Economic sovereignty starts with how you settle trade, not just with what you export

DAR ES SALAAM: IN recent times, those who are attentive to the emerging perspectives in the global arena will concur with me that there have been significant changes. These changes may require a reorganisation of our nation’s approach to sustain and expand trade with major nations.

I will emphasise the issue of international commerce and the use of various currencies, as I believe it is fundamental and requires us, as a nation, to reorganise ourselves. This reorganisation is in various directions. In the past, I have written about the significance of Tanzania as a nation in its bid to join BRICS.

If the government’s strategies have not yet been finalised, the country should initiate a process to enable Tanzanian financial institutions to join BRICS. The benefits of joining BRICS will become more pronounced in the future, given the rapid pace of global change.

I am stating this because, in my ongoing research to continue offering economic advice, I have observed new developments regarding recent reports that VTB Bank has successfully executed 100 trades and payments. Unquestionably, such developments, and many more to come, among the major nations will have implications for the use of the dollar, a currency that has long been the global trade currency.

This article, in a way, continues where I left off in my article “Not an Option: The Timing of Joining BRICS,” which was published by the Daily News. To ensure we are all on the same page and to assist my colleagues who are unfamiliar with these matters, not privileged to insights into these critical global issues, or have limited time for in-depth research, I will endeavour to clarify the meaning of VTB Bank’s trading relationship with India at “100 per cent”.

Importantly, I will also explain what this implies and its impact on the use of the dollar as a global trading currency. When individuals refer to VTB Bank as trading with India at 100 per cent, they typically mean that there is no involvement of the US dollar, trade is settled entirely in national currencies (ruble–rupee in this instance) or through alternative clearing systems and payments are routed outside SWIFT, often through bilateral mechanisms.

The significance of this and the lessons that a nation such as Tanzania can learn stem from the fact that VTB is a major Russian state-linked bank. Sanctions have prevented Russia from accessing Western financial infrastructure, compelling it to dedollarise trade, establish currency exchange lines, and, as a major nation, accept localcurrency settlement discounts or inefficiencies.

In contrast, India, in this instance, receives discounted energy and commodities, expands its geopolitical autonomy, and, most importantly, mitigates its exposure to US secondary sanctions (to a certain extent).

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In summary, this is what I would call a sanctions-proof trade engineering arrangement from an economic perspective, rather than merely a banking arrangement. In these circumstances, the question arises: Does this pose a threat to the US dollar as the world’s reserve currency?

The brief answer, from an economist and financial analyst with solid insight, is that it will not happen immediately. In the long term, it will erode the dollar’s monopoly. The dollar remains the dominant currency because 85–90 per cent of global FX transactions involve the US dollar. The majority of commodities, including oil, gas, wheat and precious metals such as gold, are priced in dollars.

The financial markets in the United States remain the most liquid and profound. Nevertheless, headlines are not the only thing evolving; behaviour is too. In my view, a structural transition is underway.

The example and case at hand, VTB–India, are indicative of a broader trend: Russia– China (ruble–yuan). Yuan oil pricing experiments between China and Saudi Arabia. It is imperative that we acknowledge and understand that the BRICS is advocating for the establishment of localcurrency trade frameworks.

Although central banks are increasing their gold and nonUS dollar reserves, this does not signal the demise of the dollar; rather, it undermines its exclusivity. Consider the following: The dollar is transitioning from being the sole highway to being the largest highway in a burgeoning global financial network and from an economic perspective, the implications aren’t small.

I believe that, in the global context, the true implication of the situation is that currency power has now shifted to political power. Trust, market depth and enforcement authority (sanctions) have been the foundation of the US dollar’s strength for an extended period.

However, when sanctions become excessively frequent, nations respond by establishing parallel systems that entail higher transaction costs in exchange for sovereignty. In this instance, the strategic perspective suggests that VTB’s trade with India is less about economics and more about our preference for incurring inefficiency costs rather than relinquishing policy independence. I believe this perspective is becoming increasingly prevalent.

What lessons can Tanzania glean from trading with large nations?

For the time being, I will focus on five critical areas. In my view, Tanzania is well placed to increase its exports by leveraging value addition and an improved business environment. This is where the practicalities begin. If time permits, I will address additional concerns and the actions our nation must consider to capitalise on the evolving payment systems, which also offer a convenient means of obtaining financing.

Initially, currency dependence is a strategic risk. At present, Tanzania’s trade remains heavily reliant on the dollar, as it is priced, cleared and financed in the dollar. I am of the opinion that those who understand these matters would concur that the country is susceptible to external policy disruptions, imported inflation and foreign exchange volatility.

In reality, even partial local-currency trade (TZS–CNY, TZS–INR) can ease the pressure on reserves. As Tanzania prepares to double its exports and establish a one trillion-dollar economy by 2050, it is imperative that we adopt a trade strategy that prioritises efficiency over size. Large nations do not engage in “fair” trade; rather, they engage in strategic trade.

Tanzania should not limit itself to exporting raw materials in this sector; rather, it should negotiate processing, storage and logistics clauses and link trade agreements to technology transfer and skills development. To underscore the importance of exporting refined cashew products with a guaranteed offtake, consider the following example.

My third type of lesson for consideration in Tanzania requires an improved economic diplomacy strategy. In the future, it is imperative that our nation prioritise diversifying its partnerships rather than its allegiances. The trade between Russia and India demonstrates that it is unnecessary to pick sides.

Tanzania can engage in trade with the United States, the European Union, China, India and the Gulf States. It is high time, as a nation under the leadership of our BOT, to seriously consider implementing multi-currency settlement. While it is crucial to maintain policy space, nonalignment is no longer a political construct; it is a financial structure. Fourthly, our initial defence in this complex and ever-changing world is regional trade.

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Tanzania must continue to strengthen the EAC and SADC settlement systems. Additionally, regional clearinghouses should be utilised whenever feasible.

Reduce the use of the dollar in intra-African commerce. The AfCFTA is more potent than many realise, provided that settlement systems function properly. The overarching message for Tanzanian legislators, policymakers and our representatives in the House of Parliament, as they deliberate on the 100-day assessment of her excellence, Dr Samia Suluhu Hassan, is that the VTB–India case I have employed in my thinking here does not result in the cessation of dollar dominance through trade.

However, it points to a future in which currencies are multipolar. The distribution of power is shifting from the issuer of money to the manager of trade routes and settlement systems. While my subsequent strategic advice and analysis will focus on the practical steps Tanzania can take to reduce its dollar exposure and link to the BRICS expansion and African development finance, for now the lesson for Tanzania is clear.

The establishment of economic sovereignty depends on how commerce is settled, rather than solely on the products exported.