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Picture: Reuters
Picture: Reuters

Global news sites have been dominated of late by debates by analysts and political leaders on whether the dollar is on its way out as a global reserve currency.

For those in favour of maintaining the status quo, the idea that the dollar may be replaced is ludicrous, as the majority of global trade is still facilitated through the mighty Benjamin.

However, proponents of its replacement are adamant that the era of the US’s domination of the global economy is fading, and by extension the global status of its settlement mechanisms. The tit-for-tat debate has now reached SA’s shores through the Brics economic bloc’s continued endorsement of the so-called dedollarisation project.

International relations & co-operation minister Naledi Pandor and her politically aligned colleagues frame their project not as anti-US initiatives, but rather as empowerment strategies for emerging market currencies. This backward-looking conviction is profoundly misguided, another hare-brained scheme from a government hopelessly out of touch with geoeconomic realities.

These proponents do not understand that the architecture of the global financial system has, for more than half a century, been founded on the unassailable bedrock that is the dollar — the currency of unparalleled reach and influence.

With growing regularity, a discourse among ideologues who seek to “liberate” competing currencies resurfaces. It propagates the view that the US is in its twilight years, and that some big political event will catalyse the fall of the dollar as the world’s reserve currency and thereby unravel US hegemony.

A firm dose of reality is required. The ANC and co purport that US economic strength stems from its global currency status, when in fact the opposite is true. The dollar’s dominance is a manifestation of America’s economic strength, not its source.

A blunder of epic proportions

Whenever the de-dollarisation narrative (the idea of shifting from the dollar to alternative currencies for international settlements) re-emerges, it ignites intense debates among various political factions, especially within the Brics bloc. This misguided narrative is driven by an underlying anti-Western sentiment, a deficiency in financial literacy and an overlooking of the geopolitical and historical context.

The economic argument is that if Brics members ceased to use the dollar, its dominance would inevitably falter. One fundamental problem arises though: no Brics member appears willing to adopt another’s currency due to the significant competitive advantage it would confer within the alliance.

The ANC and co purport that US economic strength stems from its global currency status, when in fact the opposite is true. The dollar’s dominance is a manifestation of America’s economic strength

In a more local context, for three critical reasons — volume, access and trust — it would be a strategic blunder of epic proportions should SA continue with this pursuit.

  • Volume: For a currency to function effectively as a medium of exchange and trade, and especially as a reserve currency, it must exist in immense volumes. This is necessitated by the sheer scale of the financial and physical transactions that it would need to lubricate on a daily basis. In 2023, there are only four currencies in the world that could theoretically have the capacity to fulfil this role — the dollar, the euro, the yen and the yuan.
  • Access: One must be able to obtain near-unlimited volumes of the currency as a medium of exchange. Only the dollar satisfies this criterion. For example, during the 1980s, Japan sought to globalise its yen in an effort to establish it as a key international currency. It sought to do this by allowing the yen to float freely on foreign exchange markets and by encouraging the development of offshore yen markets. Yet the lack of deep and liquid financial instruments denominated in yen ensured those offshore markets never took off. Japan’s inability to establish the yen as a global reserve currency was a significant factor in the subsequent economic stagnation it experienced in the 1990s, often referred to as its version of a “lost decade”. During this period, Japan’s policy responses to the economic challenges it faced were severely limited, and as a consequence the country experienced a prolonged period of low growth and deflation.
  • Trust: Confidence in a currency is fundamentally underpinned by stability and predictability. In this dimension, the dollar is exemplary. America’s relatively consistent trade-to-GDP ratio, which naturally hovers around 23%, mitigates the effect of daily currency value fluctuations and promotes confidence in the currency’s stability. Conversely, a country like China exercises tight control over its trade system and micromanages its currency’s value. Despite China’s cosmetically robust economic standing, the yuan’s transparency lags behind that of the dollar, largely due to the Chinese government’s limited disclosure of information concerning its monetary policy. China has been printing money in astonishing volumes; the People’s Bank of China (PBOC), the country’s monetary authority, issued more than 9.62-trillion yuan in 2021 alone, the largest amount issued within a single year in its history. The irregularity of these capital flows and the unpredictability of regulatory changes make it challenging for investors to establish confidence in the yuan. Uncertainties about whether a currency will retain its value the next day will always come into play. While the US may also have faltered in this regard, even as a frayed rope, it still binds more securely than any other.

Insurmountable challenges

The countries within the Brics bloc span disparate levels of economic development, structural variations and distinct political systems, complicating the potential consensus on common currency management. For instance, Brazil and Russia, as commodity exporters, may advocate for a depreciated currency to enhance the competitiveness of their exports. Simultaneously, manufacturing giants like India and China may prefer a stronger currency to safeguard their local industries. China, a one-party state, may lean towards a fully centralised monetary policy framework, while SA and India’s democratic systems favour decentralisation.

The proposal of a jointly managed currency would therefore present an insurmountable and unwanted set of challenges, primarily due to the inherent diversity among the member nations. The economic and political heterogeneities among Brics members create a labyrinth of potential disagreements and policy clashes that would impede the implementation and effective management of a shared currency.

An illusion of choice underscores the complexity of replacing the dollar, as even the most viable alternatives have failed to meet the even the most basic criteria. Brics members must understand that the dominance of the dollar is not just about its use as a settlement mechanism, but that it serves as a symbol of economic stability and trust in the international financial system. Any attempt to replace it would need to address these aspects first. Every attempt by a country or group of countries that sought to challenge the dominance of the dollar has failed. SA’s interests are thus inextricably intertwined with the continued global financial leadership of the dollar. Any move to replace it with another currency as a means of international settlement would be akin to shooting oneself in the foot — a strategic folly of monumental proportions.

It is incumbent upon the SA government to recognise this reality, abandon the misguided vision of dedollarising our economy, and realign its efforts towards mending our national fabric. Failing to do so risks not only diverting essential resources, but also engulfing South Africans in yet another unnecessary and wholly avoidable economic disaster.

• Dion George is DA shadow finance minister.

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