By Dr. Suleiman Walhad
April 21, 2022
About a month ago Jerome H. Powell of the Federal Reserve said on Restoring Price Stability, “we are committed to restoring price stability while preserving a strong labor market”. The Chairman noted that they are fully aware of the hardships on the way, despite strength of the labor market. He further noted that inflationary tendencies on the way or already underway would cause or impose significant hardships and especially for those least able to withstand higher prices of essentials like food, housing and transportation. Jerome H. Powell was talking about his country where inflation is running high and the same goes for countries in Europe and everywhere else.
The ongoing European conflict and the deep and dangerous effects it has on the rest of world is obvious to all those leaders of countries who are concerned about their people and countries and the same should be the same for the Horn of African States. The price rises and inflation that is now a feature of the economic situation of each country would not spare the Horn of Africa States and it is high time the members of the region addressed those important matters that would enable its populace to survive the harsh times ahead. Food security is essential. There is already an existing drought and famine in the region, and the prices of imports of both food and other goods would go even higher. Some items might not even be available in the markets. Price of energy, now an almost essential item will further rise and the need for cheaper resources would be as essential as it can be. There is where the GERD is important for the region for each region would almost be isolated without seeking to be isolated.
There will be countries that would not be able to pay for their debts such as happened in Sri Lanka or Lebanon. Many countries would become bankrupt as the inflationary tendencies coming from the United States spreads and as the European conflict continues. The picture remains bleak! The United States registered only last month its highest inflationary rate at some 8.5%, the biggest in over some forty something years and the same went for the United Kingdom which also recently published inflation at 7%, the highest in over 30 years. Many central banks, like those of the UK, New Zealand, Japan, South Korea, Canada, the United States, and others all increased their prime interest rates over the past month, and this is not the end of the story. The coming month of May 2022 is expected to bring forth further price rises.
The coming period is not going to be easy and the countries of the Horn of Africa States and even its people need to heed. The economy of the world is tied to the United States of America and what happens there definitely affects everyone else. The first thing we should all know is the United States Dollar is the currency of the world. It is used for paying, purchasing, selling of all kinds of goods and services in the world and every other currency is tied to the USA dollar, one way or the other. Many central banks of the world and in fact the majority, keep their hard currency reserves in this currency. It is how they pay for their imports and essential commitments to the rest of the world.
In some countries, it is already used as a local currency. We should not look far. Go to Mogadishu or Hargeisa and you would be surprised how the economy has become almost dollarized for reasons beyond the purpose and scope of this article. The American dollar or just the dollar as we generally call the United States Dollar, is essentially the currency of the world. Every country was expected to use it until the Bretton Woods Agreement came to an end in the 1970s. The Bretton Woods Agreement is so named as it was signed in Bretton Woods, New Hampshire, United States by delegates of 44 countries of the United Nations attending in July 1944 “The United Nations Monetary and Financial Conference”.
The Delegates representing the 44 countries met in Bretton Woods in July 1944 and created an efficient foreign exchange system – the “Dollars for Gold” arrangement where the American Dollar was pegged to gold prizes. The Bretton Woods Agreement also created the two important organizations of the International Monetary Fund and the World Bank. The Bretton Woods Agreement was discontinued by Richard Nixon Presidency in the early 1970s when President M. Nixon announced that the United States of America would no longer exchange gold for U.S. currency, spelling out the death knell of the “dollars for gold” arrangement set out in the Bretton Woods Agreement. Although, the Bretton Woods System was dissolved in 1971, the IMF and World Bank still remain strong. However, the lost global dollar demand that was artificially created through the “Dollars for Gold” arrangement of the Bretton Woods system, was replaced by the advent of the “Petro-dollar”, which was essentially a “Dollars for Oil” arrangement. All petroleum products, the largest commodity in world markets, were to be prized in dollars and the biggest seller of petroleum products was then the Kingdom of Saudi Arabia, which in exchange for buying weapons from the United States, would insist that all those who buy Saudi oil products would have to pay in United States dollars, thus continuing the artificial demand for dollars, which was found unsustainable in the “dollars for gold” arrangement of the Bretton Woods Agreement. The Kingdom of Saudi Arabia thus became a partner in the dollar hegemony of world currencies.
There is now a change of attitude on the part of the Kingdom as reports indicate that they may be willing now to sell their petroleum and petroleum products in other currencies such as the Renminbi of China, with its large economic base or even the Indian Rubee. The Russians also say they would sell their products in Rubles to countries they have problems with. Direct exchanges among these curencies without going through the traditional intermediate step of exchanging them in and out of dollars is a distinct possibility. What should the Horn of Africa States do in these uncertain times? We leave it to the leaders to ponder on this and many others.
In this respect one must note that as at end of 2020, the world currency reserves was estimated to be at some 12.7 trillion United States Dollars, of which 7.0 trillion or some 55.1% was in dollars alone and from here we can note that it is the main engine that moves the world economy in any direction, it so determines or it just moves, good or bad, and wherever moves the price levels in the United States, it would surely affect all other economies globally, including the Horn of Africa States. The “how” is really simple! The debts the Horn of Africa States have to pay or the imports they make or the costs of transportation and everything else, including foreign direct investment levels, is all connected to the United States dollar and, therefore, the price levels, indeed, in the United States, would have a bearing on prices the Horn of Africa States, would have to pay for their obligations.
Why is the United States raising prices anyway? America is suffering from inflationary tendencies at present and prices of all commodities are rising and this has been further exasperated by the European conflict (the war in Ukraine). The cost of production is on the rise as interest rates rise. The price of all other activities also rises including wages, transportation, raw materials and so on and the cost of borrowings from banks, even at the personal level also rises. The authority of interest rate movements always lies with the central banks who either raise or reduce the prime rates they lend to their prime customers, and this is one of the ways they control the levels of money supply in a country. When inflation rises, central banks generally increase the prevailing interest rates to reduce the level of money supply. When interest rates rise, borrowing is reduced and when borrowing is reduced, the money supply in the market is automatically reduced and the vice versa works exactly in the opposite direction.
According to the World Bank, global growth is expected to decelerate markedly in 2022, from 5.5% to 4.1%. This is to be further affected by the Ukraine war, the continuing COVID-19 Pandemic and diminishing fiscal support and lingering supply bottlenecks. The worsening drought in the Horn of Africa would, in addition to world problems, be putting many millions of the Horn of Africa States people at risk and the leadership of the region would need to be concerned with these issues rather than the narrow political games of the politicians of the region.
Both food and fuel prices in the region continue to rise and the governments would need to address these matters and more specifically its tax systems which need to be adjusted to reduce the burden on its populations. One cannot rely always on handouts and support of other good people. The governments would need to be doing their parts in alleviating the pains of their populations. An emphasis on food production and assistance thereof should be encouraged instead of imports as has been amply demonstrated by the price rise of imports. Local production and more specifically efforts to change the eating habits of the population, should be encouraged. It is surprising that the Horn of Africa Sates enjoys a sea belt of some 4700 km, which is rich in fish and seafood, yet the people of the region are dying of hunger. This must be related to other matters but certainly not lack of food! The coastal belt alone can accommodate over three hundred million additional people!
The Horn of Africa States has taken steps to reduce the old animosities and the path towards working together with each other is certainly in the right direction. The other ills to development and integration of the economies of the region in terms of infrastructure still remain, although some infrastructures, such as the rail and road link between Ethiopia and Djibouti, is good. The road links between Eritrea and Ethiopia remain below capacity although the links and port infrastructures are available. On the Somalia and Ethiopia links, the road systems are mostly weather roads, and they would need to be upgraded. Only the Berbera Corridor is being actively upgraded to allow the linkages to prosper. The vast mileages of border between the two countries would need to be totally reviewed and revamped linking Ethiopia to some of the ports along the Indian Ocean. The Djibouti-Somalia link is being also improved through an assistance provided by the African Development Bank, to finance a road linking Djibouti to Borama. Yet despite all these activities, the economic hardships in the region still remain high and the uncertainties, thereof, still leave a lot to desire.
The unfortunate part of the Horn of Africa States region is that the business community of the region leave everything to the governments and politicians, when they should be playing a more significant role in linking the economic infrastructures of the region and linkages in their own industries such as the banking sectors, the telecommunications sectors, the manufacturing sectors and even the farming and agricultural sectors. It is the business community who should be playing the roles of driving engines of integration and bringing the politicians and leaders together. It is only then, that economic uncertainties can be made less uncertain, and closer ties can be created among the populations, which have been wrongfully separated by malevolent politicians for so long!!
*Dr. Walhad writes on the Horn of Africa economies and politics. He can be reached at [email protected]