The global push to reduce global reliance on the US dollar has reached remarkable levels, with both major players such as China and the Brics bloc, and smaller ones such as Kenya, actively seeking alternatives.
Kenyan President William Ruto recently made a powerful statement during an address to the Djibouti parliament, urging African countries to abandon the greenback for trade within the continent. He stressed that the move is not intended to confront the US, but rather to promote more inclusive and open trade.
Dedollarisation refers to a shift from the current global system whereby countries sell US Treasuries and opt to hold reserves in alternative currencies or gold, while using their own currencies for transactions with key trading partners. While the dollar is expected to remain an important international currency, structural shifts are already gradually reducing its dominance.
However, the journey away from dollar hegemony will not be without challenges. In an article titled “A Bank China Built to Challenge the Dollar Now Needs the Dollar”, the Wall Street Journal’s Alexander Saeedy and Lingling Wei assert that the New Development Bank (NDB), established by the Brics partners in an attempt to reshape international finance, is facing significant challenges due to Russia’s invasion of Ukraine, which has paralysed its operations and raised concerns about its financial stability.
Also called the Brics Bank, the NDB has reportedly stopped issuing new loans and is struggling to raise funds denominated in dollars to repay its debts. This stems from the bank’s reliance on the US currency, which has become a significant obstacle. In July 2022 Fitch Ratings downgraded the NDB’s credit rating, citing difficulties the bank faced in accessing dollar bond markets. However, it is worth noting that in May the ratings agency revised the bank’s outlook from negative to stable.
This suggests that Fitch’s assessment of the NDB’s future performance and creditworthiness has improved. But even with these positive developments Saeedy and Wei suggest that Wall Street may be hesitant to lend to it due to its partial ownership by Russia and the Brics countries’ alignment with Russian President Vladimir Putin. The bank apparently had to suspend lending to Russia as a result of the Ukraine conflict, to comply with Western sanctions.
To overcome these obstacles the NDB is reported to be in talks with potential new members, including Saudi Arabia, Argentina and Honduras. However, Saeedy and Wei argue that it is unlikely that these discussions will lead to a significant capital infusion. The NDB’s borrowing costs have rocketed, and its loan disbursements have slowed markedly. When the bank took out a $1.25bn bond in April the borrowing cost was nearly five times higher than its previous borrowing.
The Wall Street Journal article also highlighted the broader challenges faced by China’s strategy to reshape the international order and reduce developing countries’ reliance on dollar-based funding. The difficulties faced by the NDB, as well as those encountered by China’s Asian Infrastructure Investment Bank and its Belt & Road initiative, underscore the complexities and obstacles in China’s efforts to challenge the dominance of Western institutions.
The problem with the Brics Bank is that it wanted to replicate the Washington institutions by financing development projects in dollars. It is only now that it is realising the geopolitical reality that the dollar is, and will always be, deployed as an economic tool. For example, the US alongside its Western allies can leverage its control over the currency to impose economic sanctions on countries or entities they perceive to be violating international norms or acting against their interests.
Other issues pertain to Washington’s substantial influence over international financial institutions such as the IMF and World Bank, which operate in dollars. This allows the US to shape global economic policies and direct financial assistance. Holding the US currency as foreign exchange reserves also gives the US an advantage over the rest of the world with respect to borrowing costs, while the dollar’s acceptance as a global medium of exchange facilitates international trade. The greenback’s prominence in global financial markets grants US financial institutions such as the Federal Reserve and major Wall Street banks significant influence over global financial operations.
It is worth noting that some of the challenges that face the NDB could be temporary setbacks that can be overcome. In May the bank’s president, Dilma Rousseff, announced that plans were afoot to get member countries to supply the NDB with local currency injections. She said for the period up to 2026 the Brics Bank would be required to allocate 30% of its lending in local currencies. Consequently, 30% of the bank’s loan book will be financed using the currencies of its member countries.
SA international relations & co-operation minister Naledi Pandor disclosed in January that the Brics bloc aims to foster a more equitable monetary exchange system to weaken the “dominance of the dollar”. Multiple currencies will therefore be used as reserves and development will in the main be in local currency. Rousseff stressed that this measure would strengthen domestic capital markets and protect borrowers from currency fluctuations, especially in emerging markets and countries whose currencies may not be fully convertible within the existing financial framework.
The dedollarisation of the international financial system would benefit everyone, including Western nations other than the US. European nations launched the euro in the early 2000s as part of a strategy to resist being subordinate to the Americans in global economic affairs. In 2021 the EU also unveiled a plan to elevate the status of the euro as an international currency, aiming to diminish the prominence of the dollar in the process.
Whether the dedollarisation of the global economy leads to a plurality of currencies or “yuanisation” (the internationalisation of the Chinese yuan), as some sceptics assert, the winds of change are blowing away from the Lincoln Memorial.
• Hadebe is an independent commentator on socioeconomic, political and global matters based in Geneva, Switzerland.
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