State’s role in shaping global finance

(From Left) President of Brazil Luiz Inacio Lula da Silva, President of China Xi Jinping and South African President Cyril Ramaphosa gesture during the 2023 BRICS Summit at the Sandton Convention Centre in Johannesburg on August 23, 2023. PHOTO | GIANLUIGI GUERCIA | AFP

As the BRICS conference got underway in South Africa last week, numerous nations held hopeful expectations that the emergence of an alternative currency for international trade could potentially diminish the dollar’s dominance.

This follows escalating geopolitical tensions, economic sanctions, and political disputes with the United States that have prompted countries to explore alternatives to the dollar, seeking to mitigate their vulnerability to the US influence.

However, the prospect of de-dollarisation, aimed at curbing the greenback’s supremacy, is unlikely to materialise soon.

Critics contend that even if such a shift were to occur, the predominant influence of major economies would likely impede the private sector from exerting substantial influence over the new currency.

Nevertheless, it remains undeniable that governments play a pivotal role in advocating for the prosperity of their private sectors in global trade dynamics.

To elaborate on the role of government in bolstering private sector enterprises, let’s consider the case of Kenya Airways (KQ).

The airline’s reliance on the dollar for procuring essential components, fuel, and operational expenses has placed it in a challenging situation, especially as it endeavours to recover from the setbacks inflicted by the Covid-19 pandemic.

In the past year alone, the depreciation of Kenya shilling by more than 15 percent has led to rampant inflation and diminished dollar reserves.

These circumstances pressure the airline and the government to devise resource management strategies during currency volatility.

While specific measures can be taken at the organisational level, achieving stability in foreign exchange necessitates macro-level decisions, notably reducing dependence on the US dollar.

Reducing reliance on the US dollar entails a multi-layered approach encompassing international, national, and corporate strategic initiatives.

First and foremost, adopt strategies to curtail the demand for the dollar. This could involve establishing bilateral agreements with regional trade partners to facilitate transactions in local currencies.

Furthermore, fortifying regional economic blocs, such as the East African Community (EAC), could promote the use of regional currencies, enhancing their financial resilience.

Secondly, the African Union should seriously consider President William Ruto’s proposition to embrace local currencies as mediums of exchange to stimulate intracontinental trade.

President Ruto asserts that the prevalence of the dollar impedes work in the continent due to its scarcity caused by high demand.

Additionally, the African Continental Free Trade Area should implement its Pan-African Payment and Settlement System.

The continent should embrace digital payments, including developing central bank digital currencies, as viable transaction alternatives in the long term.

This could facilitate cross-border exchanges in local currencies, circumventing the domination of the dollar-driven Society for Worldwide Interbank Financial Telecommunication system.

Moreover, it would enable currency swap agreements with other central banks, reducing reliance on the dollar.

At the organisational level, the dollar strength negatively impacts demand for KQ services and inflates operational expenses like fuel costs.

However, this predicament could catalyse innovative ideas at the national and organisational echelons. Implementing some of these options would require substantial courage.

Amid an increasingly challenging environment, KQ has an opportunity to lead the way by harnessing digital currencies to decrease dependence on the US dollar, thereby reshaping regional, if not global, financial dynamics.

Introducing incentives for customers to transact using a dollar-denominated currency such as the JPM Coin, offers several advantages that could contribute to a short-term reduction in dollar dependency.

The airline also possesses alternative strategies, allowing customers to pay in multiple currencies to mitigate exposure to fluctuations in any single currency.

Additionally, hedging against currency risks through mechanisms like forward contracts and options could safeguard against adverse exchange rate fluctuations.

In a world striving for financial diversification and reduced reliance on the US dollar, the just concluded BRICS conference exemplified the global sentiment toward exploring alternative currencies for international trade, fuelled by geopolitical tensions and the pursuit of economic autonomy.

The intricate web of challenges and opportunities associated with de-dollarisation becomes apparent through the lens of KQ, underscoring governments’ pivotal role in shaping the fate of private enterprises.

As nations endeavour to forge a more resilient economic future, the intricate interplay of strategic international agreements, regional financial collaborations, and technological innovations, particularly in digital currencies, will dictate the success of efforts to usher in a multipolar currency landscape.

Amid these complexities, it is increasingly evident that collective action, innovation, and well-calibrated government policies are linchpins in the transition toward a more decentralised and adaptable global financial ecosystem.

The writer is Kenya’s Ambassador to Belgium, Mission to the European Union, Organization of African Caribbean and Pacific States and World Customs Organization. The article is written at a personal level.