As global interest rates rise and financial conditions become more stringent, a strong dollar adds to the pressure, especially for emerging markets and low-income countries already at high risk of debt distress.
- A strong dollar has depressed global trade since it holds the highest purchasing power as the global invoicing currency.
- The progressive decision-making of the Russian government could save Africa from the damaging effects of a strong dollar.
- A strong dollar has depressed global trade since it holds the highest purchasing power as the global invoicing currency.
The recent surge in the dollar value has had far-reaching effects globally. The US dollar has a leading role in international trade and finance. Thus, the rise of the dollar makes it harder for countries to combat inflation. Many countries use the dollar as a benchmark currency, and a surge in its value weakens local currencies. On average, a 10 per cent rise in the dollar value leads to a 1 per cent increase in inflation. This is especially challenging for emerging markets that rely heavily on imports. Import-oriented economies, mainly in Africa, have a larger share of dollar-invoiced imports than advanced economies.
The dollar’s rise also impacts countries’ balance sheets worldwide, as 50 per cent of all cross-border loans and international debt securities are denominated in dollars. While emerging market governments are trying to issue debt in their local currencies, their private corporate sectors still have high levels of dollar-denominated debt.
As global interest rates rise and financial conditions become more stringent, a strong dollar adds to the pressure, especially for emerging markets and low-income countries already at high risk of debt distress.
The effects of a strong dollar on trade
With 2022 now history, markets feel like the COVID-19 theme has waned after the two-year peaks and troughs of the pandemic. Still, the global economy has new challenges to confront. Inflation was the highlight of the year in 2022. Amid post-pandemic recovery plans, central banks globally tightened monetary policies to control the depreciation of their currencies and manage the surging inflation.
This theme has mainly posed a challenge for emerging market economies. The strong dollar has increasingly made matters even more complicated. With global monetary and fiscal tightening a common theme, the World Bank downgraded its growth forecast for emerging economies in 2022.
A strong dollar has depressed global trade since it holds the highest purchasing power as the global invoicing currency. With the dollar value rising, other currencies have depreciated, lowering economic growth and global trade engagement.
A strong dollar has also ruined the creditworthiness of countries with dollar-denominated debts, especially in Africa. This has reduced the US dollar’s purchasing power, leading to debt sustainability struggles. This has led to an obstructive knock-on effect for emerging economies since their markets have linked supply chains and commodity demand. The stronger dollar has also intensified inflationary pressures for the import-oriented emerging economies since they are typically import-oriented.
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Russia’s trade with Africa in local currencies
The de-dollarisation debate has remained under the radar for quite some time. However, with the recent economic challenges, countries have considered turning from the dollar to strengthen their currencies. In the wake of the ongoing tensions from the war in Ukraine, Russia has pointed towards trading with African nations in their local currencies. This represents a crucial move towards the long overdue de-dollarisation of African trade.
According to Russian Foreign Minister Sergey, Russia and African nations are closing towards settlements in national currencies. The parties are preparing documents on reorganising the trade cooperation mechanism under Western sanctions. Lavrov reiterated that Russian and African partners would work on progressively reducing trade in the US dollar in mutual trade payments.
“Documents are being prepared to reconfigure the mechanisms of interaction in the face of sanctions and threats, … new tools for trade and investment cooperation, supply chain systems, payments,” he said, adding that “there is a transition to settlements in national currencies, this process is not fast, but it is underway and is gaining momentum.”
Moscow has steadily pursued foreign trade de-dollarisation. In recent years, Russia and some of its trade partners, including India and China, have ramped up domestic currencies in mutual settlements to move away from the US dollar. The growing absence of the US dollar in Russia’s mutual settlements with other nations has become more prominent since 2014. Russia’s trade de-dollarisation has accelerated substantially in the wake of Western sanctions.
The benefits of trading in local currencies
Overcoming currency conversion costs
Russia’s decision to trade with Africans in their native currencies is one of several measures to boost international trade and will yield significant dividends in the coming years. With the dollar as the invoicing currency, African countries have had high currency conversion costs.
The conversion process is time-consuming and exposes businesses to various potentially costly disadvantages. One of the most prominent is a fluctuating and often unfavourable exchange rate, which constantly changes according to various macroeconomic and geopolitical factors.
These rates, available daily through Forex trading platforms, can significantly impact. Most currency conversions will also incur a processing fee, which eats into your capital and erodes this gradually over time.
Russia has recognised these commercial challenges and, more specifically, their impact on international trading volumes with African partners. By helping African countries liberalise their currencies, Russia will enable commercial entities in Moscow and other jurisdictions to hold and invest in native currencies. As a result, local currencies can be used to complete cross-border payments and transactions.
Saving time and operation costs
Trading in local currencies immediately reduces operation costs for businesses. Moreover, it also gives an allowance for planning time-sensitive payments in a way that optimises their bottom-line profit margins. For importers, it is also important to note that one of the effects of a strong dollar or a similar international currency is burdening suppliers with additional administration costs and significant time delays.
Official data has shown that the cost of transacting in international currencies is often 2 or 3 per cent higher than dealing in local alternatives. The higher cost often creates significant international trade obstacles. Ultimately, the progressive decision-making of the Russian government could save Africa from the damaging effects of a strong dollar. Consequently, international trade will become accessible to businesses in Africa. This will boost economic growth in the respective partner countries.
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