De-dollarisation despite Trump: Nations with high debt turning away from dollar to renminbi, Swiss franc

Even as US President Donald Trump has frequently threatened the international community about ‘dedollarisation’, developing nations have lately started to turn away from US dollar over high debt servicing costs and costs of borrowing. Instead, they have turned to alternatives like China’s renminbi and Switzerland’s franc.

Trump has repeatedly threatened Brics nations with tariffs up to 100 per cent about dedollarisation — the move away from US dollar and US dollar-centric financial system as the means for international trade and transactions. India has categorically stated that there are no plans at Brics for dedollarisation.

However, beyond Brics, developing countries like Kenya, Sri Lanka, and Panama have turned away from US dollar in recent years over cost concerns, according to Financial Times.

High debt servicing costs, costs of borrowing driving dedollarisation

The major reason for the move away from the US dollar is not political. Instead, main reasons are high debt servicing costs and costs of borrowing.

The debt servicing cost refers to the total amount a borrower must pay to the lender that includes the principal, interest, and any fees or other charges. The cost of borrowing refers to the price of taking on new debt, including the interest rate charged on the loan, processing charges, any other fees related to the loan. In short, it is the economic cost of accessing borrowed funds.

High interest rates set by the US Federal Reserve —that have also angered Trump— are the reasons behind the move away from US dollar.

“The high level of interest rates and a steep US Treasury yield curve…has made USD financing more onerous for [developing] countries, even with relatively low spreads on emerging market debt. As a result, they are seeking more cost-effective options,” Armando Armenta, the Vice President for Global Economic Research at AllianceBernstein, told FT.

However, such moves away from US dollar are “temporary measures” by countries that had to “focus on lowering their financing needs”, said Armenta.

For comparison, while the benchmark US Federal Reserve’s interest rates are in the 4.25-4.5 range, the Swiss National Bank cut rates to 0 per cent in June and China’s seven-day reverse rate is 1.4 per cent at the moment, according to FT.

This means that debt in currencies like China’s renminbi and Switzerland’s franc costs countries much less than similar debt in US dollar.

Dedollarisation in numbers

The Kenyan government said last month that it was in talks with Chinese’s ExIm Bank to switch to renminbi, the Chinese currency, on US dollar loans for a $5 billion railway project.

Similarly, Sri Lankan President Anura Kumara Dissanayake told the country’s parliament last month that the government was seeking loans in renminbi for a key highway project stalled since the country fell into a financial crisis in 2022.

Panama in July tapped the equivalent of around $2.4 billion in Swiss franc loans from banks, according to FT. The country’s government said that it saved around $200 million.