SINGAPORE, Nov. 15 (UPI) -- The use of a gold dinar for settlement of the international trade balance between Islamic countries could become a reality in 2003. The concept has been spearheaded by Malaysian Prime Minister Mahathir Mohamad, who wants to lessen Islamic countries' dependence on the U.S. dollar. Other countries have expressed interest in the idea recently.
Last week, the Malaysian deputy finance minister, Mohd Shafie Salleh, indicated that Iran had expressed its intention to use the gold dinar for bilateral business with Malaysia. A special economic adviser to Mahathir, Tan Sri Nor Mohamed Yakcop, was also previously quoted as saying that Malaysia would start using the gold dinar in its trade with some Islamic countries by the middle of next year.
Mahathir first raised the idea of an Islamic gold dinar as a standard unit of currency for trade and financial transactions last year. Ever since the Asian financial crisis of 1997-1998, Mahathir has been keen on exploring ways to reduce the risks of currency speculation, which he blamed for the fallout. Although gold can be volatile, it is less so than the U.S. dollar, and has an intrinsic value which paper money does not carry, he argues.
The gold dinar was used as a currency in the Muslim world until the collapse of the Ottoman caliphate in 1924, and an Islamic dinar does exist as the unit of currency of the Islamic Development Bank. But the IDB's dinar is indirectly pegged to the U.S. dollar, with one Islamic dinar equivalent to one special drawing right of the International Monetary Fund.
The Malaysian proposal is not to revive the gold dinar as a currency to settle day-to-day payments, but to revive it as a means to settle bilateral payment arrangements exclusively. This means the currency would not exist in a physical form.
The proposal is to denominate external trade in dinar (a standard unit of weight of gold), whose denomination has yet to be set. Exporters would be paid in their respective national currency by their central bank on the due date of exports, based on the gold dinar exchange rate prevailing at the time of the transaction. Meanwhile, central banks would settle the difference in bilateral trade balance every 3 months by transferring gold in their custodian's account at the Bank of England. There would not be physical transfer of gold from one country to another, but a transfer of beneficial ownership in the gold custodian's account.
Iran proposed last month to set up a secretariat in Malaysia to research the proposal further and facilitate communication within central banks of Muslim countries. Meanwhile, the Malaysian government's Islamic think-tank, the Institute of Islamic Understanding Malaysia, has pointed out that to put the dinar mechanism in motion, "careful planning is needed to ensure that when the mechanism is in place there will be a minimum of problems."
Indeed, the Malaysian authority is taking a more cautious attitude and has proposed to start the new payment system gradually, possibly with only two countries, to preserve the stability of the existing system.
Observers believe Malaysia is most likely to start using the gold dinar with Iran.
Some have raised concerns that the use of the gold dinar could contravene an existing prohibition by the International Monetary Fund on the use of gold as a medium of payment and could be a return to the Bretton Woods policy of a gold-reserve system. That system was abandoned in the early 1970s, when U.S. President Richard Nixon removed the dollar's fixed peg to gold, allowing it to float.
But gold experts argued that this is not the case, because the gold dinar will not be a national currency backed by gold. In a recent speech Mahathir pointed out that there was no intention to make the dinar a common currency for all countries.
IMF officials were unavailable for comment.
There are also concerns that recurrent trade imbalance will push the same country to deplete its reserves, which would then prompt them to buy gold on the international market, pushing prices up.
The World Gold Council has not done any study on the impact the gold dinar could have on gold prices, though it is monitoring the situation closely, said Ralston Thiedeman.
But in a recent research paper on the issue, Ahamed Kameel Mydin Meera, an associate professor at the International Islamic University Malaysia, argued that "countries with little gold reserves could trade with gold-producing countries like South Africa, Malaysia, Russia, in order to increase their gold reserves. In this way we may iron out problems while they are still small without placing undue demand pressure on the existing gold market."
"If all Muslim countries rush into implementing the gold dinar, this may only increase the international gold price substantially. However, observing the present scenario of the global financial situation, in my opinion, it is better for countries and individuals to have a good portion of gold reserves and savings," Meera added.
Eventually, the payment system would become multilateral, hence helping to iron out recurring bilateral trade imbalance, gold experts said. One source, who requested anonymity, pointed that the system was most likely to be introduced between two countries that do not possessve great trade imbalances.