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Trade: Malaysia goes for gold
By Chee Yoke Heong
KUALA
LUMPUR - Come mid-year, Malaysia is to put into place
what is perhaps the first of its kind in the world, the
dinar-gold proposal for bilateral and multilateral trade
among Islamic countries. The plan, which was announced
last March by Prime Minister Mahathir Mohamad, aims to
prevent another currency crisis of the scale seen in
Asia in 1997-98.
Just as the capital-control
measures the government introduced in response to the
financial crisis in 1998 were initially viewed with
skepticism by many, the dinar-gold plan has its share of
critics and supporters.
Malaysia's concern since
the attack on the nation's currency has been the
vulnerability and volatility of money, a bane suffered
by this country and others in the region in 1997-98 that
it now wants to avoid or minimize. Having one of the
most open economies, Malaysia is often at the mercy of
swings in its currency. Though pegging the Malaysian
ringgit to the US dollar in 1999 has brought some
semblance of stability, the currency is nonetheless
still subject to constant volatility with other
currencies.
Hence the gold-dinar idea was
mooted. Although gold might not solve the problem of
volatility, it is less unstable than the US dollar and
has an intrinsic value that paper money does not have,
says Mahathir. He believes that, with gold, speculation
and manipulation could be avoided if not minimized and
thus international trade would not be undermined.
The gold dinar was used by the Muslim world as
far back as the second Caliph, Umar (AD 632), until the
fall of the Ottoman caliphate in 1924. According to
Islamic law, one dinar is equivalent to 4.22 grams
(0.135 ounce) of pure gold and the value is based on
demand for gold.
In modern times, a gold-backed
system was adopted internationally until the Bretton
Woods system collapsed in the 1970s. The dinar is
already being used as a currency by the Islamic
Development Bank but it is indirectly pegged to the US
dollar, with one dinar equivalent to one special drawing
right (SDR) of the International Monetary Fund. (The
SDR, the "currency" established by the IMF, is set to a
basket of five major currencies, ie, the US dollar,
British pound, Japanese yen, French franc and German
Deutschmark - the last two in their euro equivalents.)
Private initiatives abound in gold-backed
payment systems, including as e-gold, Goldmoney, gold
economy, e-dinar and so on, but they are mostly confined
among private individuals and firms using gold as
payments.
The Malaysian plan, however, is
different in that it uses gold as money and not as a
gold-backed instrument, a feature that is important for
the gold dinar proposal to be successful as it would
avoid the pitfalls that caused the failure of the
Bretton Woods system, says Ahamed Kameel Mydin Meera, a
professor at the International Islamic University in
Kuala Lumpur.
The plan seeks to use the dinar
not for day-to-day settlement of trades but for
bilateral payment arrangements, later to be extended to
multilateral payment arrangements, and is solely
confined to the settlement of trades. The gold dinar,
whose denomination has yet to be determined, will not
exist in physical form but will be defined in terms of
gold. Observers believe that Malaysia is likely to adopt
a one-ounce dinar. Therefore, if the price of one ounce
of gold is US$365 as it is now, then the value of one
gold dinar will be US$365 or equivalent in other
currencies based on the prevailing exchange rate.
Since there will be no physical transfer of
gold, settlement of trade balances between countries
would be conducted through their respective central
banks every three months, for instance by transferring
the beneficial ownership of gold in their custodian's
account at the Bank of England. Exporters would then be
paid in their respective national currencies by their
central banks on the due date of exports, based on the
gold-dinar exchange rate prevailing at the time of
export. Similarly, importers will pay their central bank
in their national currency equivalent to the amount of
their imports.
Apart from the economic benefits,
the gold-dinar proposal also has a political dimension
to it. It is a response to "an inherently unstable and
ultimately unjust global monetary system", according to
the economic advisor to the prime minister, Nor Mohamed
Yakcop. It is hoped that relations among Islamic nations
could be strengthened via the trading system.
It
is "a system that will also allow the ummah
[Islamic community] to use its collective surpluses to
fund each other and help each other grow", says Nor
Mohamed Yakcop, a driving force behind the gold-dinar
proposal.
For some observers, the nature of the
prevalent international financial system means
alternative systems such as those proposed by Malaysia
should be seriously considered.
Ahamed Kameel
says developing countries are true losers in the current
global fiat money system as the 1997 East Asian
financial crisis has flashed out and the gold-dinar
system "promises a much more stable and just monetary
system, having intrinsic value in itself", unlike
currencies.
However, he noted that like
currencies, gold could also create arbitrage
opportunities, in which case there would be a need for
regulations that restrict the dinar to real
transactions. But he believes there are more benefits
than risks with the Malaysian proposal.
In this
structure, exchange-rate risks, a phenomenon of the
current floating exchange-rate regime and the source of
much chagrin, would be eliminated, as there would be no
need for forward, futures or options on currencies.
And unlike the forward, futures and options
markets, the gold dinar does not depend on speculators
for increased liquidity. According to one economist, the
virtual nature of the gold dinar and the strict limit
and authority on the usage of it serves as a barrier to
speculative activities and arbitrage opportunities, two
reasons gold-backed systems broke down in the past.
"In my opinion, the gold dinar is akin to the
forward contract but with its problems of 'barter',
speculative and arbitrage elements removed and is also a
superior tool for managing foreign exchange risk," says
Ahamed Kameel, author of the book The Gold Dinar.
Since people of every race, creed and
nationality treasure gold, it is a suitable global
currency that enjoys global diversification, meaning
that no single country's unique risk may be
significantly embedded in gold.
And because gold
has all the characteristics of a good money - desired,
highly valued, durable, stable, and incapable of being
either created or destroyed - Kameel believes it can
play the role of a stable international unit of account
that is missing in the current floating exchange-rate
system since the demise of the Bretton Woods system in
1971.
For Bernard Lietaer, a fellow at the
Center for Sustainable Resources at the University of
California in Berkeley and author of The Future of
Money, the plan warrants consideration as a welcome
alternative to the existing international financial
system, which, he noted, has many shortcomings.
With 87 countries having undergone major
currency crises over the past 25 years, and in a world
without a stable and predictable international standard
of value, the gold-dinar project is trying to create a
reference value - gold - that would supposedly operate
outside this unstable environment, says Lietaer.
While he is confident that the plan will become
operational, he is less confident that the gold dinar
will solve all the problems of Malaysia's foreign trade.
He sees the project as a stepping stone to another
system that also opens the doors to participation from
other non-Muslim countries, rather than an end in
itself.
The problems holding back its
effectiveness are the issue of volatility of gold due to
its narrow market and the fact that not many of
Malaysia's major trading partners produce gold.
For these reasons he proposed a currency backed
by a broader-based basket of commodities and services
that includes the gold dinar and the silver dirham as
two of its components. The other components could
include crude oil, palm oil or rubber, products of which
Malaysia and its major trading partners are significant
producers or users. A currency backed by a broader
basket that is also interest-free (and therefore
compatible with Shariah law, a Malaysian and Islamic
concern) would be more stable than if it would rely only
on one of its components.
As to the
repercussions of the gold-dinar plan, reactions have
been mixed as to the impact on gold resources and the
gold market. Some believe gold resources would be
depleted and prices of gold would be pushed up. Others,
including Lietaer, believe the impact on gold prices
would be positive but the actual volume of physical gold
stored or traded would be minimal.
"Compared to
other factors - like the possibility of a war in Iraq
and the resulting impact on oil prices, or a change of a
policy of the Chinese or Japanese towards dollar
holdings - the gold dinar would have a comparatively
less dramatic effect," opines Lietaer. The reason is
that since the mechanism involves the settlement of
balance at the end of a determined period of time, there
is no necessity to hoard large amounts of gold.
For example, if at the end of a three-month
cycle, the total exports from Malaysia to Saudi Arabia
is 2 million gold dinar and the total exports of Saudi
Arabia to Malaysia is 1.8 million gold dinar, only a
relatively small amount - 200,000 gold dinar -
supporting a total trade value of 3.8 million changed
hands.
And the mechanism could be further
refined if the credit or debit outstanding at the end of
each quarter can be forwarded to the subsequent quarters
and final settlement is made only at the end of the
year, thus for the year as a whole, the payment flows
are further minimized, explained Nor Mohamed Yakcop.
And in this age of information technology,
transactions can be conducted electronically, making
gold safe to be kept with a custodian and thus
relegating the problems associated with the physical
handling and transport of gold worldwide a non-issue.
Despite the many benefits expressed about the
gold-dinar project, some critics say the project would
be limited in its coverage, as many of Malaysia's
Islamic trading partners are non-gold producing
countries. In addition, Malaysia's trade with other
Islamic countries is minuscule, accounting for just
slightly more than 1 percent of total trade volume. Thus
far, only Iran has expressed interest in participating
in the project.
While the plan is to start
small, at the bilateral level, it is based on a big
vision of forging ahead with an alternative that is to
work in parallel to the present international financial
system.
As Nor Mohamed Yakcop said, the
promotion of direct trade between Islamic countries
through the mechanism of the gold dinar could, quoting
an ancient proverb, be the initial first step in the
proverbial journey of a thousand miles.
(©2003
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