De-dollarization: Its impact on African economies
The World Bank was established in 1944 to help rebuild Europe and Japan after World War II and initially named the International Bank for Reconstruction and Development (IBRD). It was also created to help restore and sustain the benefits of global integration, by promoting international economic cooperation. As we write, a rival establishment, the New Development Bank (NDB) has been set up by the Brazil, Russia, India, China and South Africa (BRICS) group seeking to move away from the US dollar in international trade. What is termed de-dollarization is aimed at reducing dependency on the US dollar and help the BRICS group achieve financial independence and avoid foreign currency risks and financial shortages that may affect negatively long-term investments.
In an April 14 interview with Chinese media outlet CGTN, former Brazilian President Dilma Rousseff outlined her vision of the NDB that she now heads: “It is necessary to find ways to avoid foreign exchange risk and other issues such as being dependent on a single currency such as the dollar.” Among measures the NDB seeks to take include avoiding current systems that favor the world’s richest countries. In her swearing in Ms. Rousseff called for the creation of “a world with less poverty, less inequality, and more sustainability.”
It therefore stands to reason that in addition to the five core BRICS nations, Bangladesh, Egypt, and United Arab Emirates, all developing economies, are being invited, while others like Argentina, Iran and Algeria also have shown interest in joining the bank. It is expected that countries from the debt-prone developing world including Africa would express interest and membership in the rival bank to the World Bank and the IMF.
De-dollarization and subsequent establishment of what we call the BRICS bank, the New Development Bank, and its role in international trade and commerce implies the internationalization of currencies. As digitization is supposed to create a level playground for almost all spheres of the economies worldwide, so should currency internationalization. The NDB will be here to ensure competition and even more advantage to developing economies and therefore, be able to cooperate with regional banks such as the Asian Development Bank and the Africa Development Bank which over time have ensured fairness in their terms in borrowing to member countries.
Kumar Vivek, Deputy Commissioner at India’s Ministry of Finance, affirms in his submission titled De-dollarization: Implications, Challenges, and Opportunities for the Global Financial System, that the process of de-dollarization is “inextricably linked to the internationalization of other currencies, as the reduction in the global reliance on the US dollar necessitates the emergence of viable alternatives. In this context, the Euro and the Chinese Yuan have emerged as the leading contenders to assume a more significant role in the global financial system.”
The logical demand on Africa, and therefore, the developing world, is that they are obliged to strengthen their currencies through trade. Better and purposeful bargaining for fair trade among nations would also stabilize national economies. Cross-border transactions, investment and reserve assets would provide potential benefits. What comes to mind includes regional currency systems as the ECO in ECOWAS nations that could enhance financial stability and reduce the shocks that come from a single dominating currency as the dollar. We would recommend further a single continental currency with all the advantages and economic profits that could accrue.
It would be exciting to see an African continental currency, competing on the international money market for Africa’s vast resources. De-dollarization would relax the unbending and draconian interest rates, as well as their so-called conditionalities on loans contracted from the Bretton Woods institutions, whose terms are selective and punitive to developing nations.
With South Africa as a core member of the BRICS and also a signatory to the African Continental free Trade Area (AfCFTA) the continent stands to benefit from the arrangements of the BRICS. According to the World Bank the free trade agreement ‘will increase Africa’s income by $450 billion by 2035 and increase intra-African exports by more than 81 percent.’ The UN Economic Commission for Africa also predicts that the single market trade agreement will enable the African economy to reach the $29 trillion mark by 2050. Impliedly, African currencies would reap a boost in their values.
The potential of de-dollarization and internationalization of currency does not necessarily come without risks and shocks that if not carefully managed well could put developing economies into unimaginable problems. As currencies assume more prominence on the global trade landscape, so do they face potential fluctuations in global economic conditions and financial markets. Internationalization could heighten competitive pressures that could lead to cross-border intrigues that could lead to currency wars. Global economies do not make permanent friendships among nations, but permanent interests and, therefore careful and intelligent navigation of the seas would ensure peace and harmony among players, particularly in Africa.
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