By Ayanda Holo
Introduction
The global financial order is experiencing a profound transformation, marked by the waning dominance of the US dollar and the emergence of alternative economic alliances such as BRICS+ countries (Brazil, Russia, India, China, and South Africa, Iran Egypt, UAE, Ethiopia). This change is crucial for Africa, which has traditionally depended on Western financial institutions for development funding. As the credibility of the International Monetary Fund (IMF) and the World Bank erodes, African nations are compelled to seek new sources of capital and economic partnership.
The present article examines how the decline of the dollar influences Africa’s reliance on external funding, explores the potential of BRICS to reshape Africa’s economic landscape, assesses the risks associated with dependence on BRICS, and analyzes the role of local currencies in enhancing intra-African trade. Based on research from tier one institutions and BRICS Think Tanks, this article examines the potential opportunities that the rise of BRICS offers for Africa amidst tumultuous trade wars framed around current tariffs and reciprocal tariffs. It highlights the importance of a balanced and diversified approach to reduce reliance on Western influence and promote sustainable development and economic sovereignty. It also proposes putting in place strategies that are resistant to economic shocks emanating from trade wars beyond the continent.
The Decline of the Dollar and Its Impact on African External Funding
Erosion of Dollar Dominance
The US dollar has long served as the linchpin of global finance, underpinning trade, reserves, and development lending. However, recent geopolitical developments, including aggressive US financial policies and escalating tensions between major powers, have undermined confidence in the dollar’s stability (Zhou, 2023, Tsinghua University). According to the South African Institute of International Affairs (SAIIA), the mass sell-off of US Treasury bonds by global investors reflects a growing skepticism about the dollar’s long-term viability (SAIIA, 2023).
Consequences for African Funding
Africa’s dependence on dollar-denominated loans and aid has rendered it vulnerable to fluctuations in the dollar’s value and to shifts in Western investor sentiment. The African Development Bank (AfDB) estimates that the continent faces an annual infrastructure financing gap of approximately $100 billion (AfDB, 2022). Traditionally, this gap has been bridged by Western institutions and private investors. However, as the dollar’s appeal diminishes, these sources of funding are contracting, leading to stalled projects and slower economic growth (BRICS Policy Center, 2023).
Moreover, many African countries are already grappling with unsustainable debt burdens, much of it denominated in dollars. Currency depreciation exacerbates repayment challenges, increasing the risk of debt distress (Institute for Economic Research on Innovation, South Africa, 2023). The withdrawal of Western investment, driven by risk aversion and dollar instability, further compounds these challenges, threatening to deepen inequality and stall development across the continent.
BRICS as an Alternative: Opportunities and Mechanisms
Emergence of BRICS Financial Institutions
In response to the limitations of the Western-dominated financial system, BRICS has positioned itself as a beacon of hope for African development financing. The New Development Bank (NDB), established by BRICS, has already disbursed over $30 billion for infrastructure projects, including several in Africa (NDB Annual Report, 2023). The NDB’s willingness to finance projects in local currencies reduces exposure to dollar volatility and aligns with the broader BRICS strategy of de-dollarization (BRICS Research Group, University of Cape Town, 2023).
South Africa’s Strategic Role
South Africa serves as a critical gateway for BRICS investment on the continent. Its mineral and diamond exports, previously reliant on Western markets, are increasingly redirected to BRICS partners such as China and India (SAIIA, 2023). Furthermore, Chinese-led initiatives like the Belt and Road Initiative (BRI) have provided alternative funding streams for African infrastructure, often with fewer conditions than Western loans (China-Africa Research Initiative, Johns Hopkins University, 2023).
Local Currency Trade and Proposed BRICS Currency
BRICS nations are actively promoting trade settlement in local currencies, thereby reducing reliance on the dollar. The potential introduction of a common BRICS currency, as discussed at recent summits, could further erode the dollar’s dominance in global trade (BRICS Policy Center, 2023). For Africa, these developments offer the prospect of more stable and predictable financing, less susceptible to external shocks.
Risks and Challenges of BRICS Dependency
Geopolitical and Institutional Risks
Despite the promise of BRICS, several risks warrant careful consideration. Internal disagreements within BRICS, such as the India-China border dispute, may impede the bloc’s ability to implement unified financial policies (Moscow State Institute of International Relations, 2023). However these countries have maturely managed these risks through consensus, the hallmark of BRICS Characteristic of equal partnership, and respect for each other. Additionally, the institutional capacity of African financial systems to manage non-dollar transactions remains limited, necessitating significant reforms and capacity-building (Institute for Economic Research on Innovation, 2023).
The Role of Local Currencies in Intra-African Trade
Enhancing Regional Integration
The use of local currencies in intra-African trade, championed by both the African Continental Free Trade Area (AfCFTA) and BRICS, holds significant potential for economic integration. According to the United Nations Economic Commission for Africa (UNECA), intra-African trade remains low, accounting for only 17% of total African exports (UNECA, 2022). High transaction costs and currency mismatches are major barriers.
Reducing Transaction Costs and External Vulnerability
By settling trade in local currencies, African nations can significantly reduce transaction costs, mitigate exchange rate risks, and retain more value within the continent (AfDB, 2022). The Pan-African Payment and Settlement System (PAPSS), supported by AfCFTA, exemplifies efforts to facilitate cross-border payments in local currencies, thereby fostering regional value chains and economic resilience (AfCFTA Secretariat, 2023).
Lessons from BRICS
BRICS’ experience with local currency trade provides valuable lessons for Africa. The bloc’s efforts to bypass the dollar in mutual trade have enhanced financial autonomy and reduced exposure to external shocks (BRICS Research Group, 2023). If effectively implemented, similar strategies could transform Africa’s economic landscape, promoting sustainable growth and reducing dependence on external funding.
Conclusion
The decline of the dollar and the rise of BRICS represent ought not be regarded as point of crisis. Instead, it shoud be regarded as a pivotal moment for African development financing. While the erosion of dollar dominance poses immediate challenges—such as reduced access to traditional funding and heightened debt risks—it also creates opportunities for Africa to diversify its financial partnerships and assert greater economic agency. BRICS offers promising alternatives in the form of CRA and PAPSS through the support of the AfCTA and institutions like the NDB, local currency trade, and potential new currencies. However, the risks of overdependence, geopolitical tensions, and institutional weaknesses must be taken into consideration.
In order to navigate the current complex landscape, African nations ought to pursue a strategy of diversification: strengthening intra-African trade, building robust local financial systems, engaging with a broad array of global partners and prioritize BRICS+ countries. The use of local currencies in trade, supported by initiatives like AfCFTA and PAPSS, can play a continental transformative role in fostering regional integration and economic resilience.
Ultimately, Africa stands at a crossroads. The choices made in the current era of financial realignment will determine whether the continent emerges as a sovereign actor in a multipolar world or remains subject to external dependencies. By harnessing opportunities presented by the BRICS framework while guarding against new forms of dependency, Africa can chart a path toward sustainable and inclusive development.
References
1. African Development Bank (AfDB). (2022). African Economic Outlook 2022.
2. AfCFTA Secretariat. (2023). Annual Report.
3. BRICS Policy Center. (2023). BRICS and Africa: New Pathways for Development.
4. BRICS Research Group, University of Cape Town. (2023). BRICS and the Global South: Financial Alternatives.
5. China-Africa Research Initiative, Johns Hopkins University. (2023). Chinese Lending and African Debt Sustainability.
6. Institute for Economic Research on Innovation, South Africa. (2023). Africa’s Financial Systems in a Multipolar World.
7. Moscow State Institute of International Relations. (2023). Geopolitics of BRICS: Challenges and Prospects.
8. New Development Bank (NDB). (2023). Annual Report.
9. South African Institute of International Affairs (SAIIA). (2023). Africa and the Shifting Global Financial Order.
10. United Nations Economic Commission for Africa (UNECA). (2022). Intra-African Trade and Regional Integration.
11. Zhou, X. (2023). The Future of the Dollar and Global Finance. Tsinghua University.
.){kind=link}