Digital currencies may break the US Dollar’s hold over Africa’s cross-border trade
January 16, 2024
Michael Kimani Kioneki

Africa’s unhealthy dependence on the United States Dollar (USD) for cross-border trade is fueling an arms race for digital currency alternatives. To put this in perspective, close to half of Africa’s trade is settled in dollars. So every year, Africa loses $5 billion in associated costs for settling trades in USD and United States bank schemes. Sometimes these trades are between neighbouring African countries or economic zones. Other times it is with partners offshore.

By 2019, extra-Africa trade to China and Asia Pacific, Europe and intra-African trade was responsible for over 60% of Africa’s final destination for goods and services. But when it comes to the final destination of payment flows, the US reigns supreme, even though in 2019, the US only made up less than a tenth of Africa’s total trade.

USD or bust? Africa is not standing idle

This mismatch between commercial and financial payment flows heavily favours the USD at the expense of other currencies, including local African currencies. In order to boost the efficiency and profitability of cross-border trade, Africa must come to terms with the economic costs of settling billions of payments in USD.

But who or what will replace the Dollar?

A cluster of digital currency options (real and proposed) has lined up to deepen the conversation. In no particular order:

  • China’s digital currency, the e-CNY, by the People’s Bank of China (PBOC)
  • Central bank digital currencies (CBDCs) by African countries, such as the Central Bank of Nigeria’s e-Naira,
  • Digital currencies by regional economic communities (RECs), such as the proposed Eco from ECOWAS
  • Non-sovereign decentralized cryptocurrencies like Bitcoin

China’s digital currency, the e-CNY, is the strongest contender for a piece of the payment flows between China, Asia Pacific and Africa.

As 2020 approached, approximately 4 out of every 10 trades in Africa’s total trade flowed through the China-Asia Pacific corridor, 5 times more than the US. Even though China is Africa’s largest trading partner, only 7% of global foreign exchange transactions by turnover involved the Chinese Yuan. As of April 2022, the Yuan trailed the USD, Euro, British Pound and Japanese Yen, with the USD involved in a staggering 88.5% of total global foreign exchange turnover.

However, with China at the forefront of the global race to develop CBDCs, Beijing’s odds look vastly better in Africa, where it can pull on its decades-old influence and more recent economic power. There are over 10,000 Chinese companies operating across the continent, with these firms having made over USD 300 billion in investments. China’s dominance in Africa’s technology landscape is well documented. Six out of every ten smartphones in Africa are manufactured by Chinese companies like Transsion and Huawei, who are also responsible for 30% of Africa’s 3G network and 70% of its 4G network. Furthermore, between 2010 and 2017, a third of the continent’s power grid and infrastructure was constructed by Chinese state-owned firms.

Given this level of investment, with the long game firmly in mind, it came as no surprise to observers when Huawei launched the Huawei Mate 40 series with an embedded chip running China’s e-CNY wallet. These developments have been backed by two decades of loans and grants from Beijing that have indebted African countries to China. One could argue that the Chinese Yuan is already a common currency, just indirectly.

Since 2012, Yuan-denominated financial flows in the Africa-China-Asia Pacific corridor and has grown steadily year-on-year. For example, three banks in Zambia, South Africa and Mauritius have correspondent settlement banks, while Angola and Zambia and nine others have appointed legal tender status to the Yuan.

With the Belt and Road Initiative (BRI) increasingly connecting Africa to China, the China-Asia Pacific corridor is a more than ideal test case for the digital Yuan to act as a bridge to financial flows. Movement from the continent’s central banks concerning CBDCs arguably makes China’s investment into the continent over the last 20 years even more prescient.

African central banks are increasingly exploring CBDCs

With China leading the way among the major economies in launching a CBDC, Several sub-Saharan African central banks are exploring or in the pilot phase of their own digital currencies. Over half of the cited proclamations for CBDCs worldwide have cited cross-border payments as a key motivation for exploring CBDCs. But to date, only the Central Bank of Nigeria has gone to market with its e-Naira, with the hype of its launch failing to live up to expectations as it registered dismal volumes. Critics also questioned the logic of digitizing a currency whose paper equivalent already suffered trust issues and which is still used as the primary means of exchange in the formal and informal economy.

For others, the launch of the e-Naira dampened hopes for a West African single currency after two decades of work towards a common legal tender in the region. In contrast, a more cohesive regional approach in East Africa roped six member countries into a joint project to explore a shared regional digital currency scheme.

In January 2023, the East African Community (EAC) secretariat passed a decision to set up the Central Bank of East Africa by the end of the year in preparation for a single currency regime for the region’s 300 million people. In the south, South Africa, a critical hub of the African currency settlement networks for both USD and Yuan, is part of a push for another USD alternative in the form of a basket-based BRICS currency. This currency is also thought to be a competitor of the Special Drawing Rights issued by the International Monetary Fund.

These developments are the result of work done by BRICS over the last decade to cut their dependence on the USD and the risks associated with that dependence.

Great in theory, but digital currencies in practice are anything but

While the potential benefits of CBDCs and digital currencies are great, much of his potential still remains great on paper. On the ground, only two “types” of digital currencies have managed to gain any notable traction: USD-backed digital currencies and decentralized digital currencies like Bitcoin.

While only privately issued, digital versions of the USD, such as USDC and USDT, have grown in utility on the continent. Crypto startups, capitalizing on the USD crisis, go to market with USD savings and payments products for businesses and households who would rather get paid or save in USD versus declining local currencies.

The flip side, however, is grave concerns about digital dollarisation by African governments (with debt burdens priced in USD as part of this risk), especially in light of highly-inflated local currencies and half-baked digital currencies. This is why cryptocurrencies remain popular in Africa since these currencies are priced in USD. The problem is when the cryptocurrency market experiences turmoil, such as the meltdown of FTX, African holders of these currencies feel price collapses in their pockets.

The steep price falls and rallies in the crypto and digital currency space have arguably accelerated calls for regulation in the sector. The International Monetary Fund (IMF), in response to growing Bitcoin peer-to-peer trading volumes, has called for better regulations to curb the growing risks of this activity.

Yet, even amid all this activity and change within the currency space, the more things change, the more they stay the same. For now, as long as the USD survives, it will continue to reign supreme until a credible, battle-hardened challenger emerges.

Michael Kimani Kioneki is a creator from East Africa. He is the Co-Founder and Head of Growth for Africa at Fonbnk, a distributed finance company enabling a frictionless financial onramp for emerging markets.

Find Michael on LinkedIn and Twitter.