Africa pays a high price for dollar dependence

Governments across Africa are rightfully questioning the wisdom of anchoring their countries’ futures to the US dollar. The instinct grows from patterns that have shaped the continent’s financial stability, trade resilience, and growth prospects for decades.
A currency that once promised predictability now functions as a vehicle for volatility that African policymakers never signed up for. Each Federal Reserve rate hike, for instance, tightens African credit conditions as if Washington were running monetary policy for Nairobi, Accra, and Lusaka.
Dedollarization — reducing reliance on the US dollar for trade, reserves, and financial transactions — speaks to a desire for insulation, bargaining power, and policy autonomy in an era where external shocks arrive with unprecedented regularity.
While talk of dedollarization is not exactly new, it has gained traction in recent years, after several African currencies lost nearly half of their value against the dollar. Such depreciations erode tax bases, inflate debt burdens, and push countries toward International Monetary Fund programs that come with significant political costs.
Moreover, roughly 70 percent of Africa’s external debt is dollar-denominated. As the dollar strengthens, debt service costs balloon without any new borrowing. In one year alone, African governments paid more than $60 billion in interest on external debt, and a third of that stemmed from dollar appreciation rather than fundamentals.
A continent seeking structural transformation cannot tolerate a global monetary system that amplifies domestic vulnerabilities. Naturally, leaders see a mismatch: African economies are diversifying, yet currency arrangements still resemble the 1980s. The dollar’s dominance magnifies inflation pass-through because the region’s import dependence makes exchange rate shocks automatically inflationary even where fiscal discipline is relatively decent. Food imports alone cost Africa more than $35 billion annually, so a stronger dollar can quickly turn a food security issue into a macroeconomic crisis.
Thus, the heightening pursuit of dedollarization is an attempt to negotiate from a position of less fragility rather than an outright rejection of global markets. Consider this: When Kenya pays for imported crude in Kenyan shillings or when Nigeria explores yuan settlements for infrastructure deals, the goal is strategic hedging. Policymakers want to reduce single-currency exposure in the same way investors diversify portfolios. Russia’s removal from dollar-based clearing systems, for example, demonstrated how geopolitical tremors can easily spill into Africa’s trade channels even when the continent is not a party to any conflict.
Some African governments are also reading the room. Global south partners, from Brazil to Indonesia, are experimenting with local currency settlement mechanisms. BRICS expansion invited African countries into a club openly discussing non-dollar settlement infrastructure.
Moreover, China accounts for more than a fifth of Africa’s trade, and yuan-denominated transactions are rising from a small baseline. The share is still marginal, yet the direction signals Africa’s turn toward a multipolar currency environment before one emerges fully without them.
The Africa Continental Free Trade Area adds another layer. A continent-wide free trade area needs frictionless payment channels to make intra-African commerce more attractive than sourcing from Europe or Asia. To date, roughly 15 percent of Africa’s trade is intracontinental. One reason is the cost and complexity of using a third currency for African-to-African trade.
A Ghanaian processing firm buying Kenyan tea, for instance, often settles in dollars, even though neither economy uses the currency domestically. That situation makes African trade more expensive by an estimated $5 billion annually in transaction and hedging costs.

Local currencies cannot anchor trade if fiscal anchors wobble.

Hafed Al-Ghwell

The Pan-African Payment and Settlement System, or PAPSS, launched with AfCFTA support, attempts to rewrite this by enabling instant cross-border settlements in local currencies. Dedollarization gives PAPSS a fighting chance. Without efforts to reduce dependence on the dollar, AfCFTA risks importing the very structural weaknesses it aims to correct. After all, regional supply chains cannot gain traction if currency swings routinely erase profit margins. Clearing trade in local currencies might not be a silver bullet, but it is a meaningful step toward normalizing African-to-African transactions.
However, skeptics point out that African currencies lack depth, stability, and convertibility, making rapid dedollarization risky. The statement is valid, but incomplete. African policymakers are not proposing to replace the dollar with a patchwork of volatile currencies overnight. Instead, they are reducing exposure in incremental steps: expanding swap lines, piloting common payment platforms, and signing bilateral agreements that allow settlement in mutually accepted currencies.
Some argue that dedollarization could also alienate the US. However, a more resilient Africa ultimately aligns with US interests. Fragile currencies reduce Africa’s capacity to buy American goods, service American-held debt or collaborate in security partnerships. A region forever one shock away from default cannot be a reliable counterweight to growing external influence or as a steady partner in global governance.
Contrary to conventional wisdom, Washington benefits from African markets that function predictably and from finance ministries that do not spiral into crisis whenever the Federal Reserve tightens monetary policy. A modest reduction in dollar exposure could actually stabilize African economies in ways that support long-term American strategic objectives.
Investors also worry that dedollarization could inject uncertainty into Africa’s financial architecture. Yet investor behavior already reflects a deep discomfort with the current setup. Eurobond spreads for many African countries sit hundreds of basis points above comparable emerging markets because dollar volatility amplifies default probabilities.
What is more, local-currency bond markets remain underdeveloped partly because domestic institutions have little incentive to expand markets when external borrowing in dollars seems cheaper in the short term. Dedollarization, if accompanied by credible reforms, could nurture domestic markets into stable sources of long-term capital. Investors prefer certainty over habit, and Africa’s dollar dependence has delivered anything but certainty.
Ultimately, none of this signals an abrupt wholesale transition. Over 80 percent of Africa’s reserves remain in US dollars. The currency will remain central to trade finance, sovereign lending, and commodity markets for years. African countries are only trying to dilute the risks attached to its dominance because even modest shifts can yield outsized benefits. If Africa settles even 10 percent of intracontinental trade in local currencies, for instance, the continent could save hundreds of millions annually in transaction costs. Small gains cascade through supply chains in ways that enhance competitiveness.
The biggest challenge is credibility. Local currencies cannot anchor trade if inflation remains high and fiscal anchors wobble. Central banks must strengthen independence, revamp policy communication, and modernize payment infrastructure. Governments must improve data transparency to reduce the risk premium embedded in African financial markets. Dedollarization without reforms becomes symbolic; dedollarization with reforms becomes transformative.
In Africa’s context, dedollarization is less about the dollar itself and more about the continent’s long-term positioning in a rapidly changing global order. The dollar will remain indispensable, yes — but Africa would rather prefer to shape its financial future rather than inherit it.

• Hafed Al-Ghwell is senior fellow and program director at the Stimson Center in Washington and senior fellow at the Center for Conflict and Humanitarian Studies. X: @HafedAlGhwell