What is DeDollarisation
Dedollarisation is reducing the using of the US dollar as the way to do to international trade. About 80% of the international trade is done using the US dollar.
How did the US dollar come the currency for Trade
The Bretton Woods Agreement made the US dollar the reserve currency for trade and has been for more than 60 years. The US became the reserve currency above other currencies due to
the size of the domestic economy,
the importance of the economy in international trade,
the size, depth, and openness of financial markets,
the convertibility of the currency,
the use of the currency as a currency peg, and
domestic macroeconomic policies
At the time currencies were generally pegged to their gold reserves. The US had the largest gold reserves during that period. The Bretton Woods agreement came to an end between 1968 and 1973. Despite the agreement ending, the US maintained its Reserve status due to the size of its economy.
Advantages of being a reserve currency
Being a reserve currency offers massive advantages for the country as Robert Mundell wrote
“Great powers have great currencies.”
The US's reserve currency status gives it the following advantages:
Borrowing costs are lower - the country can finance its own debts in its own currency
They can run a current account deficit, which means the US can have higher expenditures than income in the export market.
International seigniorage which is the profit due the cost producing the currency is lower than the face value of the currency
Increased foreign power as the country can flex diplomatically and militarily
Reserve currency status also has disadvantages particular if alot of people have the currency - a country would need to raise interest rate to maintain value of currency and policy could become more on maintaining reserve status rather than what's good for the local economy.
What is the impact on Africa
The US dollars reserve status makes the dollar overpowered and has massive effect on African development through exchange currency risk.
The money that African economies borrow is denominated in foreign currency such as US dollars "Eurobonds". The Euro in the Eurobonds means debts denominated in another currency not necessarily Euros.
When they is an economic crisis, people reduce thier risk by moving money from emerging economies to the US dollar because of the dollars reserve status. Devaluation of the local currency such as the Ghanaian cedi occurs which means the country needs to generate more to pay buy US dollars to pay its debt. However, a slowing economy results in countries not being able to generate enough revenue which can increase the risk of debt default.
Though a weaker currency is usually supposed to be an advantage for exporters, most trade is denominated in US dollars, so it may not result in cheaper products for foreign buyers are also converting their weaker currency into US dollars.
A stronger dollar tightens trade financing conditions, constraining access to financing for firms. This offsets any improvement in export competitiveness, further dampening foreign trade.
The short to medium term solutions are
African countries raising interest rates to keep their currencies competitive as savers will chase interest rate returns
Using foreign currency reserves to support the local currency which means buying local currency from foreigners to make it look like the local currency is holding or increasing in value.
The long term solution is dedollarization. But in order to dedollarise an alternatives needs the six characteristics described earlier in this post.
What are the alternatives
The Euro - the euro has not managed to experience strong growth and is hampered by its low growth policies. The sovereign debt crisis of Portugal, Italy, Greece and Spain has made investors and traders more cautious about euro has a future currency as well.
A BRICS currency using The Yuan - China is the second largest economy making it ideal as a reserve currency but the following factors make it not an ideal option:
shallow financial market and capital controls which can make using the currency a risk medium for international trade.
Do we want China to have increased influence on African economic policy through interest rate and exchange rate policy
Giving BRICS that power will enable it to have ability to put sanctions just like the US has done.
The Bancor - Keynes and Triffin knowing making a single currency would make that country be a drag on economic growth proposed a special currency e.g. the Bancor by Keynes. The closet form of the Bancor are the IMFs SDR. However without a government backing such a currency it will lack credibility.
Most credible option is having a multicurrency world for example the African Union having a currency, BRICS being another, the Euro, the Asian and the Latin nations which would reduce the dollars influence and exchange risk. Dedollarisation will also benefit the US as the high dollar costs the country jobs and exports which limit the country's growth. Technology such as blockchain, digital currencies, and cloud-based financial infrastructure could drive de-dollarisation in emerging countries like the BRICS nations. For a multipolar world to work strong and consistent policy making is needed.