Pakistan’s Pragmatic Diversification from US Dollar: Navigating a Multipolar World

By Hazrat Hafsa

Pakistan’s gradual shift towards de-dollarization is a response to its economic vulnerabilities and changing geopolitical circumstances.

With a shortage of foreign exchange and high external debt servicing costs, Pakistan is making concerted efforts to lessen its dependence upon the US dollar. This currency is used in huge quantities for imports and remittances, causing serious foreign exchange problems.

The main measures involve enhancing RMB settlement of trade with China through the China-Pakistan Economic Corridor (CPEC) and strengthening RMB currency swaps with regional countries.

Pakistan is also increasing local currency trade with regional partners. This is not a direct attempt to challenge dollar dominance, but a wise approach to minimizing exchange rate risks, reducing transaction costs, and creating resilience through diversified financing.

The aim is to establish a more equitable financial system through cooperation such as CPEC and possible BRICS ties.

De-dollarization in the context of Pakistan does not imply complete removal of the dollar. Rather, it refers to incremental and practical measures.

These involve settlement of bilateral trade transactions in local or partner currencies — particularly RMB with China — applying currency swaps to prevent foreign exchange mismatch, and establishing new cross-border payment channels.

Further advances have been made in trade with China, with almost one-quarter of bilateral trade now settled in renminbi, and strengthened currency swap facilities providing liquidity in yuan.

It is about operational feasibility and risk reduction, not about replacing the dollar as the global reserve currency.

Pakistan’s economy is still susceptible to external shocks because of its continued current account deficits, high dollar-denominated debts, and repeated rupee depreciations.

These can compound costs in times of financial crises, compress reserves, and worsen fuel inflation.

Having more than one currency for payment is helpful. Currency swaps and RMB financing match revenues and expenses with key trading partners.

Multiple payment options buffer against geopolitical tensions, liquidity shocks, or sanctions. Local currency settlement reduces transaction fees, speeds up settlements, and boosts trade volume with China and other partners.

CPEC is playing a major role in this process. It allows for the construction of infrastructure and energy projects in RMB, reducing the need to convert foreign currencies.

The two key units are Trade Settlements and Reserve Management. Pakistan will focus on bilateral and multilateral local currency trade arrangements in countries where trade volumes warrant such arrangements, mainly with China.

The plan to convert the dollar to a reserve currency is a much longer-term goal.

Success lies in slow diversification — rising amounts of non-dollar trade settlements, development of more effective hedging instruments, and enhancing the interoperability of payment systems.

Pakistan is still keeping dollar reserves for IMF obligations, macroeconomic stability, and international transactions.

Lack of full convertibility of the rupee and weak markets for hedging in RMB limit progress. Volatility in macroeconomic activity and regulatory uncertainty restrict private sector involvement.

Geopolitical balancing — maintaining ties with the US, IMF, and Gulf allies while strengthening ties with China — adds complexity. Technical and institutional shortcomings for handling multi-currency systems also remain a barrier.

Realistic success means an increased rate of trade concluded in local currencies, particularly with China and neighbouring countries. It also means more currency swaps and non-dollar project financing, enhanced payment interoperability, reduced foreign exchange vulnerabilities, and a better spread of resources.

This is not a dollar elimination strategy — it is a diversification and resilience strategy. It seeks to enhance the efficiency of trade, balance external payments, and expand economic autonomy in a multipolar world.

Pakistan is taking gradual steps toward de-dollarization with proper caution, considering the economic realities of the country. CPEC, RMB trade settlements, and currency swaps are creating significant alternatives, especially in vulnerable industries.

In the current context of liquidity constraints, macroeconomic instability, and strong international integration into the global dollar system, these initiatives represent a new policy direction toward financial resilience and policy space.

Through this diversification, Pakistan is improving its leverage for regional integration and sustainable growth — as part of a worldwide trend in Global South financial diversification.