Can emerging economies end the dollar's dominance?

Business has vanished at Kingsley Odafe’s clothing shop in Nigeria’s capital, forcing him to lay off three employees.

One culprit for his troubles stands out: The US dollar’s strength against the Nigerian currency, the naira, has pushed the price of garments and other foreign goods beyond the reach of local consumers.

A bag of imported clothes costs three times what it did two years ago. The price these days is running around 350,000 naira, or $450.

“There are no sales anymore because people have to eat first before thinking of buying clothes," Odafe said.

Across the developing world, many countries are fed up with America’s dominance of the global financial system — especially the power of the dollar.

They will air their grievances next week as the BRICS bloc of Brazil, Russia, India, China and South Africa meet with other emerging market countries in Johannesburg, South Africa.

Despite repeated talk of the BRICS countries rolling out their own currency, no concrete proposals have emerged in the run-up to the summit starting on Tuesday.

Emerging economies have, however, discussed expanding trade in their own currencies to reduce their reliance on the buck.

Seeking alternatives

At a meeting of BRICS foreign ministers in June, South Africa's Naledi Pandor said the bloc’s New Development Bank will seek alternatives “to the current internationally traded currencies" — a euphemism for the dollar.

Pandor was sitting alongside Russia's Sergey Lavrov and China's Ma Zhaoxu — representatives of two countries that are especially eager to weaken America's international financial clout.

The BRICS grouping dates to 2009. Originally, it was just BRIC, a term coined by Goldman Sachs economist Jim O’Neill to refer to the rising economies of Brazil, Russia, India and China. South Africa joined in 2010, adding the “S” to the name.

More than 20 countries — including Saudi Arabia, Iran and Venezuela — have expressed interest in joining BRICS.

Commanding equal influence

In 2015, the BRICS countries launched the New Development Bank — an alternative to the US and European-dominated International Monetary Fund and World Bank.

“Developing nations are itching to loosen the grip of Western dominance and open the door to a new world order where the East commands equal, if not greater, influence,” said Martin Ssempa, a Ugandan political activist.

Critics in the developing world are especially uneasy about America’s willingness to use the dollar’s global influence to impose financial sanctions against adversaries — as it did to Russia after the start of its offensive in Ukraine last year.

They also complain that fluctuations in the dollar can destabilise their economies. A rising dollar, for instance, can cause chaos abroad by drawing investment out of other countries. It also increases the cost of repaying loans denominated in dollars and buying imported products, which are often priced in dollars.

Pan-African payments system

Kenyan President William Ruto has expressed concern this year about Africa’s dependence on the dollar and the economic fallout from its ups and downs, while the Kenyan shilling plunges in value.

He’s urged African leaders to join a fledgling pan-African payments system that uses local currencies in a push to encourage more trade.

“How is US dollars part of the trade between Djibouti and Kenya? Why?” he asked at a meeting, to applause.

Brazilian President Luiz Inácio Lula da Silva has supported a common currency for commerce within the South American bloc Mercosur and for trade among BRICS nations.

“Why does Brazil need the dollar to trade with China or Argentina? We can trade in our currency,” he told reporters this month.

But if the dollar’s drawbacks are easily apparent, the alternatives to it are not.

“At the end of the day, if you want to keep your reserve safe, you’ve got to put it in the dollar," said Daniel Bradlow, a senior research fellow at the University of Pretoria and a lawyer specialising in international finance.

“You’re going to need to borrow in dollars. Everybody can see all the problems with doing this, but if there was an alternative, people would use it.”

'A very long path'

Still, the dollar’s hold on global commerce has loosened somewhat in recent years as banks, businesses and investors have turned to the euro and China’s yuan.

But 24 years after the euro was introduced, the world's Number two currency still does not rival the dollar for international gravitas: The dollar is used in three times as many foreign-exchange transactions as the euro, Harvard University economist Jeffrey Frankel said in a study last month.

And the yuan is limited by Beijing’s refusal to let the currency trade freely in world markets.

“None of the alternatives to the dollar managed to get to the dominance level," said Mihaela Papa, senior fellow at Tufts University’s Fletcher School of global affairs.

“So the idea that now, overnight, you will have a new BRICS currency that would (cause) a major upheaval — it takes time, it takes trust ... I see this path as very long."