China has edged out the US as the world’s biggest contributor to the global gross domestic product which currently stands at an estimated 16 per cent.
The US accounted for 15.2 per cent of the global GDP after adjusting for purchasing power parity (PPP) in 2018. This share is expected to decrease to 13.86 per cent by 2024.
While the US still commands a sizeable amount of the world’s business, there seems to be a new order coming up where the nation will be relegated in terms of not only business but influence in a new world where the dollar will cease being the common currency.
How soon this happens is still not known but the signs are there and they have been with us for a while.
Already, China, Russia and Pakistan are laying out plans to start conducting bilateral trade and investment while issuing bonds in local and national currencies instead of the US dollar.
The eight-member countries of the Shanghai Cooperation Organization (SCO) are to finalise a road map introducing a system of mutual settlement of national currencies.
Other SCO members include India, Kyrgyzstan, Tajikistan and Uzbekistan while observer countries Iran, Afghanistan, Belarus and Mongolia are looking to becoming regular members of the SCO.
With the covid-19 coronavirus pandemic, it seems that the world is realigning itself for a new way of doing business.
As it is, the Chinese economy is already controlling a huge chunk of the global business and with the markets now more integrated and interlinked, any shock affecting China now has far greater consequences for the world economy. We have seen it with the coronavirus pandemic and it could only get more interesting to watch.
According to the UN-FAO, the supply shocks due to morbidity and mortality and the containment efforts that restrict mobility and higher costs of doing business due to restricted supply chains and a tightening of credit will affect economies leading to a reduction of economic growth.
This March, the OECD cut its forecast for global economic growth in 2020 from 2.9 per cent to 2.4 per cent, which would be the lowest level since the financial crisis a decade ago. It warned that a prolonged and more intensive coronavirus epidemic could even halve this figure to a mere 1.5 per cent.
Globally, the demand will also fall due to higher uncertainty, increased precautionary behaviour, containment efforts and rising financial costs that reduce the ability to spend.
For Africa, things could be even harder since there is also a significant devaluation of the exchange rate with respect to the US dollar. This will also affect the import-dependent countries most of which are in Africa.
But with the realigning, the African Continental Free Trade Area (AfCFTA) will come in handy by injecting new momentum and move the region from stagnation. For decades, the continent has been regarded as one of the poorest and least dynamic economies in the world. This is despite the wealth it has in terms of natural resources and human capital.
With the internationalisation, the AfCFTA in July this year, Africa, just like the rest of the world could be heading into a future of common ground in regard to trade and commerce. By breaking the cross border policies which have stymied intra-regional growth, the economic limitations could be coming to end as the continent liberalises cross-country travel and trade.
The continent is yet to have a common currency like the European Union but efforts by the various economic blocks have been seeking ways of introducing a common currency which could level the playing ground for the member countries.
In East Africa, for instance, the major benefits of a monetary union are the reduction of transaction costs, economies of international reserves, the elimination of exchange rate risk and region-wide price harmonization.
However, the region will take longer to establish a common currency since the 2024 deadline for a monetary union and the common currency is not attainable. The region has fallen behind setting up the East African Monetary Institute (EAMI) which could be the basis of a common currency. Without the relevant institutions like the EAMI to support a single currency, it is almost impossible to have the region come up with an agreement on a currency.
But West Africa has already forged ahead with the agreement to ditch their monetary sovereignty this year and introducing the ECO, the region’s new common currency.
The Economic Community of West African States (ECOWAS) 15 member countries have agreed on the ECO which brings 380 million citizens together under a common monetary framework. Nigeria, Africa’s economic powerhouse is a member of the ECOWAS and with this newly formed currency, the project for a single currency in Africa is now closer than ever.
With autonomy, many countries and regions globally will seek more independence from the US dollar which will give them more say on loans and driving concessions.
With China already controlling a large portion of the global economy, it is now a matter of when and not if the world shifts from reliance on the greenback.