- With tightening monetary policies globally, many African economies are struggling with falling forex reserves.
- Low reserves have sent governments back to the drawing board strategising on how to survive future trends while balancing trade.
- With this, leaders and policymakers in Africa are engaging in the de-dollarisation conversation.
Kenya has sent a strong message to economies in Africa on the need to accelerate dedollarisation of cross-border trade, further amplifying the global conversation on reducing reliance on the US dollar as the main mode of payment.
For over a decade, China and Russia have sought to drastically lower their usage of the US Dollar in what is commonly referred as “dedollarisation”.
This is in a move intended at shielding their economies from possible trade-limiting US sanctions. The strategy also reduces their exposure to adverse effects of US economic and monetary policy, while also asserting global economic leadership.
China, Russia slowly cutting dollar use
While China and Russia have somewhat cut their dollar use, their economies are still reliant on king dollar.
China holds significant dollar reserves and while has been keen not to allow its currency, the renminbi (RMB), to be traded freely in forex markets. Renminbi it was the fifth most traded currency as of April 2022. The yuan is the basic unit of the renminbi, but the word is also used to refer to the Chinese currency generally.
Russia’s Rubble on the other hand is not widely used abroad, and global energy markets (Russia’s main exports) are traditionally denominated in dollars.
An increasing number of countries are seeking to de-dollarise their economies. And Africa is seeking a seat in the conversation table. The move comes in the wake of weakening currencies and falling dollar reserves in many economies, which has left countries struggling to secure the greenback to pay for imports.
With tightening monetary policies in global economies, investor flight amid reduced inflows, key African economies are struggling with falling forex reserves.
This has seen Central Banks deploy measures to tame runway inflation. The low reserves are also pushing governments to find ways of surviving future trends while mitigating adverse effect on trade.
Read also: African countries under pressure on US interest rates
Dedollarisation is not a new conversation
With this, Africa has picked the conversation around dedollarisation with the recent being in Nairobi this week. According to experts, dedollarisation is not a new phenomenon but a complex policy.
Kenya’s President William Ruto, barely a year at the helm of East Africa’s largest economy, is calling on African countries to shift, if possible, away from the use of US dollar in intra-Africa trade.
He was speaking when he officially opened the African Continental Free Trade Area (AfCFTA) Council of Ministers Meeting in Nairobi. Dr Ruto called on Africa to consider an environment where the continent can trade using local currencies. A good start point, he said, could be in intra-Africa businesses and service payments.
“We are all struggling. Our businessmen and our traders are struggling to make payments for goods and services from one country to another because of differences in currencies. In the middle of all this, we are all subjected to a dollar environment. Why are we bringing dollars in the middle of our trade?” Dr Ruto noted.
To do away with the dollar in intra-Africa trade, AFREXIM Bank is building a centralised payment and settlement system to support AfCFTA.
Dubbed the PanAfrican Payments and Settlement System, banks and payment providers can plug and enjoy secure and instant payments in local currencies. The system is designed to eliminate the challenges of crossborder payments and by so doing accelerate intra Africa trade, Dr Ruto noted.
Steps to strengthen financial institutions
Without a single payment platform, payment instructions between African countries typically go through several financial institutions, increasing the costs.
“Additionally, the time has come to introduce pan-African insurance agencies and other African institutions to opportunities in the AfCFTA market. But first of all, we must take decisive steps to strengthen our financial institutions to effectively support a strong private sector performance in the AfCFTA and general pan-African business,” President Ruto said.
As AfCFTA takes shape, Kenyan President’s call could see the US dollar given a wide berth continental trade.
At least 54 African Union (AU) member states have signed AfCFTA agreement as of April, with 49 having ratified it, making them eligible to trade. Ghana, Cameroon, Egypt, Rwanda, Tanzania and Kenya are the pioneers piloting the trade system.
Present during Dr Ruto’s address were Azali Assoumani, President of the Union of Comoros, and Chairperson of the AU Assembly of Heads of State and Government. Mr Issoufou Mahamadou, Champion of the AfCFTA, and former President of the Republic of Niger. Wamkele Mene the Secretary General of AfCFTA, Yves Fernand Manfoumbi the Chairperson of the AfCFTA Council of Ministers, ministers from African countries, members of the Diplomatic Corps, and tens of captains of industry.
According to experts, full dollarisation could create a positive investor sentiment in the continent, almost extinguishing speculative attacks on the local currency and the exchange rate.
“The result is a more stable capital market, the end of sudden capital outflows, and a balance of payments that is less prone to crises,” experts note.
Intra-Africa trade is very low
Intra-Africa trade is remarkably low, at 17 percent compared to 40 percent in Asia, 60 percent in the USA and Europe at 70 percent.
Read also: AfCFTA presents golden opportunity for Africa to trade equally with MNCs
The bulk of Africa’s imports and exports relate to markets outside the continent. Although Africa has been a net importer of agricultural commodities since 2,000, about 81 percent of these imports come from outside Africa, while 78 percent of her exports go to other continents.
Non-tariff barriers distort investment dynamics and impede competitiveness, Dr Ruto said. As a result, these barriers undermine or even invalidate a free trade area.
“This is why we must take such barriers as weak transport and logistics capacity, customs-related delays, rules of origin, import bans and export restrictions, quotas and levies, technical barriers, import permits and licenses, very seriously,” he said.
“For AfCFTA to be effective, this dialogue must make it clear that a free trade area is precisely that: free trade area,” the President insisted.
Africa is emerging as a focal point of important global agendas. And this presents a crucial opportunity the continent to pursue self-sufficiency.
Disorganised food and energy supply chains
The increasingly complicated, delicate and uncertain geopolitical environment has exerted disruptive pressures upon global trading systems. The shocks started from diverse events such as 2016 BREXIT, whose effects continue to reverberate globally. The hit is also related to WTO’s Doha negotiations that remain unfinished and escalating protectionism. Even more recently is the Covid-19 pandemic, the Russia-Ukraine war and the roiling climate change crisis.
“The shocks and stresses arising from these events have exacerbated the vulnerability of African economies, intensified poverty and suffering. The Russia-Ukraine conflict alone has disorganised food and energy supply chains which serve our continent, causing acute shortage and driving commodity prices to unprecedented levels that are unaffordable to the majority of our people,” the Kenyan President said.
He said Africa urgently needs to work its way steadily from the bottom of global value chains. This will be achieved by among others unlocking the full potential of its abundant endowments of natural resources. There is also urgent need of harnessing her human capital through industrialisation, mineral processing and manufacturing.
“About sixty percent of global arable land reserves are in Africa, and we’ve not begun to utilise it,” he said.
Africa exposed ‘badly’ to commodity price shocks
African exports are among the world’s least diversified. These commodities account for over 60 percent of the total merchandise exports in 45 out of 55 countries. This situation exposes Africa “quite badly” to global commodity price shocks, undermining the continent’s prospects for inclusive growth.
According to Dr Ruto, the continent must be intentional about rehabilitating its economies from grave deficiencies to drive growth. A major enabler of continental economic takeoff requiring considerable investment is infrastructure. According to President Ruto, poor infrastructural connectivity works against Africa’s ambitions to realise full trade and economic potential.
Consequently, there is need align government and private sector complementarity with the colossal demand for port, rail, road systems. Similar undertaking will be necessary in air transportation, power and energy, as well as in ICT infrastructure.
With appropriate levels of connectivity, Africa’s digital economy is projected $180 billion by 2025, or 5.2% of the continent’s GDP. This trajectory is set to hit $720 billion by 2050, or 8.5 percent of African GDP. Lack of efficient transport networks increases the price of goods traded among African countries by between 30 and 40 percent.
Bearing in mind that 16 African countries are landlocked, underdeveloped transport connectivity hampers intra-Africa trade. This drives up the cost of imports and exports to various market destinations.
Single African air transport market
“The current level of technology in the fields of infrastructure development across sectors is fairly high. This dialogue is a golden opportunity for African private sector and African governments to deploy the concept of technological leap-frogging, ensuring that advanced technologies are incorporated into priority infrastructure investments,” he said.
Similarly, he called on the implementation of the single African air transport market (SAATM). This strategy is expected to define the opportunities for the private sector to invest in a liberalised air transport sector. It will also enhance air traffic penetration from 14.5 percent and help enhance African integration.
“This moment requires us to be bold and ambitious in fashioning our way up from the bottom of global trade, productivity and industrialisation,” President Ruto said.
