African continental trade impeded by absence of common currency

dedollarize dd

While using the U.S dollar currently offers more transactional certainty, its scarcity in many African countries dampens their trade, creates artificial inflation and raises the cost of doing business.

As the most in demand currency in the world, the US dollar offers the most certainty for international traders. However, dollar scarcity in Africa creates artificial inflations, raises the cost of doing business and impedes trade between countries in Africa. To keep up with the ever-growing dollar demand in the economy, African states are faced with the choice of devaluing their currencies or engaging in more extractive industries, exporting raw materials and commodities such as minerals or crude oil, with the expectation of drawing in more dollar reserves to keep the cycle going.

For example, Kenya finds it more economically beneficial to grow flowers for the European export market, using its land, water, and labor resources, rather than trading with neighboring Ethiopia. To trade with Ethiopia, Kenya needs dollars earned from flower exports. Since Kenya can only earn a limited amount dollars due to the scarcity of goods that can be exported for dollars, trade between the countries remains limited.This situation repeats across 54 places in Africa, preventing the continent’s 1.2 billion hardworking people from benefiting collectively.

Africa chasing the dollar in this way has other effects. Since the demand for dollars outweighs the demand for African exports, which in many cases are raw commodities also supplied by many others, the price for these goods is typically suppressed. This situation generally applies to the global south. It is the fundamental essence of the established international system that inherently disadvantages underdeveloped economies into permanent low value added extractive states. African leaders echoed the need to reform the international financial system that perpetuates their exclusion during the Paris Summit on a new Financial Pack this month.

Image 6 27 23 at 5.50 PM
Dollar reserves still account for largest share of central bank reserves across most of the world.

Despite the many challenges and political instabilities, several African economies are potentials for a transformational economic development. South Africa, Nigeria, Egypt, Kenya, Ethiopia, and others possess valuable industries, services, and talents. For example, Egypt and South Africa have an internationally competitive construction sector. Nigeria has a well-developed oil, gas, and plastics industry. Kenya is perhaps the leader of IT and software on the continent. Ethiopia has an advanced aviation transport and logistics industry and is on the way to becoming a green energy exporter.

Nonetheless, in the current format, without access to sufficient dollar reserves, intra-continental trade in these goods and services is handicapped. African dependency on the U.S dollar for continental trade has been a drag on economic integration, hindering economic activity despite the continent’s vast entrepreneurial population and abundant natural resources.

While using the U.S dollar currently offers more transactional certainty, its scarcity in many African countries dampens their trade, creates artificial inflation and raises the cost of doing business. Currency devaluations meant to lure-in more dollars via more exports spike costs of key imported goods, such as fuel, fertilizer, pharmaceuticals, and capital equipment. These also happened to be key inputs that play a major role in increasing productivity on the the African continent.

The increased cost of these inputs adds tremendous inflationary pressure on domestically produced goods and services that Africans consume. For instance, expensive imported fertilizer directly impacts the cost of food, which is persistently the biggest expenditure item for a majority of African households. In an attempt to secure dollar reserves for key imports from advanced economies, dollars needed within Africa dry up quickly. Hence the needs to de-dollarize Africa’s continental and regions trade.

Adopting regional African currencies and reducing dollar dependency will alleviate this pressure and provide for more dollar reserves for trade outside of the continent. Moreover, it will strengthen regional integration, enhance intra-African trade, and reduce dependence on imports.

June, 2023 meeting of The Intergovernmental Authority on Development (IGAD) President Ruto of Kenya stressed the importance of a regional payments system for regional trade in the Horn of Africa.

In addition to dampening intra-continental trade, the reliance on the dollar has also limited the effectiveness of African countries’ monetary policies, as they lose control over their currency’s value and interest rates. This lack of monetary sovereignty hampers the state’s ability to stimulate the economy during crises and can worsen income inequality. De-dollarization of intra-continental trade provides greater control over domestic economic policies, reducing exposure to global financial fluctuations and external shocks, thus promoting economic stability and resilience. However, achieving this requires strong fundamentals and comprehensive reforms.

Recently there have been more serious discussions about enhancing the African Export-Import Bank (AfreximBank), a a pan-African financial institution that plays a pivotal role in promoting and facilitating trade and economic development across the African continent. Established in 1993, Afreximbank works to enhance intra-African trade, support African businesses, and drive economic integration. It provides a wide range of financial services, including trade finance, project and infrastructure financing, export credit insurance, and advisory services. With its focus on promoting sustainable development and regional integration, Afreximbank has become a key player in driving economic growth, fostering innovation, and unlocking Africa’s vast trade potential.

The African Union (AU) recognizes this issue and aims to resolve it through its Agenda 2063, particularly with the Pan African Payment and Settlement System (PAPSS). PAPSS aims to make Africa’s 42 currency zones interoperable, providing economic access similar to the EU, NAFTA, and Mercosur. However, implementation challenges persist. In the meantime, short-term solutions have been proposed. One idea is to create five intermediate monetary zones corresponding to Africa’s geographical regions.

PAPSS, which was launched in January 2022, addresses complex cross-border payments by improving efficiency and promoting seamless transactions. It facilitates instant transfers of funds between African countries, reducing costs and complexities associated with foreign exchange. By decreasing reliance on foreign currencies during settlement, PAPSS improves the quality of individual African currencies and reduces turnaround time for intra-African transactions, enhancing customer satisfaction and intra-African trade.

De-dollarization is complex and will take time. It requires confidence in domestic currencies, structural reforms, and addressing underlying issues like fiscal mismanagement and corruption. Transaction costs, such as converting dollar-denominated debt and contracts into local currency, must also be considered.

It is important to note, successful de-dollarization depends on strong macroeconomic fundamentals, political stability, and effective governance. These are areas each country should assess and make progress in as it tries to meet the benchmark goals of Agenda 2063. Specific circumstances and long-term development goals must be underscored before deciding on adopting or relinquishing the use of the dollar. Such comprehensive and transformational reforms require pragmatic scalable approach, such as PAPSS and AfreximBank. A continental currency, regional economic integration, and trading blocks must function simultaneously

While it is true Africa remains the most underdeveloped continent, it also has the most potential for growth. According to World Bank data, Africa’s basic parameters such as life expectancy, infant mortality, access to education and healthcare have been improving over the past few decades. Coupled with increased incomes and population growth, Africa is on the cusp of a transformative growth. But realizing this potential cannot happen without an integrated intra-continental trade mechanism and infrastructure. To do this innovative financial and political reforms must be made. De-dollarization of intra-continental trade is one such proposal.

South African leader, Ramaphosa summarized Africa’s interest in seeing a reformed multilateral international financial institutions. He also talked about the need for concessional funding of development in Africa as well as mitigate climate change.

Related Posts
%d bloggers like this: