WILLIAM GUMEDE: Brics common currency is up for discussion amid myriad challenges
The Brics (Brazil, Russia, India, China and SA) bloc will discuss a proposal on working towards a common currency at its next meeting, to be held in SA on August 22.
However, a common currency between Brics countries is not immediately practical, feasible or implementable, given the divergent monetary regimes, the poor convertibility of the individual country currencies and that the inter-trade areas between the countries are not large enough to sustain a common currency.
The proposal for a Brics common currency envisaged that such a currency would over time become similar to that of the euro, the common currency of the EU, and would be used in transactions by countries outside Brics.
New Brazilian president Lula da Silva expressed his determination last month to work towards de-dollarising international trade, during a visit to the Shanghai-based New Development Bank, a financial institution created by Brics countries as an alternative to the Western-dominated World Bank and IMF.
“Why can’t an institution like the Brics bank have a currency to finance trade relations between Brazil and China, between Brazil and all the other Brics countries?” Lula asked. “Who decided that the dollar was the (trade) currency after the end of gold parity?”
However, talks of a common Brics currency to replace the dollar in global trade is widely premature because any new currency that is created to replace the dollar as global reserve currency will not be able to do so overnight. US GDP is still close to 25% of the global economy, which underpins demand for US dollars. Brics countries together account for 26% of the global economy. When the dollar overtook the pound as the global reserve currency, it took 50 years for a full global switch to take place.
As important, Brics countries presently do not have the capacity to replace the dollar. Brics countries weaning themselves overnight from the US dollar would unleash economic shocks in Brics countries.
A Brics common currency will require a central bank, which will require commonality in monetary policy, alignment of fiscal policies and synergy between political regimes across the trade bloc. The Brics have vastly different central banking regimes — not easily convertible, unlike say the EU when they established a common currency, the euro. China and Russia’s central banks are state controlled. SA, India and Brazil have independent central banks. A big question is whether China or Russia would surrender sovereignty over their national currencies — crucial to the success of a common currency.
Common currencies also need to be underpinned by stable political regimes. As seen by Russia’s invasion of Ukraine, there are structural weaknesses in the political stability of the Brics countries, which undermines the stability of their currencies also — and will undermine a common Brics currency. Though China has experienced high growth over the past decades, growth has slowed down. China has structural inefficiencies — its political stability depends on continuous high growth levels. There is the spectre that China could copy Russia’s invasion of Ukraine and do the same to Taiwan.
Brazil has experienced regular political and economic upheavals and its currency has also been prone to volatility. The nation is deeply split between supporters of new leader Lula da Silva and those of his predecessor, Jair Bolsonaro. The ANC government in SA has been mired in corruption, mismanagement and inefficiency, which has also undermined the stability of the rand.
Another challenge is that trade within Brics countries is too small — the phenomenon of needing an “optimal currency area” to sustain a common currency. Many large developing countries are eager to join the Brics alliance, which they see not only as alternative trade partners to the West, but also in some cases as a bulwark against what they see as developed global hegemony in markets, ideology, and culture.
Mexico, Argentina, Indonesia, Saudi Arabia and Iran have already applied to join. Turkey, the United Arab Emirates (UAE) and Egypt are also keen to join. A larger Brics grouping beyond the current membership will increase the volume of trade between the group, and expand the Brics currency area, and hence theoretically increase the possibility of creating a common Brics currency.
If large oil producers such as Saudi Arabia, the UAE and Egypt join Brics it would mean the group dominating the world’s energy supply. The strength of the dollar is partially based on the currency underpinning oil trade — the so-called petrodollar. Members of oil cartel Opec settle their accounts in dollars.
Currently only Russia is a large oil producer in Brics. If the Brics can persuade oil producers to use a new Brics currency, rather than the dollar, to settle their accounts, it will be a game-changer. Not only will it be a vote of confidence in a new Brics currency, such a move is likely to accelerate the de-dollarisation of the world.
Nevertheless, the most practical step towards reducing the use of the dollar — and therefore reducing trade transaction costs — in trade between Brics countries is for the members of the group to carry out their bilateral trade using methods such as credit receipts. As a case in point, in March, China and Brazil worked out an agreement to settle their foreign trade between each other in Chinese yuan or Brazilian real, to eliminate the dollar as a third currency in trade between these two countries, and to reduce the costs of trade.
Spillovers from US monetary policy decisions, such as interest rates hikes, the post-Covid economic downturns and the Russia-Ukraine war, have increased the value of the dollar, and global commodities — which are priced in dollars — have combined to batter emerging markets, including Brics economies.
There has been a rise in calls by trade regions to align their currencies to minimise their trading in dollars. Brazil and Argentina in January 2023 called for a Latin American currency union to extract the continent from the use of the dollar. In a joint letter, Lula da Silva and Argentina’s President Alberto Fernandez said they planned to “advance discussions on a common South American currency”.
Though geographically close, having a large volume of inter-regional trade and institutional familiarity, an attempt by Brazil and Argentina in the 1980s to launch a shared currency for trade, called the “gaucho”, collapsed because of divergent monetary policy regimes, economic institutions, and political systems, among other reasons.
In francophone Africa, countries that were former colonies of France use the colonial-era CFA franc currency. The CFA franc is used in 14 West and Central African countries. Countries using the CFA franc must keep 50% of their currency reserves with the Banque de France — which pegs the African franc to the euro. This in fact means that the monetary policy of the CFA franc members is conducted by the French central bank in Paris. In 2020, CFA franc countries resolved to replace the currency in time with a new local one, called the eco.
In a recent interview with Bloomberg, Reserve Bank governor Lesetja Kganyago also cautioned about the challenges of establishing a Brics common currency regime. He wondered how practical it would be to attempt to establish a common currency in a trade bloc in which the members are spread over vastly different geographical locations.
• Gumede, an associate professor in the University of the Witwatersrand School of Governance, is author of ‘South Africa in Brics’.
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