A recession is a significant decline in economic activities that last more than a few months. In other words, anything less tips us into a recession. Recessions are inevitable due to recurring phases of the business cycle. Since World War II to date, there have been 13 recessions. Among these recessions, 10 were in the last century, and 3 were in the two decades of the 21st century (according to the National Bureau of Economic Research.). The recession of the 21st century was the recession of 2001, 2008, and 2020. If the momentum of recession recurring remains in place, then 15 recessions are expected in the current century.
The recession of 2023 is expected, as Moody’s Analytics Chief Economist Mark Zandi and Nathan Sheets working in Citigroup stated that the probability of a recession is 50 percent within the next two years. The recession of 2023 is expected due to the compounding damage from the COVID-19 pandemic and the Russia-Ukraine conflict. It raises the risk of stagflation—defined as a situation of high inflation and unemployment rate—with potentially damaging effects on low- and middle-income economies. The Russia-Ukraine conflict has led Brent oil prices to soar to a 14-year high of $140. The surge in energy prices ultimately raises the price of energy-related commodities, which lower the real incomes, increase production costs, constrain macroeconomic policy, and tighten the financial conditions, particularly in the energy-importing economies.
A recession worsens the financial market—forex, capital, and money market— by making it more unstable. Any policy measure to stabilise the financial market is subject to softening the adverse effect of recession. The stability of the financial market mainly depends on the forex market. However, the forex market stability is subject to the level of forex reserves; the higher the import coverage reserves, the more stable the forex market will be. The stability of the foreign exchange market is indispensable because more than $5 trillion is traded on average every day, which is 25 times more than the volume traded in the equity market. This trading volume will be more than two-fold during the recession because investors demand foreign currency by considering it a recessionary hedge.
During the recession, the capital market remains under pressure due to economic slowdown, which reduces the firms’ revenue and consequently lowers the dividend. The lower dividend is a source of a bearish market and brings about an investment “crowd in” the forex market by the investor to diversify risk. However, a stable forex market can potentially reduce the investment “crowding out” from the capital market by enhancing investors’ confidence. Most of the low- or middle-income BRI member states are holding marginal imports covering the level of forex reserves. These forex reserves further dwindled amid the recession and made the forex market more unstable. Furthermore, compounding the damaging effect of recession also by raising the import prices due to the depreciation of the local currency. It implies that policy measures are required to uplift forex reserves in the low- and middle-income BRI member economies amid the recession.
Although the recession is a short-term slowdown of economic activities, a raft of short-term and long-term policy measures are required to curtail the adverse effect of the recession. A recession is inescapable, but its damage can be descended by economic cooperation. For this purpose, the Belt and Road Initiatives (BRI) project can provide a platform for economic cooperation among the 72 BRI member nations to soften the effect of recession.
On the other hand, long-term policy measures are also required for the general acceptability of the Renminbi (RMB). Currently, the RMB stands fifth in the ranking of the reserve currency. China is the largest exporter, accounting for almost 15 percent of global exports and 35 percent export share in the total exports to BRI states. But RMB cannot be explicitly recognised as a vehicle currency as its share in the global reserve currency stalled at 1 to 2 percent. Therefore, steps need to be undertaken to ramp up the share of RMB in the global reserve currency. Mounting RMB as a reserve currency will benefit the BRI states by making a pool of forex reserves comprising RMB. The forex reserves in RMB reserve currency among the BRI states are more governable than other vehicle currencies. The Chinese government is a sovereign issuer of the RMB, and the government could always create money and never run out of money or be forced into default.
The recession of 2023 is expected, as Moody’s Analytics Chief Economist Mark Zandi and Nathan Sheets working in Citigroup stated that the probability of a recession is 50 percent within the next two years. The recession of 2023 is expected due to the compounding damage from the COVID-19 pandemic and the Russia-Ukraine conflict. It raises the risk of stagflation—defined as a situation of high inflation and unemployment rate—with potentially damaging effects on low- and middle-income economies. The Russia-Ukraine conflict has led Brent oil prices to soar to a 14-year high of $140. The surge in energy prices ultimately raises the price of energy-related commodities, which lower the real incomes, increase production costs, constrain macroeconomic policy, and tighten the financial conditions, particularly in the energy-importing economies.
A recession worsens the financial market—forex, capital, and money market— by making it more unstable. Any policy measure to stabilise the financial market is subject to softening the adverse effect of recession. The stability of the financial market mainly depends on the forex market. However, the forex market stability is subject to the level of forex reserves; the higher the import coverage reserves, the more stable the forex market will be. The stability of the foreign exchange market is indispensable because more than $5 trillion is traded on average every day, which is 25 times more than the volume traded in the equity market. This trading volume will be more than two-fold during the recession because investors demand foreign currency by considering it a recessionary hedge.
During the recession, the capital market remains under pressure due to economic slowdown, which reduces the firms’ revenue and consequently lowers the dividend. The lower dividend is a source of a bearish market and brings about an investment “crowd in” the forex market by the investor to diversify risk. However, a stable forex market can potentially reduce the investment “crowding out” from the capital market by enhancing investors’ confidence. Most of the low- or middle-income BRI member states are holding marginal imports covering the level of forex reserves. These forex reserves further dwindled amid the recession and made the forex market more unstable. Furthermore, compounding the damaging effect of recession also by raising the import prices due to the depreciation of the local currency. It implies that policy measures are required to uplift forex reserves in the low- and middle-income BRI member economies amid the recession.
Although the recession is a short-term slowdown of economic activities, a raft of short-term and long-term policy measures are required to curtail the adverse effect of the recession. A recession is inescapable, but its damage can be descended by economic cooperation. For this purpose, the Belt and Road Initiatives (BRI) project can provide a platform for economic cooperation among the 72 BRI member nations to soften the effect of recession.
On the other hand, long-term policy measures are also required for the general acceptability of the Renminbi (RMB). Currently, the RMB stands fifth in the ranking of the reserve currency. China is the largest exporter, accounting for almost 15 percent of global exports and 35 percent export share in the total exports to BRI states. But RMB cannot be explicitly recognised as a vehicle currency as its share in the global reserve currency stalled at 1 to 2 percent. Therefore, steps need to be undertaken to ramp up the share of RMB in the global reserve currency. Mounting RMB as a reserve currency will benefit the BRI states by making a pool of forex reserves comprising RMB. The forex reserves in RMB reserve currency among the BRI states are more governable than other vehicle currencies. The Chinese government is a sovereign issuer of the RMB, and the government could always create money and never run out of money or be forced into default.
