THE KWACHA AND DE-DOLLARISATION
By Antonio Mourinho Mwanza
1. What is De-dollarisation?
Dedollarisation is “a process of substituting US dollar as the currency used for (i) trading oil and/ or other commodities (i.e. petrodollar), (ii) buying US dollars for the forex reserves, (iii) bilateral trade agreements, and (iv) dollar-denominated assets.”
2. Major economies in the world including Brazil, Russia, China, India, South Africa (BRICS), the Eurozone and France have begun the process of de-dollarisation. These countries are now using other currencies such as the Yuan, Roubles, Rupees etc and not the dollar for bilateral and multilateral trade.
This process was triggered by the Russia-Ukraine war after the imposition of economic sanctions by the western block against Russia.
During his recent visit to China, Brazil’s President Luiz Inacio Lula da Silva criticised the US dollar’s role in the world economy and urged the BRICS and other nations to de-dollarise. Equally, French President Emmanuel Macron while visiting China joined the chorus, emphasising that Europe must move away from the use of the U.S. dollar.
More countries are now ganging up to stop America’s hegemony of the global economy and international trade by moving away from their dependence on the dollar a unit of trade or medium of exchange.
3. The process of De-dollarisation has resulted into reduced demand for the dollar as more and more countries are now using other currencies to buy and sell strategic commodities such as oil and gas.
It goes without saying that this move is making the dollar to lose its value in a lot of countries, Zambia included. This coupled with the tax-payments for the first quota, the IMF Staff-Level Agreement on the First Review of the Extended Credit Facility, depressed economic activities which has resulted in very little demand for the dollar as very few people are trading, as well as the decision by the Central Bank to tighten liquidity through the increased Statutory Reserve Ratio and the Monetary Policy Rate have contributed to the bullish Kwacha as the demand for the dollar continue to dwindle.
4. Despite the numerous advantages of dedollarisation, there are several risks and pitfalls that must be overcome. The process of disposing the ascendant dependency on the U.S dollar requires concerted and coordinated efforts from a myriad of key stakeholders, including central banks, financial institutions, and the private sector. Further, the unfolding of alternative reserve currencies requires the development of substantial liquid financial markets as well as the establishment of credible and transparent policy mechanisms.
Precedingly, de-dollarisation may entail distortions on the international market and can heighten volatility in financial markets hence the urgent need for concerted and coordinated efforts to avoid disruptions and distortions in financial markets as well as guarantee stability of individual nation’s currencies.