Is de-dollarization getting momentum in Africa?

The idea of a payment platform that would enable African countries to trade with each other using their own currencies is getting momentum, as the system has recently begun operating commercially with nine nations joining so far, according to Afreximbank President Benedict Oramah.

The Pan-African Payment and Settlement System (PAPSS), which is funded by the African Export-Import Bank (Afreximbank), expects to have 15 to 20 countries on board by the end of the year, Oramah said in an interview before the bank’s annual meetings in Ghana’s capital.

The PAPSS system is currently using dollar exchange rates, but Oramah said they are working with central banks to develop a mechanism that would allow the 42 currencies in Africa to be exchanged among themselves.

“We are trying to make intra-African payments more local,” he said. Most of the trade within Africa is done through converting to the US dollar, which creates barriers and costs for intra-regional trade.

PAPSS, along with the African Continental Free Trade Agreement and other initiatives, aims to boost internal trade by removing these obstacles, including the need for intermediaries such as the greenback.

Some African leaders have increasingly advocated for trading in currencies other than the US dollar, which has been the dominant global currency for over 75 years. Many countries, including in Africa, want to trade in local currencies to reduce expenses, avoid sanctions and reshape the global financial system.

For instance, the South African High Commissioner to India has recently criticized the “domination” of the US dollar in the world economy. Also, the President of Kenya, William Ruto, has repeatedly urged African leaders to stop using the US dollar for trade within Africa, and to support the pan-African payment and settlement system, which was launched in 2022.

Using the dollar has some benefits, such as the stability and credibility of a strong, internationally recognized currency, but it also has some drawbacks, such as the scarcity of the dollar in many African countries, which leads to artificial inflation of the value of the currency across the continent, making business more expensive. The devaluation of the currency also increases the costs of important imports like fuel and raw materials, which puts more pressure on the economies.

Some experts say that if African countries used their own currencies instead of the dollar, they would achieve more regional integration. Using regional currencies could improve economic ties and increase trade within Africa and reduce reliance on foreign imports.

De-dollarization can also give more control over economic policies and protect African economies from external shocks and fluctuations in the global financial system, which can make economies more stable and resilient. However, this requires strong fundamentals and comprehensive reforms.

To de-dollarize successfully, African countries need to have solid macroeconomic fundamentals, political stability, and effective governance. African countries that want to de-dollarize must implement comprehensive reforms, including strengthening institutions, improving fiscal management, and promoting transparency.

However, given the fact that the de-dollarization initiative is getting momentum in Africa, Asia and some other parts of the globe, we would witness significant implications for the United States’ long-term influence in the financial, trade and economic spheres.