• Tuesday, July 23, 2024
businessday logo


Economic conversations around the clock

Economic conversations around the clock

Currently, about 58% of the world’s trade is settled in dollars, which is far larger than the euro at 20%, the third-place yen at 5.5%, the fourth-place pound at 4.9%, and the Chinese yuan at 2.2%. Shifts have happened and will continue to happen as China, India, and other countries control more of the world’s trade, and they are not as dramatic as the media makes them seem.

Recently, heavily sanctioned, and isolated, Russia had to find an alternative to dollar-denominated transactions. The new currency needed two characteristics: It had to be relatively stable and minted by a non-sanctioning country. Of the few eligible options, such as the Indian rupee and South African rand, China’s yuan was the only one actively seeking an international role and able to take it on.

The strengthening US currency and tighter financial conditions have had disastrous effects on most African economies

De-dollarization in Chinese-Russian trade

Ruble-yuan trade volume skyrocketed after Russia’s invasion of Ukraine

Explaining the concept of Currency War and Competitive Devaluation?

“Currency war” is not a term that is loosely bandied about in the genteel world of economics and central banking, which is why former Brazilian Finance Minister Guido Mantega stirred up a hornet’s nest in September 2010 when he warned that an international currency war had broken out.

In more recent times, nations that adopt a strategy of currency devaluation have downplayed their activities, referring to them more mildly as “competitive devaluation.”

The US dollar will still be in demand despite the switches

An advantage the dollar has is that it is connected to a deep, liquid, and active securities market, which makes it fast and stable to do business in and protects you from a decent amount of exchange rate risk. The US economy and its monetary credit system are also the most trusted globally; most of the world’s central banks rely on them, regardless of which currency they hold reserves in.

The value of your dollar investment is not tiered to the dollar being a reserve currency

While the dollar’s share of global trade dropped by 13% from 2000 to 2022, the S&P 500 gained over 311% in the same timeframe. Several stocks, like Domino’s Pizza, Telsa, and Apple, have gained more than 1000% in the period. As an investor in these assets, the acceptability of the dollar is not why your investment did well. Your investment did well because it gained value.

Read also: Nigeria’s dollar millionaire club shrinks 30% in a decade

Notwithstanding challenges, the African Development Bank expects growth to stabilize.

The African Development Bank has predicted in a new analysis that despite tighter global financial circumstances, African economies will remain resilient with a stable outlook in 2023–2024.

Africa’s average GDP is predicted to stabilize at 4% in the following two years, up from 3.8% in 2022, according to the report Africa’s Macroeconomic Performance and Outlook (MEO) 2023. The continent, he said, continues to be a gold mine for wise investors around the world, but it needs to work towards achieving higher growth rates, more inclusive economies, and increased resilience to outside shocks.

The stable prognosis forecast for 2023–2024 reflects the continuing policy support in Africa, worldwide attempts to lessen the effects of external shocks, and increased uncertainty in the global economy.” The new publication will offer African policymakers, foreign and domestic investors, researchers, and other development partners an up-to-date, evidence-based assessment of the continent’s recent macroeconomic performance and short-to-medium-term outlook amid dynamic global economic developments. It will be released in the first and third quarters of each year.

It is essential to implement policies that can mobilise and harness private money for development in Africa, he said, to close the continent’s enormous funding gaps. The unfavourable conditions around the world have increased inflation, the expense of debt servicing, and the possibility of debt crisis in developing nations, especially Africa.

The strengthening US currency and tighter financial conditions have had disastrous effects on most African economies.

Due to the United States’ tighter monetary policies in 2022, most African currencies, particularly in those of commodity exporting nations, saw significant value declines against the dollar. In South Sudan, the depreciation rates were 69%, whereas they were 21% in Malawi. The most globally integrated economies of Africa, such as Algeria, Kenya, Nigeria, and South Africa, may still see currency weakness in 2023,

The tightening of international financial conditions, weak external demand, macroeconomic imbalances, restricted revenues and weak investment flows, and political risk aversion related to election cycles are among the main causes of currency depreciations, according to Urama.

He asserted that the budgetary circumstances of African countries have already been strained by the COVID-19 policy responses and support for vulnerable populations against rising food and energy costs amid heavy debt and the effects of climate change. The knock-on consequences of escalating geopolitical tensions, particularly the Russian invasion of Ukraine, are another source of economic headwinds. Price stability is becoming increasingly elusive for most central banks due to these factors.