The Brics nations (Brazil, Russia, India, China, and South Korea) are also working on a common currency for the bloc, effectively moving away from the dollar.
On the continental level, the drive to de-dollarise stems from the scarcity of US dollars due to high demand, significantly impacting trade.
Most African countries rely on imports for essential goods and services such as machinery, raw materials and technology.
Dollar shortages cause difficulties settling import bills, leading to delays and restricted imports.
The Pan-African Payment and Settlement System (PAPSS) was developed by the Africa Export and Import Bank (Afreximbank) to address this problem.
This system facilitates cross-border transactions in local currencies, enhancing intra-African trade.
The goal is not to abandon the dollar completely but to boost continental trade using African currencies, streamline transactions and promote economic integration.
Despite the benefits, such as reduced dependency on the dollar and enhanced economic cohesion, challenges include currency stability and geopolitical factors.
The decision to adopt alternative currencies for international trade is influenced by economics and geopolitical considerations, where national interests play a crucial role.
The potential benefits for Africa include increased trade efficiency and economic resilience, while challenges may involve managing exchange rate volatility and ensuring widespread adoption of new systems.
Is it time Africa departed from the USD and relied on its strongest and stable currencies for trade.
The Optimum Currency Area (OCA) concept may benefit African countries, as their economic integration and similarity make a single currency or fixed exchange rate regime advantageous.
However, achieving an OCA is complex due to diverse economic structures, fiscal policy harmonisation, macroeconomic convergence and external shocks.
Significant progress in economic integration and policy coordination is required, alongside a comprehensive assessment of the costs and benefits of such a monetary arrangement.
Challenges persist despite the signing of the African Monetary Union Protocols a decade ago.
The lack of substantial progress highlights the difficulties in de-dollarisation.
The protocols require the full implementation of the African Customs Union and common market, but these have yet to be fully realised. Non-tariff barriers continue to impede progress.
Additionally, African countries' heavy reliance on imports necessitates significant dollars to finance these transactions.
High debt levels, mainly external debt denominated in dollars, further complicate the transition.
Reducing dollar-denominated debt in favour of local currencies is challenging, as internal borrowing is fiscally impractical, and attracting foreign investors willing to lend in local currencies is difficult due to their preference for the dollar.
Adopting a common African currency or promoting stable African currencies can significantly facilitate cross-border trade and investment by eliminating currency conversion needs and reducing exchange rate fluctuations, which can lead to financial losses.
Additionally, a single currency streamlines transactions, saving time.
A common currency enhances competition among firms, potentially boosting industries and encouraging regional specialisation.
It also increases sovereignty by reducing vulnerability to US government sanctions.
A unified currency fosters price transparency and curbs illegal trade, especially at porous borders, ensuring countries collect due revenue.
De-dollarisation reduces African states' vulnerability to external economic shocks, such as fluctuations in the US dollar value or changes in US monetary policy.
By diversifying currency holdings, African countries can better shield their economies from such shocks.
Furthermore, de-dollarisation supports domestic industry development by decreasing reliance on dollar-priced imports, making local goods more competitive.
Promoting African currencies also enhances financial inclusion, allowing businesses and people to participate more actively in economic activities, particularly in rural areas where dollars are scarce.
This increased access to the formal financial system and banking services fosters broader economic engagement.
To successfully achieve de-dollarisation, Africa must address critical issues by implementing appropriate protocols, dismantling trade barriers, and enhancing macroeconomic indicators.
Steps should be taken to reduce dollar-denominated debt, attract investments in local currencies, and strengthen regional financial institutions.
Collective effort and coordination among member countries are crucial for a smooth transition to de-dollarisation and realising its benefits.
It is essential to prioritise the full implementation of protocols establishing the African customs union and common market by addressing non-tariff barriers and ensuring the unrestricted movement of goods, services, and people within the region.
Enhancing regional integration will create a favourable environment for de-dollarisation and facilitate cross-border trade.
African States should meet the macro-economic convergence criteria outlined in the African Monetary Union protocols to progress towards a monetary union and effective de-dollarisation.
Efforts to lower inflation, narrow fiscal deficits, and increase the tax-to-Gross Domestic Product ratio will enhance macroeconomic stability and convergence, laying a solid foundation for de-dollarisation.
Addressing high external debt and the scarcity of financial institutions lending in African currencies, requires establishing regional financial institutions capable of providing loans in local currencies and attracting foreign investors willing to lend in stable African currencies.
Dr Odhiambo teaches Actuarial Science at Meru University of Science and Technology and is an AI Post-Doctoral Researcher and a Public Policy Analyst. [email protected] X: @Dr_Jodhiambo
