Africa’s Financial Firewall: Building our Path in a Shifting Global Order
Introduction
For several decades, Africa's economic trajectory has been significantly influenced by Western financial systems, with the U.S. dollar playing a dominant role. This long-standing arrangement, whilst offering certain advantages, has also fostered dependencies, limiting the continent's autonomous control over critical financial mechanisms. The prevalence of the dollar in trade denomination and payment networks has been pervasive. However, the global financial landscape is undergoing considerable transformation, evidenced by nations such as India, Russia, and China actively developing independent financial infrastructures.
This report does not aim to critique the historical prominence of the U.S. dollar but rather seeks to delineate pathways for Africa to establish its own robust financial instruments and infrastructure. We will analyse the continent's current economic vulnerabilities, derive valuable lessons from India's progression towards financial independence, and propose a multi-pronged strategy for constructing Africa's financial resilience. This endeavour extends beyond mere resilience; it concerns unlocking substantial economic potential. With the implementation of effective management structures – specifically, frameworks like the African Sovereign Development Trust proposed and advocated by The Ndege Group – there is a credible projection, according to the Group, that Africa's economy could expand to exceed US$40 trillion / €38 trillion (approximated based on current exchange rates and an original £32 trillion projection).
This analysis emphasises the critical functions of initiatives like the Pan-African Payment & Settlement System - PAPSS, innovative resource-backed trade mechanisms, the cultivation of a genuinely sovereign financial ecosystem (a key focus for The Ndege Group), and a coordinated African currency strategy in realising this transformative objective. Through the strategic utilisation of its abundant resources and the cultivation of collaborative partnerships, Africa can attain greater financial sovereignty and assume its appropriate role as a significant participant in the evolving global economy.
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I. The Diminishing Dominance of the US Dollar in Global Finance
The global financial system, whilst still heavily influenced by the U.S. dollar, is undeniably shifting towards a more diverse, multi-currency framework. An examination of global trade invoicing reveals a substantial and growing portion is conducted in currencies other than the U.S. dollar. Although the dollar maintains a leading share in export invoicing, the trend over the past decade indicates a gradual but steady decline in its dominance.
Over the last ten years, the U.S. dollar's position as the world's primary reserve currency has exhibited a marked decrease. According to International Monetary Fund COFER data, the share of U.S. dollars in allocated foreign reserves held by central banks and governments declined from approximately 64.7% in Q3 2016 to 57.4% in Q3 2024. Extending the timeframe, since the year 2000 when its share exceeded 70%, there has been a long-term structural contraction.
Notably, this reduction has not solely benefited traditional reserve currencies like the euro, Japanese yen, and British pound. A significant portion of this shift has favoured non-traditional reserve currencies, such as the Australian dollar, Canadian Dollar, Swedish Krona, and South Korean Won. Furthermore, the Chinese Renminbi (RMB), SingaporeanDdollar, and Nordic currencies are gaining attention. The RMB's share currently stands at approximately 2% of global reserves; whilst its internationalisation has advanced, its recent growth as a reserve currency has shown complexities. This evolving landscape presents both challenges and a significant opportunity for Africa to redefine its financial relationships and reduce its dependence on the U.S. dollar.
II. Africa's Reliance on the US Dollar: An Overview of the Challenges
Africa's financial framework currently exhibits a high degree of reliance on the U.S. dollar, a dependency which, although perhaps initially practical, now presents numerous economic challenges and constrains the continent's financial autonomy. The dollar serves as the principal currency for most international transactions, including much intra-African trade. Its use extends to the pricing and settlement of nearly all vital imports, such as oil, wheat, medicine, and other essential commodities. Consequently, the cost of these goods is dictated by the dollar's exchange rate, exposing African economies to the volatility of global currency markets and permitting transactional investigation. Furthermore, the dollar dominates foreign exchange transactions, accounting for a widely cited ~88% of such activities globally (according to the BIS 2022 Triennial Survey). Estimates suggest that a significant portion, perhaps around 45%, of Africa's cross-border payments utilise the SWIFT system, which is heavily intertwined with dollar and euro transactions.
This profound reliance generates a spectrum of economic difficulties for African nations. A strong dollar increases import costs and reduces export competitiveness, thereby hindering economic growth. The repayment of dollar-denominated debt, which constitutes a significant portion of Africa's external borrowing, becomes more burdensome when the dollar appreciates, potentially precipitating debt crises. African economies are also vulnerable to U.S. monetary policy decisions. IMF analysis suggests that dollar appreciation can negatively impact GDP in emerging markets across Africa.
Several African nations have acutely experienced the consequences of this dollar dependence. Nigeria experienced significant Naira depreciation in 2023-2024. Ghana saw its Cedi undergo severe depreciation and volatility, contributing to a debt crisis, with inflation peaking at 40.1% in December 2024. Egypt experienced inflation exceeding 30%, reaching a record high of 38% in September 2023. Reports indicate Kenya allocated a very high percentage, possibly around 60%, of its tax revenue to debt servicing in recent fiscal years, a burden amplified by dollar strength. Across sub-Saharan Africa, currencies have generally weakened against the dollar, fuelling inflation. Reports suggest countries like Ghana and Sierra Leone saw depreciation exceeding 45% during certain periods. This trend increases import costs (estimates suggest over two-thirds priced in dollars) and elevates public debt levels (estimated at ~40% external, with over 60% of that reportedly in dollars). This cycle can compel African countries to prioritise dollar-generating exports, sometimes to the detriment of sustainable development objectives. Ultimately, the persistent scarcity of U.S. dollars within Sub-Saharan African economies impedes the settlement of foreign debts and the financing of essential imports, underscoring the urgent necessity for alternative financial arrangements.
III. The Indian Strategy for Financial Independence: Lessons for Africa
India has demonstrated strategic foresight in constructing a financial system exhibiting increasing resilience to external pressures and reduced reliance on the U.S. dollar. Its strategies offer valuable insights for Africa's pursuit of financial sovereignty. The following points draw upon an analysis of India's key strategies, adaptable to the Africa's context:
Bypassing SWIFT: India reportedly processed an estimated $48 billion in oil transactions with Russia outside of SWIFT, demonstrating a viable method for conducting essential trade whilst reducing reliance on Western-controlled infrastructure. Necessary adaptation for Africa: Focus on strengthening PAPSS and establishing agreements with systems like SPFS and CIPS
Currency Swap Agreements: Establishing Rupee-Yuan swap deals with China enabled direct bilateral trade without U.S. dollar conversion. Necessary adaptation for Africa: Prioritise negotiations with key trading partners; build confidence in local currency stability
Alternative Payment Networks: Integrating India's RuPay system with Russia's SPFS reduced dependence on Western infrastructures. Necessary adaptation for Africa: Focus on scaling up PAPSS and establishing formal linkages with SPFS, CIPS, and other regional systems
Diversification of Gold & Resource Trade Routes: Reports suggest India strategically routed a significant portion (possibly 68%) of its gold imports via hubs like Dubai, shielding transactions. Necessary adaptation for Africa: Explore similar routing strategies for key resources; ensure transparency and prevent illicit activities
Utilisation of Alternative/Barter-Based Trade: Employing barter-based transactions for key resources amidst restrictions. Necessary adaptation for Africa: Consider only as a last resort; focus on formalising alternative trade mechanisms
India's overarching strategic objective is ambitious, reportedly aiming for 70% of its trade to be independent of U.S. sanctions by 2027. This highlights a proactive approach to financial independence.
For Africa, the Indian model provides crucial takeaways. The multi-pronged approach indicates that a singular solution is improbable. African nations must assess the applicability of each strategy within their unique contexts. Whilst direct replication may not always be feasible, the core principles possess significant merit. The success underscores the necessity of strong political will and strategic planning. African governments must demonstrate unwavering commitment and formulate comprehensive roadmaps to realise this objective. By meticulously studying and adapting elements of the Indian approach summarised below, Africa can expedite its own progression towards enhanced financial independence and resilience.
India's fiscal strategy for trading and potential for African application
IV. Africa's Path to Financial Sovereignty: A Multi-faceted Approach
A. Developing an African Alternative to SWIFT: The Role of PAPSS
The Pan-African Payment and Settlement System (PAPSS) represents a transformative initiative designed to revolutionise intra-African trade by facilitating real-time, cost-effective transactions in local currencies. Launched in January 2022 by the African Union (AU) and the African Export-Import Bank (Afreximbank) in support of the African Continental Free Trade Area (AfCFTA), PAPSS aims to address the persistent challenge of cross-border payments in Africa. Initially deployed in the West African Monetary Zone (WAMZ), PAPSS has subsequently expanded. As of February 2024, the PAPSS network comprised 12 central banks, 51 commercial banks, and 5 payment switches . The stated objective was to integrate all African central banks by the end of 2024 and all commercial banks by the end of 2025. In November 2024, Egypt was designated as the headquarters for PAPSS, anticipated to enhance visibility and encourage broader participation.
Status of PAPSS as of February 2024
PAPSS possesses the potential to significantly curtail Africa's dependence on foreign currencies and catalyse intra-African trade. By enabling payments in local currencies, PAPSS addresses substantial costs and volatility associated with using the U.S. dollar or euro. Afreximbank estimates that PAPSS could yield annual savings exceeding US$5 billion in payment transaction costs. With successful expansion, PAPSS could support the facilitation of the potential $3.5 trillion in intra-African trade projected under the African Continental Free Trade Area (AfCFTA) Secretariat framework. The system diminishes the requirement for correspondent banks, enhances payment efficiency, promotes financial inclusion, and supports market-determined exchange rates. However, achieving universal adoption is gradual, facing challenges including integration with existing regional currency systems and the need for technological upgrades and SME awareness. Collaboration with alternative payment networks, such as Russia’s SPFS and China’s CIPS, could offer additional insulation from external financial pressures.
B. Implementing Resource-Backed Trade Mechanisms
The implementation of resource-backed trade mechanisms offers a considerable opportunity for Africa to decrease its reliance on dollar-denominated pricing and augment its financial sovereignty. Global examples exist, such as the Angola-China model (infrastructure loans repaid with oil revenues) and historical Japan-China arrangements. Ghana's establishment of the Gold Board (GoldBod) to streamline the gold trade represents a step towards potentially leveraging resources more strategically, possibly paving the way for future "resource-for-technology" or similar agreements, governed by frameworks like Ghana's GIPC Act for technology transfer.
Considering Africa's immense resource endowment, resource-backed trade agreements are a feasible strategy. Structures could involve direct exchange or using resources as collateral. Pricing resources in alternative units (gold, yuan, digital currencies) could reduce exposure to Western monetary policies. The exploration of a resource-backed stablecoin by BRICS nations signals growing global interest. Africa can learn from existing models, prioritising transparency, robust governance, and equitable benefit distribution.
C. Establishing a Sovereign Development Finance Ecosystem
Africa's reliance on traditional development finance institutions (IMF, The World Bank) has often involved policy conditionalities criticised for limiting economic policy space. To cultivate greater financial sovereignty, Africa must establish a resilient sovereign development finance ecosystem and currency. Sovereign Wealth Funds (SWFs) can mobilise domestic resources for strategic investments. The emergence of decentralised finance (DeFi) also introduces alternative models, aligning with Sub-Saharan Africa's demonstrated interest in accessible digital financial services.
The Ndege Group, for example, is establishing a (potentially by 2050) US$300 billion Development Finance Fund (DFF) that prioritises ethical investment independent of traditional conditions. Syndicating investments with global partners both within and outside the conventional Western banking system ensures development is financed according to African priorities. This requires significant capital mobilisation and strong governance but is deemed essential by proponents to unlock the continent's economy.
D. Towards a Unified African Currency Strategy
Whilst complete monetary unification remains a long-term objective, Africa can implement incremental measures towards a unified currency strategy. Expanding and strengthening existing regional currency arrangements (EAC, SADC) can facilitate local currency cross-border payments. The introduction of gold-backed digital currencies presents another potential avenue, with Zimbabwe's experience offering lessons despite challenges. Furthermore, negotiating currency swap agreements with non-Western trade partners can enable trade settlement entirely outside the U.S. dollar system, as demonstrated by India.
V. Diversifying Partnerships: The Rise of Non-Western Economic Influence in Africa
Africa's economic partnerships are undergoing increasing diversification beyond traditional Western frameworks. Trade volume between China and Africa reached approximately US$293 billion in 2024, marking continued growth, although Africa maintains a trade deficit. Trade between Russia and Africa reportedly reached a record level in recent years, with significant increases in Russian exports, particularly agricultural goods. India-Africa trade also demonstrates a strong long-term growth trajectory, although specific figures for 2023/2024 require verification.
The expansion of the BRICS economic bloc carries significant implications, aiming to lessen U.S. dollar dependency and promote alternative payment networks. For African nations, this offers opportunities via institutions like the New Development Bank (NDB) (which already funds projects in South Africa and Egypt, aiming to lend in local currencies without traditional conditions), access to diverse markets, and de-dollarisation initiatives. The BRICS exploration of alternative payment systems to SWIFT further supports this trend.
VI. Conclusion: Building a Resilient and Sovereign African Financial System
The analysis presented herein emphasises the feasibility and critical importance of Africa pursuing enhanced financial sovereignty by mitigating its long-standing dependence on the U.S. dollar and associated Western financial systems. Global trends of diminishing dollar dominance, compounded by Africa's economic vulnerabilities, mandate a proactive, multi-dimensional strategy. Drawing inspiration from India's strategies, Africa can formulate its own trajectory towards greater economic resilience.
Strengthening PAPSS is paramount for reducing currency conversion needs and costs in intra-African trade. Implementing resource-backed trade mechanisms, demanding careful governance, offers a viable pathway to leverage natural wealth for strategic imports and potentially price resources alternatively. Developing a sovereign development finance ecosystem, including bolstering African SWFs and exploring alternatives like DeFi, can furnish funding independent of traditional conditionalities. The Ndege Group maintains that its vision of a unified African Development Finance Fund is indispensable for unlocking the continent's potential – the foundation for the projected multi-trillion-dollar economy. Pursuing a coherent African currency strategy through regional blocs, potential digital currencies, and swap agreements can further diminish external vulnerabilities.
As the global financial landscape evolves, Africa is situated at a pivotal juncture. By strategically diversifying partnerships and embracing innovative financial solutions – guided by a vision of self-determination and supported by The Ndege Group, Africa's Sovereign Development Trust – Africa can transition from being a price-taker. It can construct a resilient and sovereign financial system tailored to its own development priorities, thereby unlocking its immense economic potential. The future economic prospect for the continent holds the potential for substantial, multi-trillion-dollar growth.
