USD has historically been the world’s primary reserve currency, dominating international trade and finance. However, a growing number of countries, particularly in Asia and Africa, are beginning to challenge this long-standing reliance on the dollar. They are actively seeking alternatives to enhance their economic sovereignty and reduce vulnerability to fluctuations in the US economy and its monetary policies.
Ethiopia is among these nations taking proactive steps to diminish its dependence on the dollar. The country has been engaging in currency swap agreements with key trading partners, including the United Arab Emirates (UAE) and China, and is exploring similar arrangements with Russia. These agreements allow Ethiopia to conduct trade using its own currency or that of its partners, which can help stabilize its economy by reducing exposure to dollar exchange rate volatility.
Moreover, by fostering these partnerships, Ethiopia aims to streamline its trade processes, making transactions more efficient and accessible. This shift not only promotes local industries by encouraging the use of domestic goods but also strengthens Ethiopia’s position in the global market. As more countries follow suit, the traditional dominance of the dollar may face increasing challenges, leading to a more diversified international monetary landscape.
The dominance of the US dollar in global trade has its roots in the aftermath of World War II. In 1944, delegates from 44 nations, including Ethiopia, South Africa, and Egypt, convened in Bretton Woods, New Hampshire, to establish a new economic order for the post-war era. This historic gathering resulted in the creation of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD). A pivotal decision made during this meeting was the IMF’s policy of pegging member countries’ currencies to the US dollar, which at that time was backed by gold. This arrangement not only solidified the dollar’s status but also positioned it as the central currency for global trade.
Even after the US suspended the gold standard in 1971, the dollar’s preeminence continued unabated. Today, it constitutes over 58% of global foreign exchange reserves and accounts for more than 50% of international trade transactions. However, as geopolitical landscapes evolve and economies become increasingly interconnected, nations worldwide including Ethiopia are actively exploring strategies to diminish their dependence on the dollar and seek alternative currencies.
Ethiopia has made significant strides in this direction, recently pursuing de-dollarization through currency swap agreements with the United Arab Emirates (UAE) and China. Discussions for a similar arrangement with Russia are also in progress.
In an exclusive interview, Sergei Ryabkov, the Deputy Minister of Foreign Affairs of the Russian Federation, highlighted the optimistic talks between Ethiopia and Russia regarding this swap deal, suggesting that an agreement may soon be reached.
According to the National Bank of Ethiopia (NBE), data shows that These agreements will allow Ethiopia to trade with these nations using its own currency, the birr, as well as the local currencies of its partners Emirati dirhams and Chinese Yuan. Specifically, the UAE and NBE have agreed to swap up to 3 billion dirhams and 46 billion birr, while a comparable agreement with China promotes the use of the birr and Yuan in trade.
He mentioned “We advocate for an expanded adoption of local currencies in trade and transactions with all partners. For example, in our trade with China, over 80% of transactions are now conducted in local currency.”
Additionally, utilizing local currencies is integral to initiatives like the National Development Plan (NDP), which includes loans and other measures designed to address shortfalls in local and municipal budgets, he noted.
These currency swap agreements hold numerous advantages for Ethiopia. By bypassing the US dollar in trade transactions, the nation aims to mitigate the volatility and foreign exchange shortages that have historically hampered its economic growth, he said.
In his part, Economist Advisor and Experts, Mossisa Huruma (PhD), stated that these agreements facilitate smoother and more efficient cross-border transactions, enhancing trade relations with key economic partners.
Ethiopia has long grappled with foreign exchange shortages, a challenge that has had significant repercussions for crucial sectors like agriculture; he said that the country often struggles to import essential agricultural inputs, such as seeds and fertilizers, many of which are sourced from countries like Russia. These imports typically require payment in USD currency, adding to the financial strain on Ethiopian businesses and farmers.
By entering into currency swap agreements with Russia, China, and the UAE, Ethiopia can alleviate these challenges. For instance, trading directly in birr with these countries simplifies the importation of goods, thereby lowering costs and supporting the agricultural sector, which is a cornerstone of Ethiopia’s economy.
Mossisa further explained that rising food prices in Ethiopia, driven by supply and demand imbalances, are often linked to the restrictions associated with dollar-based trade. The new agreements enable more flexible and direct trade relationships, potentially stabilizing import costs and contributing to price stability in local markets. This, in turn, would bolster food security and reduce inflationary pressures, he said.
He emphasized the standing of these currency swap agreements for Ethiopia’s economic stability. By providing liquidity in local currencies, the deals with the UAE, China, and Russia allow for more effective settlement of cross-border transactions. This financial and commercial cooperation enhances the flow of currency and goods, reducing reliance on third-party currencies like the US dollar.
Moreover, these currency swaps reflect a broader global trend towards a multipolar monetary system, wherein countries increasingly seek to diminish their dependency on the dollar.
Ethiopia’s active participation in this evolving system empowers it to exert greater control over its economic future, thereby enhancing its resilience against external economic shocks and fluctuations in global currency values.
The agreements with the UAE, China, and Russia represent vibrant steps toward improving Ethiopia’s economic stability and fostering growth. By providing the nation with increased flexibility in international trade, these deals ensure access to essential resources while mitigating the risks associated with the volatility of global currencies, particularly the US dollar.
Facilitating trade in local currencies not only stabilizes Ethiopia’s foreign exchange reserves but also strengthens its agricultural sector and helps alleviate rising import costs. As the Ethiopian economy becomes more integrated into the global marketplace, these currency swap agreements present a promising path forward, one that could enhance financial independence and support sustainable long-term growth.
This shift towards local currencies in international trade is not merely a reaction to economic pressures; it represents a strategic move towards greater sovereignty in financial matters.
By reducing reliance on the US dollar, Ethiopia joins a growing number of nations that recognize the benefits of diversifying their economic relationships. This strategy not only protects against the vulnerabilities associated with dollar dependency but also fosters closer ties with emerging economies that are willing to engage in mutually beneficial trade agreements.
Besides, the move towards de-dollarization through currency swap agreements with the UAE, China, and Russia marks a significant development in Ethiopia’s economic strategy. This proactive approach to building a more resilient and independent economic future continues, and the implications of these agreements may extend far beyond immediate financial benefits, potentially reshaping Ethiopia’s role in the international economic community for years to come.
BY KALEAB GIRMA
THE ETHIOPIAN HERALD SATURDAY 28 DECEMBER 2024
