil can be denominated in any currency, but what matters is the currency in which oil is paid for. “To request payment for oil in dinars makes sense only to the extent that the earnings from exporting oil and gas are needed to purchase imports of goods and services from countries using dinars as a medium of exchange,” says Drollas.

“If most of a country’s imports are from countries using dollars, then requesting payments in dinars means that the exporting country is exposing itself unnecessarily to foreign exchange risks,” he added.

Drollas says that according to currency theory, the success of a new currency would depend on the extent to which the countries forming the currency area traded among themselves. That said, however, he believes that “oil and gas exporters would be trading more with the West than among themselves, which suggests that the new currency might struggle to be successful.”

To an observer familiar with a little Islamic history, it seems that Mahathir is trying to restore the glory days of the Ummah, or Islamic nation. There may be room for optimism and an element of truth to this view, but the obstacles and challenges seem immense. If Malaysia succeeds, however, it would have reinforced itself as a centre for Islamic finance and have anchored a new currency that may change the course of the Muslim world. ||**||

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