Africa pays a high price for dollar dependence

https://arab.news/p4qj5

Governments across Africa are rightfully questioning the wisdom of anchoring their countries’ futures to the US dollar. The instinct grows from patterns that have shaped the continent’s financial stability, trade resilience, and growth prospects for decades. A currency that once promised predictability now functions as a vehicle for volatility that African policymakers never signed up for. Each Federal Reserve rate hike, for instance, tightens African credit conditions as if Washington were running monetary policy for Nairobi, Accra, and Lusaka. Dedollarization — reducing reliance on the US dollar for trade, reserves, and financial transactions — speaks to a desire for insulation, bargaining power, and policy autonomy in an era where external shocks arrive with unprecedented regularity. While talk of dedollarization is not exactly new, it has gained traction in recent years, after several African currencies lost nearly half of their value against the dollar. Such depreciations erode tax bases, inflate debt burdens, and push countries toward International Monetary Fund programs that come with significant political costs. Moreover, roughly 70 percent of Africa’s external debt is dollar-denominated. As the dollar strengthens, debt service costs balloon without any new borrowing. In one year alone, African governments paid more than $60 billion in interest on external debt, and a third of that stemmed from dollar appreciation rather than fundamentals. A continent seeking structural transformation cannot tolerate a global monetary system that amplifies domestic vulnerabilities. Naturally, leaders see a mismatch: African economies are diversifying, yet currency arrangements still resemble the 1980s. The dollar’s dominance magnifies inflation pass-through because the region’s import dependence makes exchange rate shocks automatically inflationary even where fiscal discipline is relatively decent. Food imports alone cost Africa more than $35 billion annually, so a stronger........

© Arab News Pakistan