DailySun
“We will preserve the US dollar as the world’s reserve currency, despite facing substantial threats. Several nations are moving away from the dollar. If they decide to discard it, they won’t engage in transactions with the United States — we are poised to enforce a 100% tariff on any goods they send.”
These statements were made by then-President-elect Donald Trump during a campaign rally in September prior to his election victory in November. Although Trump’s second term will not begin until early next year, the economic effects of his forthcoming administration on African economies are already becoming evident. For instance, in the wake of the election results, the US dollar experienced a significant uptick against African and other emerging market currencies.
This rise can be primarily linked to Trump’s expected protectionist economic policies. His proposals to raise existing tariffs by an extra 10% on most foreign goods and impose tariffs of 60% or more on Chinese products are anticipated to increase the costs of imports in the US, leading to amplified inflationary pressures and requiring the Federal Reserve to maintain elevated interest rates.
Higher interest rates would likely strengthen the US dollar, as traders gravitate towards the higher yields associated with US assets, boosting the dollar’s value against African currencies. This scenario — marked by declining African currencies and a more robust US dollar, alongside potentially prolonged higher interest rates — would significantly affect the ability of African nations to service their considerable dollar-denominated external debts, making them much costlier in local currency terms. This would complicate financial strategies for heavily indebted countries like Angola and Kenya, obstructing their capacity to sustain high levels of spending through borrowing in capital markets.
Push for Dedollarisation in Africa
Nonetheless, it remains uncertain whether Trump will follow through on his threats of sanctions against nations striving to reduce their reliance on the US dollar. Although existing “dedollarisation” efforts are still in their early stages, Trump’s threats will require careful consideration by African economies weighing this route.
Zambia is one nation actively seeking to decrease its dollar dependence. Last year, President Hakainde Hichilema convened with the vice-president of the Bank of China, Lin Jingzhen, in Lusaka to discuss enhancing the use of the Chinese renminbi (RMB) throughout southern Africa.
As China ranks as Africa’s largest trading partner and main creditor, many influential figures in Zambia and across the continent view the increased use of the renminbi as a natural evolution. Similarly, Kenya’s President William Ruto has championed the use of local currencies for trade within the continent in lieu of the US dollar, as African nations aim to establish themselves as an autonomous trading bloc.
On a broader scale, the BRICS coalition of emerging economies — including South Africa, Egypt, and Ethiopia — has voiced intentions to create a BRICS currency and develop alternative financial systems to challenge the Western-dominated Bretton Woods framework. At the recent BRICS summit in Kazan, members agreed to implement a “BRICS Clear” payment system designed to facilitate settlements and clearing between BRICS nations and partner countries, effectively diminishing reliance on the US dollar for such transactions.
These initiatives are primarily fueled by the aspiration to recalibrate the global economic power dynamics to more accurately mirror today’s multipolar landscape. African nations, along with numerous other emerging economies, seek to reduce America’s influence, which some critics argue has leveraged the dollar’s reserve status to pursue its foreign policy goals through sanctions.
Are the Threats Credible?
Can Trump truly pressure African nations to relinquish their dedollarisation efforts through enhanced punitive measures like increased tariffs? Philip Pilkington, an investment expert based in London, argues that such actions would only heighten Africa’s resolve to eliminate reliance on the dollar for international trade.
“Dedollarisation is already in progress, largely due to the excessive imposition of sanctions by the United States. Any attempt to escalate these sanctions will merely expedite the process of dedollarisation,” claims Pilkington.
“This isn’t a serious proposal, and I doubt it will come to fruition.”
Charlie Robertson, head of macro strategy at FIM Partners in London, also expresses skepticism regarding Trump’s dedication to these plans, particularly as they contradict some of his other declared economic goals.
While Trump has previously suggested that the dollar losing its reserve status would equate to “losing a war” due to the political and economic fallout, he has concurrently maintained that the dollar’s strength in global forex markets is problematic. He has attributed this robust dollar to inflating the costs of US manufactured goods, rendering them less competitive compared to lower-priced alternatives from China and beyond, and for aggravating America’s massive trade deficit.
Promoting a weaker dollar while simultaneously bolstering demand for it by pressuring emerging market economies to continue using it seems contradictory. In fact, Robertson informs African Business that Trump’s proposal to impose tariffs on nations pursuing dedollarisation is “perplexing” as it “contradicts his aim of a weaker US dollar — if he desires a weaker dollar, he should encourage dedollarisation.”
Trade Implications
However, Robertson also suggests that Trump’s plans for imposing substantial tariffs on foreign goods could compel countries to seek alternative trading partners, potentially leading to transactions in different currencies — this could reduce, though not entirely eliminate, the dollar’s dominance.
For example, if Trump decides against renewing the African Growth and Opportunity Act (AGOA), which offers 32 Sub-Saharan African nations duty-free access to the US market for thousands of products, it could result in a larger share of those goods being sold in alternative international markets and potentially settled in different currencies.
“An intriguing scenario for me would be if Trump’s tariffs result in an increased share of global trade occurring outside of the US,” states Robertson. “That could encourage more nations to contemplate using the euro or renminbi.”
As with many of Trump’s proposals, it remains uncertain whether he will indeed implement the threatened extensive tariffs on countries looking to distance themselves from the US dollar. Given his lack of focus on Africa during his first term, it is conceivable that he might not closely monitor any initiatives pursued by African leaders in this regard.
What is more certain is that Africa, along with the global community, is encountering a more fragmented trading environment that could complicate macroeconomic conditions for at least the next four years.
