Necessity is the mother of the invention may be a cliché, but cutting across millennia, that oft-repeated phrase resurfaces at regular intervals. This time around, when the world is undergoing a traumatic trajectory let loose by the Russian-Ukraine war, the need for a new financial architecture, more than anything else, is felt across the world.
What could be the reasons for that? This can be attributed to the weaponization of the dollar, a fact which has been silently felt ever since the Bretton Woods agreement was signed leading to the creation of the IMF, where the Greenback was treated as the major currency for conducting international transactions. The dollar rules the roost between then and now, accounting for more than 88% of global trade transactions. The remaining 12 percent is shared among an assortment of currencies like the Renminbi, Euro, and Yen. Implicit in the weaponization of the dollar is the array of disruptions and heartburns that it has been causing from time to time.
The question being asked from different countries including from Africa is how much of their supply chain disruption or economic instability is due to the weaponization of the dollar. Look at the heavy import bill incurred by the African countries for bringing to the shore essential goods like food grains, healthcare products, and several other goods. Analysts maintain that more than 90% of the imports are dollar-denominated. If the local currencies lose their exchange values against Greenback, importing countries have to part with higher amounts for imports. It will have three spinoff effects. Foremost is the drain on the foreign exchange reserves. A comfortable foreign exchange cover to meet at least three to four months’ imports gives a measure of stability to the domestic economy. The second is the inflationary pressure since the importing government or the private sector would pass on the increased prices to the consumers. The third factor is the higher cost of servicing the external debt of countries, which of late, zoomed to dizzy heights in most African countries. Apart from that, a devalued currency against the dollar would squeeze export receivables since the host country’s export could fetch only lesser dollar terms for the same export unit.
Perpetration of these woes was felt all across the world but largely felt across the continent and countries like Sri Lanka, which were at the mercy of the dollar. That is why the coinage weaponization of the dollar, reckoning the insurmountable instabilities and havoc that the dollar can create. There are well-crafted policies being pursued by countries to insulate the onslaught of the dollar at least partially. A case in point is India establishing a Special Rupee Vostro Account for settling trade transactions among countries, which have agreed to be in the group. African countries included in the list are Tanzania, Kenya, Uganda, Botswana Mauritius, and Seychelles. The list is expected to widen as the scheme picks up. Some of the larger trading partners included in the list are Russia and UAE in India’s de-dollarization effort.
There are some remarkable successes in taming the dollar. Foremost is the Chinese example. More than 49% of the Chinese cross-border payment is settled with yuan and is poised to assume a higher proportion as countries like Bangladesh, Russia, and Laos are keen to expand their involvement in the grouping. Indonesia has a similar arrangement with South Korea and Australia for settling debts in their respective currencies. South East Asian countries have a trailblazing record of settling debts and transactions in local currencies.
To imagine that the dollar’s predominance will vanquish in the coming years or decades will be wishful thinking. However, its overwhelming importance can be reined in so that the havoc it causes can be minimized if not eliminated in the long run, even if it calls for a new Bretton Wood oversight architecture. As analysts opine that new initiatives to settle trade transactions in local currency can be only an additional window and not totally shutting door transactions.
What should be the takeaway for the African countries? Should it start a local currency settlement on the lines that India or China has launched? When the tariff walls are lowered since the operation of the free trade agreement, it can be assumed a conducive ecosystem prevails in the continent to have a payment settlement system among the group of countries in the region, which can be gradually enlarged depending on the progress the system would make, fully realizing that the dollar days are still not over. But the moot point is which should be the currency to be picked; Rand or Naira or a new currency to be created for this, acceptable to all. Yes, it is easier said than done since there are hard issues to be addressed. To begin with, it will be expedient for African countries to join an already existing arrangement; say India’s new initiative of Special Rupee Vostro Account, as it is gaining some momentum.
