De-Dollarization in Africa: Why National Currencies Still Face a Crisis of Confidence

For years, the idea of African nations ditching the US dollar in favor of their own currencies has been gaining traction. African leaders have voiced strong reasons for de-dollarization, highlighting the need for economic independence and trade autonomy. Think about it – why should countries trade with each other in US dollars when the US isn’t even involved in the transaction? Kenyan President William Ruto articulated this perfectly back in 2023, questioning the logic of Kenya and Djibouti settling trades in USD.

De-Dollarization Hype vs. Reality: Why the Move is Stalling

President Ruto’s remarks resonated deeply, especially across the Global South. But this isn’t a new concern. The dominance of the US dollar, often called dollarization, has been questioned for years. Yet, it never quite sparked enough momentum for real change. For a long time, the US dollar’s global grip wasn’t seen as a major threat, even though some smaller nations pointed out how the US seemed to use its currency power for political leverage.

Everything shifted when the US used the dollar’s might to sanction Russia after the Ukraine invasion. Suddenly, many countries felt vulnerable. The idea that Washington could weaponize its currency became a widespread concern. For nations worried about becoming the next target, de-dollarization – finding alternatives to the dollar – became a logical and urgent step.

Talk about alternatives often centered around the BRICS bloc (Brazil, Russia, India, China, and South Africa). Many anticipated BRICS would launch a currency to challenge the dollar. By late 2023, expectations were high. However, BRICS didn’t deliver a dollar alternative, much to the disappointment of staunch US critics. The lack of a clear plan for a BRICS currency has dampened hopes for a swift end to the US dollar’s reign.

This lack of a ‘silver bullet’ has sent many countries, initially eager to join BRICS and move away from the dollar, back to the drawing board. What does ‘back to the drawing board’ mean in this context?

• Continued Reliance on Bretton Woods Institutions: It means these nations are still engaging with institutions like the World Bank and the International Monetary Fund (IMF).
• Sticking with the Dollar System: It means they are still largely operating within a US-dominated financial system, playing by Washington’s rules.
• Challenges for Sanctioned Nations: For countries under US sanctions, it unfortunately means resorting to less efficient and more costly financial workarounds.

Creating a currency to rival the US dollar is clearly a monumental task. But this begs the question: why is it so difficult? What makes the US dollar so resilient, even among its critics?

The US Dollar: A Safe Haven in a Sea of Volatile Currencies?

The answer might not be about what the US is doing perfectly right, but rather what some of its opponents are struggling with. Let’s look at Africa again. Persistent high inflation in many African nations has led citizens to believe that holding onto their local currency is a risky proposition.

In fact, many African economies are heavily dollarized because people prefer to transact in US dollars rather than their own currencies. Why?

• Global Recognition: The US dollar is universally recognized and accepted.
• Value Preservation: Crucially, it’s seen as a store of value, something many domestic currencies fail to be, especially in high-inflation environments.

When a currency consistently loses value against others, public confidence erodes. Without confidence, a currency struggles to survive. A major confidence killer? Central banks printing excessive amounts of money to cover debts and other expenses.

Pumping money into the economy without a corresponding increase in production leads to one inevitable outcome: inflation. Sadly, this is a common practice in many central banks, including some in Africa, triggering currency crises and pushing people towards dollarization.

So, going back to President Ruto’s question: African traders often demand US dollars because they lack trust in the stability of their own currencies, or those of their trading partners. It’s not about geographical proximity to the US; it’s about perceived stability and value. The US dollar, compared to many African currencies, offers that stability.

Some African governments, like Kenya, have appealed to traders to use local currencies. Others have even banned foreign currency use in domestic transactions. But these bans often backfire, driving transactions underground and hurting local economies. Eventually, many countries are forced to backtrack. Ethiopia, once seen as a BRICS supporter and advocate for de-dollarization, recently reversed its ban on foreign currency transactions.

The Path Forward: Building Confidence, Not Just Rejecting the Dollar

De-dollarization in Africa isn’t just about rejecting the US dollar; it’s fundamentally about building confidence in national currencies. Here’s what needs to happen:

• Sound Economic Management: African nations must prioritize responsible fiscal and monetary policies to control inflation and stabilize their economies.
• Independent Central Banks: Central banks need to operate independently, free from political pressure to print money to finance government deficits.
• Promoting Local Currency Use (Strategically): Instead of outright bans, incentivize local currency use by ensuring its stability and value. Perhaps through policies that reward local currency transactions or make it more attractive for savings.
• Regional Trade Agreements: Strengthening regional trade agreements and payment systems in local currencies can gradually reduce reliance on the dollar for intra-African trade.

In conclusion, while the desire for de-dollarization in Africa is understandable and driven by valid concerns about economic sovereignty, the path to achieving it is complex. Simply wishing the US dollar away won’t work. African nations must address the root cause: the lack of confidence in their own currencies. Until African countries demonstrate sound economic management and build trust in their national currencies as reliable stores of value, the US dollar will likely remain the preferred currency for trade and savings. De-dollarization, therefore, starts at home, with building robust and credible national economies.