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De-dollarisation: defying the dominance of the US dollar?

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Picture: ANA file – Almost half of global trade is financed in dollars, most of the world’s loans and debt securities are pegged in dollars while an overwhelming 90 percent of the transactions in the forex market involves the buying and selling of dollars, the writer says

By David Monyae

Since the Bretton Woods Agreement of 1944 at the end of World War II, the world has been operating under a dollar-based global financial system. That year, 44 countries represented at the summit agreed to create a new system of exchange rates that would see each country peg the value of their currency against the dollar.

The US agreed to support the global circulation of dollars with its substantial gold reserves. Although the system has changed since then, the dominance of the US dollar in the global financial system is still not in dispute. On average the world’s central banks hold about 62 percent of their foreign exchange in reserves ahead of other leading reserve currencies such as the Euro, Renminbi, Yen, Australian Dollar and the British sterling pound.

The central banks use their US dollar reserves to pay for their imports, service their country’s debts, regulate the value of their own local currencies and also bail out their economies in times of crisis. This has seen the dollar being labelled the world’s reserve currency. Countries such as China, Japan and Russia have some of the biggest US dollar reserves at US$3.1 trillion, US$1.2 trillion, and US$444 billion respectively.

Almost half of global trade is financed in dollars, most of the world’s loans and debt securities are pegged in dollars while an overwhelming 90 percent of the transactions in the forex market involves the buying and selling of dollars. Some of the world’s most traded commodities like oil are predominantly paid for in US dollars. The US dollar has been able to maintain its dominance because of the US’s large financial markets, productive economy, stability, and high liquidity.

However, the dominance of the US dollar as the world’s leading reserve currency has given the US significant leverage. Washington can use its control of the US dollar to block any country or firm from accessing the US financial system to conduct international trade and process transactions. For example, countries such as Russia, Iran, Sudan, and Zimbabwe have been slapped with financial sanctions that have made it difficult for them to access US dollars to conduct international trade or service their debts.

Moreover, the 2008 financial crisis, the US’s increasingly polarised political environment and that country’s incompetent handling of the Covid-19 pandemic have undermined confidence in the US dollar. This has led other countries around the world to consider reducing their dependence on the dollar and to explore alternatives, a phenomenon economists have called de-dollarisation. For example, the Shanghai Cooperation Organisation (SCO) which has China, Russia and India – some of the world’s biggest economies – is actively promoting the use of local currencies and non-US payment settlement systems in cross-border transactions.

China has signed currency swap agreements with members of the SCO including Uzbekistan, Kazakhstan, Tajikistan, and Pakistan among others which would see them conducting trade in their own currencies. Since the imposition of financial sanctions on Russia by the US and the European Union (EU) following its invasion of Ukraine, Moscow has accelerated efforts to conduct its international trade in the Russian rouble and the Chinese yuan.

Even before the war, Russia and China had signed the Sino-Russian Financial Alliance in 2015 to try and promote the use of their respective national currencies in their trade with each other. The impact of the agreement has become increasingly visible over the years. The proportion of China-Russia trade transactions that use the yuan have increased from just over 3 percent in 2014 to almost 18 percent in 2021.

In Latin America, the biggest economies in the region, Brazil and Argentina have been mulling the possibilities of de-dollarising their trade for a while by using a common currency.

Presidents Alberto Fernandez of Argentina and Lula da Silva of Brazil wrote a joint article in January wherein they stated their desire to consider a common currency for South America. They reasoned that the common currency would reduce operating costs, avert their vulnerability to US sanctions, facilitate trade and financial flows and advance economic integration in South America.

However, the two countries’ hugely different levels of inflation, interest rates and debt present a potential stumbling block in the creation of a currency bloc. Moreover, the BRICS countries (Brazil, Russia, India, China and South Africa) who collectively control more than 25 percent of the global economy and are home to over 40 percent of the world’s population have also considered creating an alternative reserve currency to the dollar. The common currency would be based on the basket of the five countries’ currencies and would expedite international payments and boost trade between them.

During his African tour in January, the Russian Foreign Minister Sergei Lavrov reiterated that BRICS was seriously considering setting up a common currency and that this matter would be discussed at the BRICS Summit to take place in South Africa in August.

A common currency has also been on the radar of Africa’s plans since African leaders signed the Abuja Treaty in 1991 with plans to create an economic and monetary union with a single central bank. It was believed that the common currency would foster and accelerate regional integration and promote economic growth by reducing transactional costs in trade and eliminating the currency convertibility challenge.

As such, it is clear de-dollarisation is on the agenda of many countries in the world who are wary of the unilateralism of the US. While the reasons are compelling, it remains to be seen whether the idea of de-dollarisation will materialise. It will certainly not be an easy task to establish alternative reserve currencies.

South Africa and Africa should fully understand that these global developments will have a huge impact on the Continent. The global order is undergoing gradual change that requires Africa’s full participation. The post 1945 world order led by the US and the western world remains on a shaky grounds.

However, BRICS in its current configuration does not constitute significant anti-hegemonic force to usher a new world order. Therefore, expanding BRICS to include Algeria, Turkey, Iran, Saudi Arabia and Argentina will strengthen BRICS’ voice to speak on behalf of the entire developing world.

David Monyae is Associate Professor of International Relations and Political Science, and is Director of the Centre for Africa- China Studies at the University of Johannesburg

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