eBusiness Weekly
Elton Thabiso Makwara
The US dollar reign in global trade is a complex interplay of economics, technology, and geopolitics.
As nations explore digital currencies, we’re at a crossroads of financial innovation and traditional power structures.
However, the US dollar hegemony is in question, especially in light of the ongoing Russia-Ukraine crisis. A truly global dialogue is needed to shape the future of money. I am no fan of the greenback, but I have to admit, the US dollar is not going away anytime soon.
We have heard about the upcoming de-dollarisation for decades now. But it never really happens. To understand why and what are the real hurdles to clear for a true de-dollarisation of the global monetary system we need to understand how the US dollar system works first.
In a globalised economic system, you want to trade with as many partners as possible in a seamless way.
When the Global South exports commodities to China and the trade happens in US dollars, the Global South accumulates US dollars.
In other words, today the US dollar is the Global (Reserve) Currency of choice. Statistics shows that over 80 percent of global FX transactions and plus 50 percent of global trades and payments happen in US dollar.
The overreliance on the US dollar as a reserve currency has, in certain instances, led to vulnerabilities and imbalances in the global economy, especially for the Global South. More importantly, in the last 30 years competitors have not been able to alter this massive US dollar dominance.
Against all forecast, de-dollarisation is not happening as per many expected. US dollar just reached an all-time high.
The US dollar is currently used in more than 48 percent of international payment transactions, the highest level in more than a decade. Overall, while marginal de-dollarisation is expected, rapid de-dollarisation is not on the cards.
Well, it is because being the US dollar seems fun and an “exorbitant privilege’’ from the outside. But fulfilling the role of Global Reserve Currency isn’t easy.
Let me start from the asset side. When Zimbabwe exports in US dollars, in a proportion that is more than we spend US dollars to import from the outside, the country accumulates US dollar foreign exchange reserves.
The US dollar enters the domestic banking system, and ultimately the Reserve Bank is responsible for managing this FX reserve buffer.
That means keeping these US dollars safe and liquid. In our monetary system, keeping money safe and liquid means avoiding credit risk and investing in deep and liquid markets that guarantee a painless turnover if necessary.
If it were just about safety and liquidity, you would simply keep the dollars in the reserve account at the Central Bank, and not invest in anything.
However, the US Treasury market stands out as the global leader in this field. The market is as big as plus US$20 trillion in size, liquid and underpinned by a deep repo ecosystem that ticks all boxes. No capital controls, democratic roots and the rule of law reinforce the case.
Most importantly, an ample supply of US Treasuries provides to the rest of the world what they need, a safe and liquid asset where to recycle the USD proceeds from their global trades. As global trades increase, the world needs more Treasuries.
What’s the potential alternative to the USD?
Japan
Its government bond market is plus 60 percent absorbed by the Bank of Japan, and there have been multiple days in a row where no trade have happened in the JGBs (Japanese Government Bonds). So how can you store your FX reserves in such an illiquid market? Japanification of US bonds is inevitable.
Europe
With such a fragile monetary but non-fiscal union, and the only AAA countries potentially able to provide the world with safe collateral is Germany with its German Bunds, but instead it is been sticking to austerity for decades.
Countries, particularly those in the Eurozone, have pursued de-dollarisation to promote the international use of their currency, the euro, in a bid to enhance their global economic standing and secure greater financial autonomy.
BRICS+
You are facing a combination of capital controls (China), US and EU led sanctions (Russia), corruption and frequent episodes of double-digit inflation (Brazil).
No one seems likely to want to take these risks when storing their hard-earned FX reserves accumulated from selling their goods and services abroad.
China and Russia, have sought to diminish the influence of the US dollar as a means of countering perceived American hegemony and mitigating the impact of US sanctions.
The truth is that US Treasuries don’t have a valid competitor as a global vehicle where to invest FX reserves. However, the China led BRICS+ is slowly spearheading the process of de-dollarisation.
China has been attempting to internationalise the renminbi. However, the renminbi’s global footprint is still small despite growing every year, and this will be a long process requiring reforms.
Being the US dollar is not easy, you must provide an ever growing and liquid asset where foreign currency can recycle their FX reserves. And this is also true for the other side of the coin. Debt.
Foreign countries will want to borrow in your currency. US dollar-denominated foreign debt is huge, and it makes an orderly de-dollarisation not more than a fairy-tale.
Entities outside the US have accumulated over $12 trillion of USD debt. This is because to finance global businesses that sell stuff in US dollar, you need USD debt
I can’t stress how important it is to understand this concept. If you want to break this system and “de-dollarise’’, you need to deleverage a $12 trillion debt system.
If the Global South where to walk away from the US dollar global system today, this would hamper its organic inflows of US dollar, and the Global South corporates would be choked under US dollar scarcity as they need to repay and refinance their US dollar debt. If they don’t sell stuff in US dollar, there avenues for US dollar would be limited.
When you de-leverage a debt-based system, you are either bidding up the debt denominator (the US dollar) or you are witnessing tectonic geopolitical events where the world order is at stake.
In such case, either the Global South corporates would be forced to bid for cash US dollar to try and keep up with servicing their US dollar debt or they would have to default on it hence losing any credibility and access to international credit markets.
Should Zimbabwe focus on de-dollarisation?
As the global financial landscape undergoes a transformative shift towards de-dollarisation, developing countries such as Zimbabwe must carefully weigh the potential benefits and risks associated with this transition.
Moving away from the US dollar could reduce Zimbabwe vulnerability to fluctuations in US monetary policy and enhance Zimbabwe monetary autonomy, enabling Zimbabwe to better tailor policy actions that aligns with our domestic economic conditions.
Moreover, the diversification of reserve currencies could provide a buffer against currency fluctuations and capital flow reversals, reducing the likelihood of financial crises and improving overall financial stability.
However, de-dollarisation has devastating costs for Zimbabwe.
As Zimbabwe transition away from the US dollar, the probability of facing a heightened exchange rate volatility is one, which could impact trade, investment, and capital flows.
In fact, Zimbabwe is already facing heightened exchange rate risk, partly due to de-dollarisation policy introduced by
treasury boss Professor Mthuli Ncube in 2019.
Additionally, the development of deep and liquid domestic financial markets, a prerequisite for currency internationalisation, could prove to be a formidable challenge for Zimbabwe given its less developed financial systems.
Furthermore, the potential costs associated with the transition, such as adjustments to existing trade and financial arrangements, may be significant and could strain limited resources. As such, there is wisdom in adopting a prudent and measured approach towards de-dollarisation.
An orderly unwind of the US dollar is a fairy tale
A true de-dollarisation of our system can and will happen over time, but it won’t be orderly. It will come with tectonic geopolitical events and the transition to another system will be very painful. This is why you keep hearing about it, but it never happens.
The US dollar dominance is true only if people trust the US dollar.
De-dollarisation, I think will only occur under a major geopolitical event like war or something that causes people to lose faith in America’s ability to service debt. It will mean an event that reduces the value of the US dollar and people flee it.
Elton Thabiso Makwara
Elton Thabiso Makwara is a passionate advocate for financial literacy. He has strong research interest in financial economics, monetary economics and geo-economics. He writes here in his own personal capacity. For feedback e-mail [email protected] or call 0784460621
