Sovereign Nations Explore De-Dollarization to Diversify Economies

In a world where the dollar reigns supreme, several sovereign nations are exploring avenues of de-dollarization to diversify their economies. 

The BRICS bloc, along with six other nations, is at the forefront of this economic shift, seeking to mitigate the impacts of dollar shortages and the consistent hikes of the Fed Fund rates which are causing a devaluation of their currencies against the greenback.

The International Push for Economic Diversity

Brazil, Russia, India, China, and South Africa, collectively known as the BRICS bloc, are leading the charge in international de-dollarization efforts. 

They are joined by Iran, Saudi Arabia, the UAE, Egypt, Argentina, and Ethiopia, all pushing the agenda to de-dollarize their respective economies due to witnessing a shortage of dollars and experiencing the devaluation of their currencies against the greenback.

Trade Settlements in Native Currencies

The United Arab Emirates has initiated settling oil trades with India’s top refiners in Rupees, and Argentina is set to pay for imports from China in Yuan instead of dollars. 

These strategic moves are indicative of a broader shift towards using native currencies in international trade, reducing reliance on the U.S. dollar.

Impact on U.S Treasury Bonds

The BRICS nations have started to slowly sell down their U.S Treasury Bonds, having collectively sold off US$18.9bn in the last month to defend their currency against the U.S Dollars. 

This sell-off is a clear indication of these nations’ commitment to reducing their dependence on the dollar.

Domestic Dollar Dependence

Former CBN governor, Mallam Sanusi Lamido, had earlier expressed concerns over the increasing use of the dollar for domestic transactions in Nigeria. 

The preference for dollar payments by many big schools and hotels highlights the pervasive influence of the dollar in the domestic economy, even as the country grapples with its worst FX liquidity problems in recent years.

Nigeria’s efforts to de-dollarise its economy

Nigeria has previously attempted to reduce its dependence on the U.S. dollar through a bilateral currency swap between Nigeria and China valued at ¥16bn (circa US$2.5bn). 

However, the swap deal has not been successful enough to reduce the demand for U.S. dollars, with major Chinese exporters showing a preference for dollar payments.

Some of the reasons for its failure include:

1) The size of the swap (N720bn over 3 years) compared with N1.27trn worth of imports from China in H1 2023 alone, is not large enough to have any appreciatory impact on the naira.

2) Chinese exporters were not as excited about the deal as the CBN.

3) They would rather avoid the cumbersome process of converting the Renminbi to Dollars in China

The Way Forward:

The continuous devaluation of the naira against the dollar and the depletion of the country’s foreign reserves necessitate more stringent measures by the CBN to reduce its dependence on the dollar. 

The exploration of de-dollarization strategies is crucial as the country seeks to navigate its FX liquidity problems and diversify its economy.

BRICS: What you need to know

Reports say Goldman Sachs created the term BRIC in 2001 for Brazil, Russia, India, and China under the belief that these economies would dominate global growth by 2050.

BRICS is an acronym for Brazil, Russia, India, China, and South Africa. It is a group of five major emerging economies that have been collectively growing at a fast rate.

The BRICS nations seek to deepen economic cooperation between the member countries and stand in contrast to the Western sphere of power.

These countries have a combined population of over three billion people and a combined GDP of over $20 trillion.

Since their first meeting in 2009, the BRICS countries have held summits every year. They have established the BRICS Development Bank and the BRICS Contingent Reserve Arrangement.

It is also important to note that they are all facing a number of challenges, such as rising inequality, corruption, and environmental degradation. These countries are also major exporters of commodities, such as oil, gas, and metals.