Left out in the cold, Africa explores de-dollarisation

While the world continues to push for a return to normalcy, the post-COVID-19 period presents profound changes to global economic structures. One of these is the growing momentum behind de-dollarisation – the upending of the US dollars’ hegemonic influence on trade economics and politics. 

Macroeconomic shocks and rampant inflation have drawn attention to the weakness of African currencies relative to the US dollar, and the resultant high cost of foreign exchange on the continent. This has prompted a resurgence of conversations concerning cooperation-based initiatives that would enable countries to trade in their native currencies – without recourse to the greenback.

Empty forex coffers force defaults

The rising cost of debt across the Global South is a principal driver of efforts to reconsider the centrality of the US dollar to international trade and finance. In the decade prior to the COVID-19 pandemic, many governments took advantage of low borrowing costs to issue Eurobonds. However, states found themselves caught out when travel restrictions interrupted economic productivity and trade, and drove up the cost of refinancing loans. 

In 2021, Zambia became the first to default on its external debt in the aftermath of the COVID-19 pandemic. While some observers had long predicted sovereign default given the Lungu government’s penchant for largesse, the trigger was a drop in exports and economic growth that resulted in public debt accounting for 130% of GDP. Locked out of global capital markets as investors sold off Zambian debt, the government had no choice but to default.

The start of the Ukraine War in 2022 upended hopes of a measured return to the economic norm, forcing up the cost of key commodities from energy to grains, and driving new fears of defaults. Ghana – one of the first African nations to issue a Eurobond, in 2007 – sought to restructure its domestic and foreign debt in November 2022, before eventually defaulting the following month. Ghana’s pain confirmed the emerging crisis, with at least 20 other African countries in – or at risk of – debt distress. 

No greenbacks left for imports

Dollar scarcity has become more acute in East Africa in 2023, with Kenya the first to show signs of a serious crunch from the beginning of the year. The country’s US dollar reserves have reached an eight-year low, with import cover dropping to 3.69 months – below the East African Community’s (EAC) four-month requirement. The dollar scarcity is caused by a flurry of factors, including the repayment of loans incurred during the previous administration, the impact of the pandemic on key exports and tourism, and an overall decline in remittances – Kenya’s current largest source of forex.

As banks tightened their forex offerings, a regional parallel market emerged to meet private sector demand. Kenyan companies traded covertly with hotels and aviation firms flush with dollars following the recent recovery of international tourism, as well as companies in neighbouring countries. This included Tanzania, which only revealed its own dollar shortage in June after introducing new capital control regulations, including clamping down on black market currency trading. Rwanda has also taken action to stem the parallel market, issuing a new directive in May that reiterates the criminality of unlicensed forex dealing.

Dollar dependency double-bind

The no-nonsense response to emerging black market trading in the EAC is warranted, considering the cyclical impacts an established parallel market would have, and the difficulty of rooting out illegal trading faced by other countries. Neighbouring Ethiopia faces a more harrowing situation, with its foreign reserves believed to be under USD 2 billion, or 0.6 months of import cover. Ethiopia is another African sovereign seeking to restructure its international debt, having approached foreign lenders in 2021.

The country faces the same difficulties as EAC economies, further compounded by the two-year war in its northern regions which saw exports decline due to the conflict and ensuing sanctions, while increased military spending drove up imports and public debt. These factors compounded long-standing structural issues, including the strong dollar black market – where the USD has traded at upwards of ETB 100 since September 2022, while the official rate continues to sit at around ETB 53. 

Ethiopia faces mounting pressure from Bretton Woods institutions to liberalise the forex market in order to let rates converge but continues to resist an immediate unpegging due to the feared impact of currency devaluation on its debt obligations. Efforts to crowd in foreign currency from local firms has stifled the liquidity of banks in the face of the imminent entry of foreign competitors. Regular crackdowns on the black market to facilitate convergence have proven futile, instead exposing complicity by government officials and the private sector.

Across the continent in West Africa, another large, federated state faces a similarly strong and widely normalised forex black market. Nigeria is another useful case study of the dangers that dollar dependency and scarcity can cause, and the daunting task of forcing rate convergence once the parallel market is well-established. Mostly linked to the country’s intimidating import dependency – including its reliance on refined petroleum products despite being a major crude producer – Nigeria’s central bank kept its rates pegged from 2016 until 14 June. 

The new administration’s decision to roll out a managed float of the naira has seen the biggest currency devaluation in its history, with the official rate against the US dollar falling to NGN 632 from NGN 461 within a day. Despite this, the parallel market has maintained its strength, only weakening slightly from NGN 760 to NGN 755 in the same period. The devaluation has caused government debt to increase, including the cost of servicing the government’s USD 41.7 billion foreign debt. 

Re-balancing the books

As progress towards debt restructuring for Chad, Ethiopia, Ghana and Zambia under the highly-anticipated G20 Common Framework continues to stall, African leaders are looking for solutions to curb the need to fall back on such extreme measures. One of the most obvious solutions is reducing import dependency, such as Dangote’s plans for Nigeria’s first functional refinery in decades, however, the need to invest in local industry will be costly in both money and time – including dollar-heavy capital expenditure. 

A more immediate solution has emerged in the global trend away from the dollar, with major economies, including the UAE and India, declaring their openness to circumventing its use in trade. In March, Kenya signed a deal with Saudi Aramco, the Emirates National Oil Company (ENOC), and Abu Dhabi National Oil Company (ADNOC), enabling oil marketers to pay on credit and in shillings to reduce the demand for US dollars. In the same month, Tanzania became the 18th country to join the Reserve Bank of India’s initiative to enable bilateral trade in native currencies.

African initiatives are also emerging, as the African Continental Free Trade Area (AfCFTA) begins to move towards full operationalisation. Leaders across the continent are rallying for increased intra-African trade, and Afreximbank has presented its Pan-African Payments and Settlement System (PAPSS) as a solution to minimise bottlenecks in cross-border payments. PAPSS enables countries to trade directly in their own currencies rather than hinging on the dollar, and after successful pilots expects to have at least 15 African countries integrated by the year’s end, as well as future plans to include the Caribbean Community (CARICOM).

Fragmentation and cooperation

While the US remains confident that no alternatives currently exist to displace the dollar’s role in global reserves, Treasury also expects the greenback’s dominance to slowly decline, citing a “natural desire to diversify”. The European Central Bank has also acknowledged the rapid shifts in trade policy, warning that regulators should be vigilant to the “fragmentation” of the global economy. In Africa, this fragmentation has emerged as a renewed push for international and intra-African cooperation, as leaders push to reduce barriers to trade, payments, and travel, amongst other key issues. 

The Ukraine War has accelerated plans for a BRICS currency union, backed by the Brazilian real, Russian ruble, Indian rupee, Chinese renminbi, and South African rand. Some have dismissed the initiative as idealistic and overly ambitious – with pointed criticism lobbed at the rand’s ability to serve as a reserve. However, plans for a launch in August are seemingly undeterred and BRICS is actively exploring plans to broaden its membership, with reports of two East African nations and one West African country – all unnamed – expressing interest in joining the trade bloc.

Kenyan President William Ruto’s push for increased adherence to PAPSS – as well as a more ambitious call for a single African currency! – has seen the media draw quick comparisons with the likes of Muammar Gaddafi. However, the current African context is arguably more complicated than the one that informed Gaddafi’s vision, and as always, the proof of the pudding remains in the eating. 

Barriers to the implementations of older and more localised initiatives have seen endless delays, such as the EAC’s Monetary Union which has been pushed back to 2031, as officials continue to argue over which country would host the central bank, while failing to agree on fundamental policy issues.This draws doubts over the continent’s ability to effectively rally behind pan-African initiatives amongst competing priorities, although mounting economic pressures may force their hand. 

About the author

Jasmine Okorougo is an Associate Consultant at Africa Practice with a special focus on political economy and digital financial service developments across sub-Saharan Africa. She can be reached at [email protected].