African Nations' Use of USD Hinders Solutions to Internal Challenges: Expert
Reducing the dominance of the US dollar is widely discussed by the experts and political figures from the countries of the Global South. States are looking for ways to increase the use of local currencies instead of the US dollar. The necessity of this transition has been repeatedly highlighted by the developing countries.
SputnikThe use of US dollar by the African countries limits their ability to cope with internal challenges, Ronney Ncwadi, Professor and Director of the School of Economics, Development studies and Tourism at the South African Nelson Mandela University, told Sputnik Africa.
"African countries using the US dollar have little control over their own monetary policy. And this restricts the ability to respond to domestic economic challenges such as inflation and/or recession, as they are influenced by the US monetary system," Ncwadi said.
The expert also noted that reliance on the
US dollar "brings about the external dependency on the stability and policies of the US financial system."
"As always, as this expression says, when the US sneezes, everybody catches the fever and depending on the US dollar currency exchange rate does dampen the growth in our African continent," the professor stressed.
In addition, he highlighted that dependence on the US currency increases Africa's "vulnerability" to global economic crises, deteriorates the continent's trade efficiency and its competitiveness.
"It makes us vulnerable to global economic shocks, and also it makes our trade inefficient. I also have to mention that it does make trade inefficient because we conduct trade in foreign currency, that US dollar. The inefficiencies lead to delays, it leads to complexities in cross-border transactions. It requires digital documentation and, of course, approval processes. So our competitiveness is affected," Ncwadi explained.
Moreover, the expert emphasized that reliance on the US dollar puts Africa "at risk of a lack of currency sovereignty," "limits" the countries' sovereignty and hampers regional economic integration.
"It hinders the efforts to promote and stabilize the local currency. And also it does limit economic integration because we use the common currency, such as the US dollar, it hinders regional economic integration efforts within Africa, and it discourages intra-african trade and economic cooperation. So, overreliance on the US dollar carries huge disadvantages for African countries' development," the professor underlined.
Apart from this, according to him, the use of US currency implies "high transaction costs" due to fees for currency exchange and international banking services.
"Using the US dollar often involves multiple currency conversions and the involvement of foreign correspondent banks and this results in high transaction costs including fees for currency exchange as well as international banking services," the expert underlined.
Along with the mentioned drawbacks of the US dollar dependence for the continent, Ncwadi named exchange-rate risks, adding that "fluctuation in the value of the dollar impacts on the cost of imports and exports," which, in turn, "leads to instability for businesses and governments."
Joining PAPSS Expected to Increase Kenya's Regional Trade
Last Friday, the Central Bank of Kenya officially joined the Pan-African Payments and Settlement System, a financial market infrastructure, which allows making payment transactions
across Africa.
Commenting on the benefits of this move for Kenya, Ncwadi underscored that it will boost the country's regional trade and facilitate the financial inclusion of the Kenyans, as well as "make [the state] attractive in terms of foreign investment."
"PAPSS becomes even more relevant because this system is going to help Kenya particularly enhance its regional trade. It's also going to enhance financial inclusion as it is going to enable more Kenyans to be included, even those that are in the rural areas. They will be able to access and benefit from the financial services as cross-border transactions become more accessible. It's also going to make Kenya attractive in terms of foreign investment, in that people will find it easier and less costly to conduct financial transactions with Kenya," the expert revealed.
The professor went on to say that PAPSS will "help Kenya to stabilize its currency," adding that it will provide the country with opportunities to enhance its cooperation with other African states.
"I have to mention, as well, that that system is going to help Kenya to stabilize its currency as it participates in PAPSS. It is also going to make Kenya's currency remain viable and easily convertible in the context of regional trade and settlement. I must also say that the PAPSS is going to align Kenya more so with the broader African financial integration systems and initiatives that are already taking place in Africa, and that will in fact lead to more opportunities for collaboration as well as partnership with other African nations," he noted.
Key Factor in Promoting Trade in Local Currencies
In addition, Ncwadi stressed that the system will "play a crucial role" in the transition to
trading in local currencies within the continent by offering for local businesses "cost-effective platform for currency conversion."
"Now, how will this happen? The currency conversion, firstly, the Pan-African Payments and Settlement System is going to provide an efficient and cost-effective platform for currency conversion. Businesses can use this system to convert their local currencies into the currencies of their own trading partners within Africa. This will simplify the process of conducting transactions in local currencies," the expert highlighted.
The professor underlined that the system will provide the businesses with "more transparent and competitive exchange rates for currency conversion," encouraging them to "use local currencies for transactions as they can better predict and manage exchange rates."
"Because at the moment, the exchange rate against the US dollar is very hard to predict and many times it is subjected to high levels of volatility. This is going to help now to stabilize the exchange rates and conversion of the Kenya currency into other local or other African currencies or their trading partners’ currencies," he added.
According to Ncwadi, this way PAPSS will foster the
reduction of the US dollar dependency on Africa and "minimize the associated currency conversion fees, because every conversion carries in itself some level of fees."
Moreover, the professor emphasized that the system will stimulate the governments of the African nations to "promote the use of local currencies in trade by offering incentives such as tax benefits, reduced protection fees for business."
Speaking about how PAPSS could enhance trading under the
Africa Continental Free Trade Area, the expert noted that the system "is going to ease the process of facilitating cross-border transactions."
"It is going to streamline cross-border payments and settlement within Africa. It is going to make it easier and more efficient for businesses to engage in trade across the continent. It's also going to simplify our transactions and of course encourage more trade at the Africa Continental Free Trade Area," he said.
Furthermore, Ncwadi stressed that thanks to the system, the local companies will be able to save money from exchange-rate fluctuations, "making the products and services more competitive."
The professor also underlined that not only will the businesses be able "to transact in their preferred local currencies" with the help of the platform, but they will also benefit from the speed of the trade transactions.
"I want to say, as well, that it is going to provide a platform for a transparent and efficient currency conversion and exchange system and this will allow businesses to transact in their preferred local currencies. We should reduce reliance on foreign currencies like the US dollar and minimize exchange-rate risks. And of course, it's going to help in terms of speed and efficiency which will enable faster and more efficient settlement of trade transactions which will lead to quicker fulfillment, reduce delays and improve customer satisfaction in cross-border trade," he elaborated.
Ncwadi added that the system will "mitigate all the risks associated with cross-border transactions" and would be advantageous for
intra-african trade, "making it more accessible and cost-effective, reducing trade barriers" and strengthening financial infrastructure.
As for the advantages of PAPSS for the ordinary Africans, according to the professor, the system will help the countries to overcome the financial exclusion of their population.
"The first and most important for the ordinary citizens in Kenya and elsewhere is financial inclusion. Many countries have what we call financial exclusion, where the majority of the people, particularly people like the rural areas and poor, are excluded from financial systems. So PAPSS is going to provide access to formal financial services for individuals who may have been previously excluded from the payment system. This will include rural areas, underserved areas, and it is going to empower them to save and send money and, of course, access credit," he explained.
In addition, the expert noted that PAPSS is going to ensure "a more efficient and cost-effective way to receive the remittances" from the people who have moved abroad to work and send the earned money back to their families at home.
"A lot of African countries depend a lot on people that have left those countries and send remittances back home. So family members depend on these remittances because they have some of their family members that have left and are working abroad. So this system is going to provide a more efficient and cost-effective way to receive these remittances and ensure that more of the money sent, reaches its intended recipients," Ncwadi underscored.
Apart from this, the professor mentioned that the system will also decrease the use of physical cash, "leading to greater financial security and reducing risks associated with theft and loss."
Moreover, he stressed that the local authorities could also resort to PAPSS to "disburse social welfare payments and benefits to citizens more efficiently and ensuring that those who need assistance receive it promptly."
"So, financial inclusion, cost savings, greater opportunities, improved financial security for older Africans, is going to be the name of the game. It has a potential to empower individuals to better manage their finances, access formal financial services and participate more actively in the economy, and ultimately it is going to improve the living standards and economic growth across the continent." Ncwadi summarized.
In conclusion, the expert praised Kenya's inclusion in PAPSS, which is going to decrease Africa's
reliance on the West and will enable the continent to "stand on its feet."
"Businesses are more likely to engage in trade with neighboring countries and also it is going to foster economic growth in Africa. So, yes, we welcome this great move that Kenya has taken to officially join PAPSS, which I think to me is going to help Africa as a whole and the continent and, more and more so, is going to lessen our dependence on the US. And Africa will again stand on its feet as Africa and be able to raise its income without depending so much on the West," he said.