10-year Simulation of Commodity-Based Convertibility of the Pakistan Rupee: a Model for Developing a D-8 Currency Bloc?

Abstract

In recent years the fiat currencies being used worldwide have experienced inflation and instability, including instability of exchange-rates and their manipulation by larger countries.  However, introducing convertibility of a currency, such as with a gold standard, faces major difficulties, and although various different means to overcome these problems have been proposed over more than a century, they have not been implemented.  The little-known Grondona System of conditional currency convertibility based on primary commodities was designed to enable individual countries to introduce a limited element of real commodity convertibility into their monetary system, rather than rigid convertibility like the classical gold standard.  This paper presents a simulation of 10 years of operation of the Grondona System as if implemented in Pakistan.  The results show how the system’s market-driven, counter-cyclical stock-holding could have operated in terms of Pakistan Rupees over the past decade, expanding the Rupee money supply as commodity prices fell, and then reducing it as commodity prices rose again, driven by market prices.  The discussion of the results explains how, if other countries also implemented the Grondona System, the different systems’ operations would help to stabilise the different countries’ mutual exchange-rates, since their domestic money supplies would expand and contract in response to the same commodity market price-movements (though on different scales, due to each country’s different economic structure).  Since the Grondona System has been previously shown to be Shariah-compliant, the paper thereby illustrates how the D-8 group of countries could gain the benefits of partially stabilising their mutual exchange-rates by each implementing the system independently in their domestic currency.  This arrangement might later evolve naturally into a currency “bloc”, from which the D-8 countries would receive benefits of improved stability of their collective economic environment.