In recent months, numerous African currencies have faced relentless depreciation against the US dollar—a phenomenon leading to substantial capital outflows, mounting pressure on central bank foreign exchange reserves, and spiraling inflationThe situation is dire: countries such as Egypt, Nigeria, and Kenya have witnessed uprisings and political instability due to soaring prices and currency devaluation, as the persistent strength of the dollar forces them to explore alternatives.

Since March 2022, the Federal Reserve of the United States has embarked on an aggressive rate-hiking cycle, pushing the federal funds rate to a target range of 5%-5.25%. Recent Consumer Price Index (CPI) data has led market analysts to speculate that one of the most radical interest rate increases in decades may soon draw to a close

However, this shift has only exacerbated the cost of acquiring US dollars for emerging economies, raising the stakes on dollar-denominated debt and adding volatility to their markets.

This year, several African currencies—including the Kenyan shilling, Nigerian naira, Central African CFA franc, and South African rand—have continued to weaken against the dollar, with similar trends noted in currencies elsewhere, such as the Argentine peso and the Indian rupeeFor many African nations, the dollar has long been regarded as a “hard currency”—a preferable alternative to their frequently fluctuating local currenciesImporters and foreign investors typically relied on the dollar to conduct transactionsHowever, this trend appears to be shifting dramatically.

As these local currencies lose value against the dollar, nations are experiencing heightened difficulty in paying for imports and settling obligations to foreign investors

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Countries like Egypt, Nigeria, and Kenya—key destination points for investment—are facing significant dollar outflowsWith increasing inflation rates and record levels of currency devaluation, civil unrest has erupted in various instances, shaking the political landscape.

Since last March, the Egyptian pound has depreciated by over 50%, with the official exchange rate now hovering around 1:31 against the dollarFurthermore, following Nigeria’s central bank’s June 14 decision to eliminate its peg to the dollar, the naira has plummeted by more than a thirdA report from the International Monetary Fund (IMF) released in May indicates that since January 2022, the average depreciation of currencies in the Sub-Saharan region has been around 8%, with specific countries like Ghana and Sierra Leone seeing depreciation exceeding 45%.

The rising cost of imported goods, particularly when calculated in local currencies, directly contributes to an increase in the overall cost of living, which in turn fuels inflation rates that have reached a staggering 30% across the continent

According to Christopher Adam, a development economics professor at Oxford University, this prevailing crisis stems precisely from supply chain disruptions triggered by the COVID-19 pandemic, alongside a subsequent global economic downturn that substantially slashed the prices of Africa's primary exports while also crippling the tourism industry—one of the vital sources of dollar inflows.

Looking at Nigeria, the continent’s largest economy, the Central Bank has revealed that the country faced an international balance of payments deficit of $840 million in 2022, a stark contrast to its previous year’s surplus of $3.75 billionAs Africa’s leading oil exporter, this data reflects the adverse effects of changing global oil prices.

The escalating dollar scarcity places these African nations in a precarious dilemma

Christopher Adam comments that if countries pursue fixed exchange rates, shortages of dollars could become evident while floating exchange rates could lead to severe currency devaluations.

According to the IMF report, a staggering 40% of the public debt in Sub-Saharan Africa consists of external debt, with upwards of 60% of it denominated in dollarsAs local currencies depreciate, repaying dollar-denominated debts becomes increasingly onerous, placing many nations on the brink of a potential debt crisis.

During a visit to Nairobi in May, IMF chief Kristalina Georgieva stated that 19 of the 35 countries in Sub-Saharan Africa are either in or near a debt crisisThe IMF has flagged Kenya as a high-risk nation concerning debt issues as well.

Research from Kenya's Economic Policy Research Institute highlights that due to the depreciation of the shilling, the cost of foreign-denominated repayments surged 25% compared to early 2021. Kenya’s President William Ruto affirmed this reality, noting on July 12 that rising interest rates and a strengthening dollar have made financing options costlier, effectively increasing risk premiums for African nations

Kenya spends approximately $10 billion annually on debt servicing, with a particular focus on repaying $2 billion in Eurobonds due next yearThe proportion of debt repayment costs relative to total national revenue has ballooned from 59.5% in 2021-2022 to 63.5% in 2023-2024.

Zimbabwe’s situation offers further insightsData from the African Development Bank states that the nation’s combined debt has reached $17.5 billion, including $14.04 billion owed to international creditors and $3.4 billion in domestic debt.

A United Nations report dated July 12 noted that in Africa, interest payments on debt significantly outstrip expenditures on education or healthcare, with 3.3 billion people living under circumstances where servicing debt interests takes precedence over funding critical sectors like education or health

"Countries face an impossible choice: repay debts or serve their populations," it stated.

UN Secretary-General António Guterres further emphasized during a press conference that the average borrowing costs for African nations are four times higher than that of the US and eight times higher than those in the wealthiest European economies.

In light of the prevailing dominance of the dollar, many nations are actively seeking alternativesReports from local African media indicate that President Ruto has urged African leaders to work towards adopting the Pan-African Payment and Settlement System (PAPSS), aimed at enhancing intra-African trade while diminishing the dollar's role as the world’s reserve currency

This system was developed with support from the African Union and various central banks across Africa, spearheaded by the African Export-Import Bank and the Secretariat of the African Continental Free Trade Area.

"The disparity in currencies complicates payments for goods and services across borders, with the entire process being influenced by the dollar dynamics," Ruto stated"We don't need to rely on the dollarOur traders will focus on moving goods and services while entrusting the complex task of currency settlement to the African Export-Import Bank."

Similarly, Zimbabwe's former Minister of Information and Communication Technology, Supa Mandiwanzira, noted in an interview that relying on the dollar for purchasing goods like fertilizers and seeds poses significant risks for the country

He suggested a shift towards enhancing competitiveness with local currencies, advocating a diversified reserve currency strategy in light of the trend towards "de-dollarization."

South Africa is counting on the BRICS cooperation mechanism, with President Cyril Ramaphosa indicating that currency issues will be a key topic at the upcoming BRICS summit scheduled for AugustStatements from financial commentator Zhang Xuefeng suggest that the recent depreciation of multiple African currencies against the dollar, coupled with calls to eliminate the dollar from trade, reflects a growing desire to reduce dependency on the dollar and mitigate the risks associated with currency fluctuations against the dollar.

Zheng Lei, chief economist at Samoyed Cloud Technology Group, also weighs in, indicating that the current push for alternative currencies or local currency settlements could develop into a persistent long-term trend

Some countries seem to be intent on lowering their reliance on the dollar, enhancing their sovereignty and economic status by adopting alternative currencies for settlements or promoting their local currencies as international settlement currencies.

Nevertheless, it is critical to recognize that "de-dollarization" does not equate to the imminent loss of the dollar's dominanceExperts suggest that while this movement is gaining momentum, the dollar's preeminent status is unlikely to be undermined in the short termIndependent international strategic analyst Chen Jia asserted that while the push for de-dollarization is rapidly intensifying, a viable substitute for the dollar remains a considerable distance away.

Zheng also pointed out that the dollar's enduring dominance can be attributed to the United States' position as the world's largest economy and pivotal trading nation, along with the stability provided by its government and financial institutions