How realistic is it to end the greenback’s dominance?
By Mumbi Mutoko
For decades, the U.S. dollar has dominated the global financial system. It serves as a benchmark for worldwide transactions, the reserve currency for many central banks, and the currency of choice for international trade. However, the dollar’s dominance has been challenged recently as other nations have begun to think about trading in their own currencies.
Many factors, like stimulus programmes and the historically low-interest rates put in place by the Federal Reserve, have contributed to the dollar’s decline in value. This problem was made worse by the COVID-19 pandemic since the US government has had to raise expenditures to aid in the economy’s recovery from the pandemic’s effects. The U.S. dollar has decreased in value in comparison to other currencies as a result, including the euro, the yen, the yuan, and even at one point, the bitcoin.
Some countries have decided to reevaluate their reliance on the dollar for international commerce in light of its recent depreciation. Russia is one of the nations that has thought about abandoning the dollar. The Russian government has robustly promoted its own currency and encouraged other countries to use alternative currencies for cross-border transactions. Because China actively encourages its usage in cross-border trade, the Chinese yuan has also been gaining currency.
Russia has been subject to sanctions since its invasion of Ukraine, and nations willing to continue doing business with it, like India and China, have started trade negotiations using their national currencies, the rupee, and yuan, sparking discussions about the de-dollarization of the world trading system.
Iran has been attempting to get away from the dollar as well. Iran and Russia decided to stop trading in dollars in 2020 and instead use their own national currencies. To get around American sanctions, Venezuela has also been looking at using other currencies, such as the euro and the Chinese yuan, to get around American sanctions.
The U.S. dollar has long been the world’s primary reserve currency, but “powerful countries” are attempting to downplay the value of this position. The US is facing challenges since European countries also want to trade with the Middle East without worrying about the sanctions imposed by the Americans.
For instance, Iran is a market that Europe wishes to trade with. The Europeans, however, want to avoid being controlled by US laws when doing business with Iran. Such factors are pushing countries to champion de-dollarization. Hence moving away from the greenback might lessen their exposure to American sanctions, which the government of the United States has used effectively to enforce its foreign policy goals. However, experts are still not convinced it is easy to ditch the dollar.
The shift away from the dollar may significantly impact the world financial system and the American economy. That might weaken American influence and power and allow other nations more authority over domestic economic policies.
Moreover, Kenya has begun purchasing oil using the Kenyan Shilling. On April 11, 2023, President William Ruto announced that the nation had discovered a means to purchase oil items using the Kenyan Shilling rather than the US dollar.
“Today, we can buy fuel in Kenyan shillings, something many people never thought possible. From April, all our fuel marketers will be able to buy our fuel products in Kenya shillings, reducing pressure on our dollars,” President Ruto said.
“You will see the dollar exchange rate drop phenomenally in the next month or so. In my estimation, in the next couple of months, the exchange rate will come below Sh120, maybe Sh115.”
The Kenyan government signed a six-month supply agreement for diesel, super fuel, and other oil products with Saudi Aramco and the Abu Dhabi National Oil Corporation (Adnoc). In the agreement, the Kenyan shillings will be used to pay for the oil, relieving some of the strain on the nation’s currency, which has been falling to new record lows weekly.
Davies Chirchir, the Cabinet Secretary for Energy and Petroleum, stated that his ministry would centrally organize the imports via government-to-government. The UAE National Oil Company Group is the third participant the government has chosen to take part in the fuel import agreement (Enoc).
By extending the time needed to source the dollars from the current five days to 180 days, the proposed transaction is projected to reduce the demand for dollars caused by petroleum imports. The action aims to stabilize the currency and relieve pressure on the Kenyan shilling.
The six-month period of the fuel import agreement would see a temporary suspension of the open tender method, which was previously employed to increase transparency in Kenya’s oil industry. For the provision of fuel for 270 days, the government requested proposals from government-owned organisations throughout the Middle East. The chosen businesses will now provide the fuel on credit, enabling the Kenyan government to pay for the goods in Kenyan shillings over six months.
The Kenyan economy is anticipated to benefit from this government-to-government oil products import agreement by reducing pressure on the national currency and stabilising the exchange rate. (