On 1 July 1944, about 700 delegates from 44 nations gathered in Bretton Woods, New Hampshire. The delegates gathered for the United Nations Monetary and Financial Conference, which would become known as the Bretton Woods Conference. Officially, this conference was held to discuss how to ensure greater political stability in the world and prevent World War III. In truth, a new economic world order was birthed. 

At the Conference, several events of importance occurred. First was the formation of 2 entities; the International Monetary Fund, the body responsible for monitoring the international monetary system, and the International Bank for Reconstruction and Development, later called the World Bank. 

It was also here that the U.S. dollar took the place of gold as the international medium of exchange for global trade. This choice was rationalized by the fact the US economy was, at the time, considered the largest and most stable in the world. Coupled with its economic output, technological and military capabilities, and the because the U.S. financial markets are deep and have high liquidity, few other currencies could come close to matching what the greenback offered.

79 years later, the U.S. dollar accounts for 59% of global foreign exchange reserves. This widespread use of the dollar for international trade also created a network effect that reinforced its position as the leading reserve currency. As more countries increased trade with each other, and more transactions were fulfilled in dollars, it became more convenient and efficient for others who transacted with them to use the dollar too. Other currencies recognized as reserve currencies by the IMF are the Japanese Yen, the Canadian Dollar, the Chinese renminbi, the Euro, and the Swiss franc. The U.S. dollar together with the Euro account for 80% of all allocated foreign exchange reserves [1].

As you read this, the U.S. dollar has considerably risen in value against other currencies on the foreign exchange market. Against the Kenyan Shilling, for instance, the dollar has gained 13% in value within the last 6 months (Jan - June 2023). One of the key factors influencing the rise in the dollar’s value is the increased demand for it in the foreign exchange market. As demand for U.S. dollars increases relative to its supply, its value rises as well, making it more expensive to acquire. The U.S. Federal Reserve has also been on an interest-rate hiking spree, raising interest rates 10 consecutive times in a period of 2 years. Foreign investors seeking higher returns have increased their investments in U.S. assets thereby increasing demand for dollars. Countries on the receiving end of this hike are finding it more expensive to import goods and service debt to international partners. For many emerging countries, servicing debt was already taking the lion’s share of total expenditure even before the dollar strengthened.

Against the backdrop of a global economy that is stretched thin, the dollar’s dominance in global trade is starting to falter, especially in emerging economies, where governments are increasingly seeking ways to reduce reliance on the dollar. Geopolitical tensions escalated by the fallout from the Covid-19 pandemic and the ongoing Russian invasion of Ukraine have also sent countries exposed to U.S. sanctions to seek financial autonomy by trading internationally using other currencies.

The Pan-African Payment and Settlement System (PAPSS)

To supplement AfCFTA commerce, the African Union, in partnership with the African Export-Import Bank (Afreximbank) launched the Pan-African Payment and Settlement System (PAPSS) in January 2022. PAPSS is intended to be a centralized financial market infrastructure that enables efficient and immediate cross-border payments in African currencies.

PAPSS is an ambitious initiative by the African Union, one part of a multipronged approach to enhance intra-African commerce and financial activities. Uptake for the PAPSS system is still low, with less than a quarter of all African countries having enrolled as of 2023. The payment infrastructure intends to establish a comprehensive payment and settlement platform that would allow African countries to undertake trade and financial activities in their respective native currencies[2]. 

Of most interest here is that PAPPS is not attempting to create a currency for the continent in the same way as the Euro is for the Eurozone, but rather to allow all 55 countries to trade amongst themselves using their own local 41 different currencies.

The impact from full uptake of PAPSS to the dollar would be significant. The Society for Worldwide Interbank Financial Telecommunication (SWIFT), which is currently the primary platform for African banks to conduct cross-border transactions, would face an estimated diversion of nearly $5 billion annually as a result of African countries trading in their own currencies.

Headwinds from BRICS 

On another front where dollar dominance is facing strong headwinds, we find BRICS, an international consensus entity launched in 2009, which has been at the forefront of the de-dollarization movement. The group currently consists of 5 members; Russia, India, South Africa, China, and Brazil. More than 20 other countries have reportedly expressed interest in joining the outfit which has accelerated the push to capture more international trade value away from the United States and Europe. During the just-concluded BRICS Summit held in Johannesburg, South Africa, six more countries were invited to join the bloc, among them Egypt and Ethiopia. Other countries which have been invited to join BRICS are Saudi Arabia, Iran, United Arab Emirates, and Argentina[3]. According to BRICS, the current global architecture is unequally dominated by a few hegemonies, marginalizing emerging economies [4]. While none of the currencies from BRICS member states can realistically take the place of the dollar, efforts by the BRICS group of countries will undoubtedly have a huge impact on the future of the dollar in international trade.

While BRICS is a big part of the de-dollarization conversation, the biggest risk for the U.S. dollar lies in the full adoption of PAPSS and the African Continental Free Trade Agreement (AfCFTA). As more and more intra-African trade is conducted using local currencies, the need to hold large quantities of dollars in African foreign exchange reserves should reduce gradually over time. The share of intra-African trade is still low at approx. 18% (2021 data). One reason why this number is so low is due to the splintered nature of the trading blocs the member states are part of. While one member state could potentially be a member of several trading blocs, this setup is not ideal. With the harmonization of all African countries into one market through the AfCFTA, intra-African trade could increase by nearly 40% to over 50% in 2040. AfCFTA alone could potentially reduce reliance on the U.S. dollar for intra-African trade by more than 20% before 2040 [5].

As more African countries enroll into PAPSS, local currencies will continue to gain importance in intra-African trade and finance, gradually reducing the African continent’s dependence on the U.S. dollar. It won’t happen overnight but the wheels are in motion.