Africa needs operating system update for successful integration 

AMADOU HOTT

Amadou Hott, a Senegalese economist and former minister of economy and planning, is Senegal’s official nominee for the position of President of the African Development Bank. Visit www.AmadouHott.com

Beyond physical infrastructure, Africa’s integration requires modern software upgrades: the systems, policies, and institutional frameworks that power trade across borders

Ask any traveller about their experience moving across parts of Africa, and you will likely hear about familiar challenges: high costs, indirect routes, and unpredictable schedules that can make even the simplest journeys more complicated and costly. These travel hurdles highlight the immense opportunity to further strengthen Africa’s integration and unlock seamless connectivity across the continent.

The potential is undeniable. According to the World Bank, the African Continental Free Trade Area (AfCFTA) stands to be the world’s largest free trade zone, encompassing 1.4 billion people and a combined GDP of 3.4 trillion USD. The African Development Bank projects that eliminating existing barriers could double intra-African trade within a decade from its current 15 percent; a figure that pales in comparison to Asia’s 60 percent and Europe’s 65 percent. Despite meaningful progress through the AfCFTA implementation led by regional economic communities, fulfilling this promise will require more efforts. Namely, Africa requires robust physical infrastructure and an operating system update to modernize institutional frameworks and encourage a new ecosystem of African-made goods and services.

Africa’s integration challenge can be likened to building a cutting-edge computer system. Success first requires powerful hardware: the physical infrastructure forming the backbone. Currently, the continent faces an annual infrastructure financing gap of between 130 and 170 billion USD to meet essential hardware requirements across transportation corridors, energy networks, and digital highways. While our international partners have historically played a crucial role In bridging this financing gap, the current geopolitical landscape demands a paradigm shift. Africa must take the lead in investing in its own hardware.

The key lies in mobilising African public and private capital first to build confidence among international partners and investors. Substantial capital can be generated within the continent through sovereign wealth funds, pension funds, high-net-worth individuals, and other sources. Development finance institutions like the African Development Bank must also play a transformative role by leveraging their expertise and credit ratings to channel this locally sourced capital into Africa’s development. The Alliance for Green Infrastructure in Africa (AGIA), launched by the African Development Bank in partnership with Africa50 and the African Union, exemplifies this approach, mobilising project preparation and project development blended capital to build a 10 billion USD portfolio of green infrastructure projects with private sector participation from Africa and around the world. Regional energy integration, as highlighted by Mission 300 launched recently in Tanzania, is equally important.

Beyond physical infrastructure, Africa’s integration requires modern software upgrades: the systems, policies, and institutional frameworks that power trade across borders. Digital solutions are key to enhancing business operations across borders and reducing trade barriers. While discussions often focus on physical infrastructure gaps, outdated manual processes frequently limit the effectiveness of existing assets. The Pan-African Payment and Settlement System (PAPSS) exemplifies this transformation, promising to save 5 billion USD annually by making cross-border payments simpler and more transparent. Moreover, pilot programmes in East Africa have shown that applying blockchain technology to existing value chains could help reduce trade costs by 20 percent, enhance protection against fraud, and expand access to new markets for businesses across the continent.

As African leaders [recently] convene[d] at the AU Summit in Addis, we are at a pivotal time that requires action: the finalization of the Protocol on Digital Trade under the AfCFTA is a first step towards the bold transformation that we must operate. We must pursue economic transformation through infrastructure development and technology integration in our trade operations to evolve from a raw material exporter into an industrial and agricultural powerhouse. Beyond manufacturing value-added goods and value creation, our ability to integrate essential services – financial services, transport and logistics, education, and healthcare – will facilitate seamless business operations across borders. By positioning economic transformation at the heart of our integration agenda, Africa can advance up the value chain to generate wealth and create quality economic opportunities for all Africans, particularly our youth and women. 

With Africa’s youth population set to double by 2050, the urgency of this transformation cannot be overstated. By effectively mobilizing our own resources first, driving economic transformation, and building both the required software and hardware, we can successfully integrate Africa. This is Africa’s moment to move beyond being the world’s largest free trade area by membership to becoming its most dynamic and innovative economic powerhouse.

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Trump Can’t Stop De-Dollarization

HIPPOLYTE FOFACK

Hippolyte Fofack, a former chief economist at the African Export-Import Bank, is a fellow with the Sustainable Development Solutions Network at Columbia University, a research associate at Harvard University’s Center for African Studies, a distinguished fellow at the Global Federation of Competitiveness Councils, and a fellow at the African Academy of Sciences.

BELFAST – During the US presidential campaign, Donald Trump pledged to make de-dollarization – efforts to reduce global reliance on the greenback – too costly to contemplate, vowing to impose 100% tariffs on countries that shun the currency. But such a move, part of a broader tariff agenda that the president-elect seems determined to enact, would do little to stop the dollar’s demise.

The greenback remains the most important means of exchange and effective store of value, making it the preferred currency for international trade and finance, as well as for foreign-exchange reserves held by central banks to ensure a steady supply of imports and insure against currency crises and macroeconomic instability. But as the world’s economic center of gravity shifts east, de-dollarization is accelerating. 

The dollar’s share of foreign-exchange reserves fell from a peak of 72% in 2002 to 59% in 2023, driven by increased demand for non-traditional reserve currencies – especially the Chinese renminbi. Moreover, the global oil trade was almost exclusively settled in dollars until last year, when one-fifth of these transactions were denominated in other currencies.

Several factors have contributed to this shift. Global South countries have become the drivers of global economic growth, changing the dynamics of global trade and energy markets. An increasingly multipolar world has ushered in a new age of currency competition, while technological and financial innovations have made it less expensive and more efficient to use local-currency settlement (LCS) for bilateral trade.

Trump, seemingly aware of the enormous economic and geopolitical benefits conferred by the dollar’s status as the world’s main reserve currency, would like to halt this process. After all, the United States is one of the few countries in the highly integrated world economy that still has effective monetary sovereignty – namely, the ability to set and achieve its economic and monetary-policy objectives without regard for other countries.

By contrast, as the eurodollar market became the backbone of the privatized international monetary system, more countries issued dollar-denominated sovereign debt, increasing their reliance on the greenback. In 2011, then-Chinese President Hu Jintao put it plainly: “The monetary policy of the United States has a major impact on global liquidity and capital flows, and therefore, the liquidity of the US dollar should be kept at a reasonable and stable level.”

Although a recent study by the Federal Reserve Bank of New York singles out geopolitical distance from the US and financial sanctions as the main drivers of decreasing demand for the US dollar, de-dollarization is not driven exclusively or even largely by America’s overreliance on the dollar as a foreign-policy tool. Rather, many governments are encouraging the use of instruments denominated in their national unit of account to capture the welfare gains associated with having an international currency. 

Perhaps the most successful example of this was Europe’s monetary integration, which gave rise to the euro, now a strong second to the dollar, accounting for around 20% of global reserves and over half the EU’s exports worldwide. In 2022, roughly 52% of goods that the European Union imported from non-EU countries, and around 59% of goods that the bloc exported to these countries, were invoiced in euros.

Following in the EU’s footsteps, Global South countries are leveraging new technologies to promote the use of LCS for bilateral trade, which can ease balance-of-payments constraints and sustain economic growth. China, for example, has developed its own Cross-Border Interbank Payment System, established bilateral swap lines with nearly 40 foreign central banks, and successfully pushed to denominate oil contracts in renminbi. Total Energies and China National Offshore Oil Corporation concluded China’s first purchase of liquefied natural gas in renminbi through the Shanghai Petroleum and Natural Gas Exchange last year.

In 2022, the Reserve Bank of India established a mechanism to enable international trade settlement in rupees, which could save around $30 billion in dollar outflows if used for Russian oil imports. Among the BRICS+ countries (Brazil, Russia, India, China, South Africa, Egypt, Ethiopia, Iran, and the United Arab Emirates), trade settled in national currencies has reportedly surpassed that in dollars. Cross-border investment in local currency is also set to rise, with the BRICS’ New Development Bank raising its local-currency lending from about 22% to 30% by 2026 to mitigate the impact of foreign-exchange fluctuations and remove cash-flow bottlenecks in financing projects.

For emerging and developing economies, de-dollarization can also mitigate the adverse spillover effects of the US Federal Reserve’s policymaking. The Fed’s most recent aggressive tightening cycle has exacerbated macroeconomic instability and dampened growth, ensnaring more and more countries in the middle-income trap and preventing global income convergence. As research by the International Monetary Fund shows, a sudden stop in capital flows to an emerging-market economy leads to an average 4.5% decline in GDP growth that year, and a 2.2% decline the following year.

De-dollarization may also reduce the need to hoard reserves, a form of insurance against external shocks and financial volatility that implies massive opportunity costs for emerging and developing economies. These countries’ monetary authorities could instead invest in higher-yielding assets, thereby generating more resources to meet development challenges, including investments that strengthen resilience to climate change.

Precautionary reserves are especially damaging for low-income countries with higher credit risks and larger interest-rate spreads, as they often involve reverse carry trades. Bangladesh currently holds a record $46.4 billion in low-yielding currency reserves to stabilize the taka while paying more than 8% interest on its sovereign bonds. 

The Nobel laureate economist Joseph E. Stiglitz estimated the annual cost of reserve hoarding for developing countries at more than $300 billion – 2% of their combined GDP – in the mid-2000s. That figure is undoubtedly higher today, given the increase in excess reserves and the growing number of countries with sub-investment-grade credit ratings accessing international capital markets.

To be sure, de-dollarization also serves as a hedge against US financial sanctions, which are expected to proliferate under Trump. But the myriad other benefits of pursuing such a policy, especially in terms of macroeconomic management and growth, are huge, and will likely outweigh the costs of the retaliatory tariffs that Trump has promised to impose on currency competitors.

The process may be slow-moving. Powerful network externalities, coupled with the depth and liquidity of the US capital markets, have made it difficult to dislodge the dollar, even though America lost its status as the world’s largest trading economy more than a decade ago. But the shift to non-traditional reserve currencies in an increasingly multipolar economic system, and the growing importance of the cross-border use of national currencies in fueling growth and achieving global income convergence, suggests de-dollarization will continue. And a tsunami of tariffs and sanctions under the next US administration will surely help it along.

Copyright: Project Syndicate, 2024.
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