The US dollar has been on everybody’s lips in various trade forums in Africa. Kenyan President William Ruto has recently questioned the use of the dollar in settling Africa’s intra-trade, and rightfully so.
Nearly all of intra-Africa’s trade is settled using the dollar. This has always meant that settlement of transactions happens in New York, which gives the US the ability to weaponise the dollar against perceived or real enemies, including the execution of economic sanctions against unfriendly nations.
This has, for decades, often triggered the question of an alternative.
The death of the dollar as a reserve currency has dominated street chatters for so many years but it just never seems to materialise.
However, for Africa, bypassing the dollar is not a walk in the park as some would make it look like. There are three major considerations.
First, what percentage of trade is intra-African? Data from Trade Map shows that in 2021, intra-African trade was only 14 percent of total trade with the world. This means that 86 percent of Africa’s trade still goes through the dollar system.
Additionally, intra-African trade is quite regionalised with East Africa being one of the biggest trading bloc. Africa’s borders are still too thick and fraught with high tariffs and transport costs. It will take time and a lot of investment in trade infrastructure to bring the figure down and bypass the dollar.
Second, there is also the issue of legacy bilateral, political alignments and global architecture. You have the Francophone central and West Africa, which is stuck to a single currency pegged to the euro and unable to unshackle itself from the French grip.
You also have the West often dangling trade deals in exchange for certain commitments (carrot-and-stick diplomacy), which includes maintaining the US dollar as the currency of reference. There is also the issue of African governments issuing dollar debts in the global credit markets, which entrenches the dollar.
The financial markets all use the dollar as the reference currency. There are also multi-lateral institutions with their agenda. Somehow in the mid of all these, a capitulation must happen, which makes it harder to bypass the dollar.
Thirdly, bypassing the dollar will require the establishment of a well-coordinated clearing house, which can either be a single or a group of financial institutions, or even a payment platform out to disrupt the status quo. The clearinghouse would then either hold the currencies of all 54 countries or choose to hold the currencies of the top 10 non-dollarised trading countries.
The latter would make more sense and probably would include South Africa’s rand, Nigeria’s naira, Ghana’s cedi, Kenya shilling, the Egyptian pound, French West Africa’s single currency the CFA, Tanzania shilling and Ethiopian birr. It would then need to underwrite trades by providing payment undertakings to the trading parties.
For instance, if a tea seller in Kenya sold tea to an Egyptian buyer, the clearing house provides a guarantee to the seller that the payment will be made promptly as agreed in the local currency. It then, through its mechanisms, debits the Egyptian buyer’s local currency (Egyptian pound) account and remits an equivalent of Kenya shillings to the seller.
Such a tripartite arrangement creates trust among traders and can trigger other innovations around it. Apart from issuing undertakings, the clearing house creates a direct exchange rate between intra-African trading blocs, something which is almost non-existent. This, it achieves through the creation of direct trade relationships between African countries. An example would be exchanging Ethiopian birr for naira.
In the world of trade, the players that build for this and win will be multi-billion dollar companies.
