How the surge in dollar poses adverse effects on African economies

by Christopher Kiiza
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The US dollar is the world’s most widely used currency. It is also the primary currency used in international trade, playing a crucial role in the world economy.

The value of the US dollar can have a significant impact on African economies, influencing the costs related to imports and exports, foreign investments, and the repayment of debts.

According to the 2023 External Sector Report by the International Monetary Fund (IMF), African economies suffer disproportionately as a result of the US dollar’s strength, facing challenges in trade, credit availability, capital inflows, monetary policy, and stock-market performance.

A strong US dollar can hurt African economies by making their exports more expensive and less competitive in the global market. This can lead to a decrease in demand for African goods and services, which can negatively impact the continent’s economic growth.

The International Monetary Fund found that a 10% increase in the dollar’s value, attributed to global financial market dynamics, led to a 1.9% decrease in economic production in emerging market economies across Africa.

A surge in dollar hampered trade and financial channels in developing market economies, particularly in Africa.

“Their real trade volumes decline more sharply, with imports dropping twice as much as exports. Emerging market economies also tend to suffer disproportionately across other key metrics: worsening credit availability, diminished capital inflows, tighter monetary policy on impact, and bigger stock-market declines,” revealed the IMF.

The IMF Report highlights that the strengthening of the US currency negatively impacted the current balances of these nations. It notes that current accounts recorded changes in countries’ saving-investment balances.

“As a share of Gross Domestic Product, current account balances (saving minus investment) increase in both emerging market economies and smaller advanced economies, because of a depressed investment rate (there is no clear systematic response for saving). However, the effect is larger and more persistent for emerging market economies,” a statement by the global lender reads.

Borrowing & Exchange Rates

Most of Africa’s borrowing is denominated by the dollar, which implies that the cost of debt repayment inflates when the value of the dollar appreciates. This can lead to a debt crisis, as African countries struggle to repay their loans.

The recent dollar appreciation against most currencies globally has proven a challenge for most African economies.

For instance, during October 2023, there was a general depreciation of all currencies within the East African Community (EAC) Partner States, against the US dollar.

The Rwandan Francs and Kenyan Shilling had the highest depreciation rates at 1.82% and 1.81%, respectively.

The Tanzanian shilling, Ugandan shilling, and Burundian Francs also registered depreciation rates of 0.74%, 0.5%, and 0.16% respectively.

The depreciation of EAC currencies, according to Uganda’s Ministry of Finance, was caused by the global strengthening of the dollar and higher portfolio outflows ensued by better rates in advanced economies.

The monthly average rate for the Uganda shilling was recorded at Shs 3,755.63/USD up from Shs 3,738.02/USD in September 2023.

African governments have not done enough to build capital markets. Regional cooperation through the Africa Continental Free Trade Area (AfCFTA), a vast and ambitious trade agreement aiming to create a single market for goods and services across the entire African continent, could help to distribute investment risk and future advantages throughout the continent.

Africa & De-Dollarization

The dollar reigns supreme in African trade, casting a long shadow over local currencies. African nations often use the dollar for international transactions, and trade among themselves.

This huge reliance on the dollar exposes African nations to volatile exchange rates, stifles regional trade in local currencies, and subjects them to the whims of the US monetary policy. The absence of a unified African currency and the limited international reach of local currencies contribute to this dependence.

There are, however, efforts to promote regional integration and develop robust local currencies aim to reduce vulnerability.

The Kenyan President, William Ruto is keen to see African countries trade with each other in local currencies, not the U.S dollar.

On his recent trip to India a few days ago, Ruto remarked how African countries are desperate for a pan African payment and settlement system where trade will be in local currency.

“We have no problem with the US dollar, but we want currency neutral trade. We want to diversify currency. For example, for us in Africa, we are working with the Afrexim Bank to have a pan African payment and settlement system where trade in Africa will be in local currency, but the settlement can be done at a higher level by a centralized system. Afrexim bank is providing a facility because we lose about 5 billion dollars every year in Africa just in exchange rates,” Ruto said.

He added: “We are saying, we want trade, we want commerce, we want transactions to be currency neutral. For us, we want to trade in our local currencies. In fact, the conversation I was having with Prime Miniter [Narendra] Modi is that even the facility that will be extended to Kenya (the 250-million-dollar facility), we want it in [Indian] Rupees. Why should we go and look for dollars when we can have the facility in Indian Rupees. We have a lot of trade, we have commodities we buy in Indian Rupees, why should we change Kenya shillings to U.S dollar, from U.S dollar to Indian Rupees? Why don’t we just agree that we can do trade between Kenya and India in shillings and Rupees?”

How Feasible is This?

The feasibility of ditching the dollar in African trade is a tricky balance between possibilities and hurdles. On one hand, using local currencies in trading brings benefits such as reduced transaction costs, boosted intra-regional trade, and increased control over economic policies. Initiatives such as the pan African payment and settlement system, and the Afreximbank pave the way for this shift.

On the other hand, challenges come into play; building trust in local currencies is vital after relying on the dollar for many decades.

Furthermore, making payments for western imports dictate the use of the dollar to settle the payments.

Can New Blocs, Geopolitics Be in Africa’s Favour?

For years, the African continent has had little voice and contribution in shaping the world agenda, not just at the global decision-making bodies such as the United Nations or the G20 where the African Union was made a permanent member in September 2023, but also in shaping the global financial architecture that is dominated by the U.S dollar and European currencies such as the Euro for the world’s biggest economic bloc, the European Union, and the British pound.

Despite having a population of over 1.4 billion people, trade between Africa and the rest of the world is transacted using the U.S dollar as a method of payment, sidelining African currencies hence losing value against the dollar.

Given the billions of dollars of aid granted to Africa by the developed world, trade imbalance due Africa’s low export volumes, and other leverage possessed by the global north, the black continent has not had a strong ground to challenge the dominance of the U.S dollar against African currencies.

However, due to the current geo political tensions between the global super powers and the rise of new blocs such as the BRICS (Brazil, Russia, India, China, and South Africa) that aim to end the use of the dollar between their trade, and accelerate their trading with Africa by granting competitive and better trade practices to the black continent, there is a feeling that Africa could use that as a corner stone to de-dollarize its trade with the world.

President Ruto gives a hypothetical response to this.

“The scramble [for Africa by the East, particularly China] would be a wrong word. Maybe a new focus. What we are saying as African leaders is that there is an African proverb that says, ‘until the lion learnt to write his own story, all stories glorified the hunter’ because he was the one writing. So, this time round, we are going to write our own story. For a long time, people wrote stories about Africa,” Ruto says.

Although there could be an argument that a strong dollar is an opportunity for Africa since it lowers the cost of inward investment into the continent for American companies and makes dollar-based African exports more competitive, the negative effects of a strong dollar on African economies outweigh the positives.

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