The shift away from the US dollar hegemony: Implications for Uganda

What you need to know:

  • Uganda should be pragmatic and consider applying to join the new structure on the block. 

In today’s world, the global financial system has undergone significant changes since the emergence of the first modern wave of economic globalisation between 1870 and 1914. 

The Gold Standard emerged in the 1970s as the basis for the international monetary system until 1971 when the then US President Richard Nixon ditched the Gold Standard. The Gold Standard failed due to adverse economic shocks, world wars, and the often-repeated attempts to establish fixed exchange rate regimes, which were preferred to flexible exchange regimes based on a fundamental confusion that flexible regimes were unambiguously an obstacle to international trade and domestic macroeconomic stability. 

After World War Two, the world’s largest economy, the US, invited and hosted delegates from 44 countries who met in Brenton Woods, New Hampshire for what is commonly known as the Bretton Woods Conference of 1944. 

During the conference, it was agreed upon that the US Dollar would become the Global Reserve Currency, and the gold standard would be maintained by fixing the value of the dollar to gold, and other currencies would in turn be pegged to dollars. The US waited until the US Dollar had circulated, dominated international transactions, and heavily entrenched as a reserve currency held by the rest of the world in 1970. In 1971, the then US President Richard Nixon ended the dollar’s convertibility into Gold as the US no longer had enough gold to back its dollar. The rest of the world was left with no choice but to use US dollars in reserve, thus the real birth of the US dollar as the dominant global reserve currency backed by the US government’s word, not gold or any other precious metal. 

The US’ financial supremacy has led international vital commodities such as crude oil and gold to be priced in dollars, the US controlling the global monetary system and controlling a quadrillion dollar of annual global transactions, the US uses this position as a key geopolitical weapon to suffocate countries with divergent interests through unilateral sanctions. The US’s approach to the weaponisation of its dollar against countries like Russia, Iran, China, among others has woken up many non-Western nations to realise their vulnerability to US dollar reserves. It is now clear that this approach has been extreme and unwise as the US turns out to be shooting itself in the foot as many economies now clearly see the dollar hegemony as a relic of US’ modern-day empire thus catalysing dedollarisation.

Countries on the watch are busy jointly developing alternative financial structures mostly centred around BRICS which has enough power to counterweight the US and its allies. BRICS’ membership is destined to grow as at least 19 countries wish to join the block. These include Saudi Arabia, Iran, UAE, Egypt, Bahrain, Argentina, Indonesia, Algeria,  among others. Besides economic sanctions, the BRICS are worried about the US’s budget deficits and continuous raising of its debt-ceiling. Digital currency and the gold standard at the centre of the new likely shift given their potential to reshape the global financial system, with its number of benefits ranging from financial inclusion, mostly in a sense of independence from relying on the US dollar as a global reserve currency, to reduced transaction costs. 

The central banks from the emerging markets and some developing economies (EDME) are aggressively purchasing gold in rush for the new bull run on gold. They are accumulating gold reserves at a rate last seen over half a century ago. For example ,the central banks alone accounted for 34 percent of the total demand for gold in the third quarter of 2022.  
Globally, China is at the forefront of the global race of the Central Bank Digital Currencies revolution. 

Uganda is too addicted to the US dollar-led global financial hegemony, to the extent that much of its external debt is denominated, paid, or serviced in US dollars and borrows the US dollars to prevent its local currency from depreciating. Uganda’s central bank should consider a significant investment in R&D of the Central Bank Digital Currency, as it would provide an opportunity for financial inclusion and independence from the US dollar. Regardless of Uganda’s gold origin, Bank of Uganda should invest in keeping a significant share of the total gold stocks that pass-through Uganda. Uganda should be pragmatic and consider applying to join the new structure on the block. 

Francis Muhire, Economist & Lecturer, Makerere University Business School