WILLIAM GUMEDE: Brics and the bars to dedollarising the world
A common currency is impractical in the short term due to divergent monetary regimes, the poor convertibility of currencies and small intratrade areas
A common currency between Brics (Brazil, Russia, India, China and SA) countries is not practical, feasible or implementable in the short term given their divergent monetary regimes, the poor convertibility of individual country currencies and that intratrade areas are still relatively small.
More recently India has expressed its opposition to the formation of a Brics common currency, adding to scepticism that the group will in the near future be able to create an alternative trading currency to the dollar.
India says it wants to rather strengthen its own currency, the rupee. This is understandable considering that the country now has the most dynamic economy — with the highest annual economic growth rate — within the Brics trading alliance. India’s foreign strategy is to maximise trade with both the US (and the West in general) as well as its Brics partners, not just one or the other.
While a partner with China in Brics, India is also a fierce rival of the Chinese dragon, and fears that China wants to turn its own currency, the yuan, into a Brics common currency so that it can dominate new Brics monetary institutions. India’s concern is that a Brics common currency would bolster the Chinese economy in much the same way the dollar has the US economy in its function as the global reserve currency.
India’s external affairs minister, Subrahmanyam Jaishankar, said recently that his country would insist on well-defined criteria for accepting new members, with new entries restricted based on trade, alignment on global institutional reforms needed, and geographical considerations. India’s trade with the US and Europe brings it billions in income, which it does not want to risk by dismissing the dollar in favour of an untested Brics currency.
Proponents of a Brics common currency say it would initially be used to settle trade deals between members, while the countries continue to use their domestic currencies for home use. Over time the currency is envisaged to be used in trade with non-members, and eventually replace the dollar in this context. If launched, the currency is likely to be backed by gold (and other commodities), meaning such a currency will be convertible into gold.
However, SA Reserve Bank governor Lesetja Kganyago has cautioned over the practicality of establishing a common currency in a trade bloc in which the members are spread over vastly different geographical locations. The success of the euro, the common currency of the EU, has been partially based on geographical proximity, similarity in economic and political institutions and regimes, and individual economies giving up their national currencies.
A Brics currency will also require a Brics central bank, commonality in monetary policy, alignment of fiscal policies, and synergy between political regimes across the trade bloc. Yet as things stand the Brics currencies have mismatched central banking regimes and are not easily convertible — unlike the EU when the euro was established. China and Russia’s central banks are also state controlled, whereas SA, India and Brazil have independent central banks. A big question is whether China or Russia would surrender sovereignty over their national currencies, which would be crucial to the success of a common currency.
In addition, as seen by Russia’s invasion of Ukraine, there are structural weaknesses in the political stability of the Brics countries, which also undermines the stability of their currencies. Though China has experienced high growth over the past decades, it has structural inefficiencies and there is the ever-present threat of conflict with Taiwan. Brazil has also experienced regular political and economic upheavals and its currency has been prone to volatility. In SA, the ANC government has been mired in corruption, mismanagement and inefficiency, which has undermined the stability of the rand.
It is instructive that individual Brics countries do not have large foreign exchange holdings of fellow members’ currencies, with most having traditionally stocked stable currencies — supported by stable governments — such as the yen, Swiss franc and euro. Brics countries trying to wean themselves off the dollar overnight would unleash economic shocks within those countries.
Another major challenge is that trade between the Brics countries is still small, undermining the requirement of an “optimal currency area (OCA)” to sustain a common currency. Expanding Brics membership would increase the volume of trade, helping to secure an OCA and, in theory, increasing the viability of a common Brics currency.
Many large developing countries are already eager to join the Brics alliance, which they see not only as alternative trading partners to the West, but also in some cases as a bulwark against the 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 and Egypt are also keen to do so.
The fact is though, that the US still accounts for almost 25% of the global economy, which underpins demand for US dollars, whereas Brics countries together account for 26% of the global economy. Switching from the dollar cannot happen overnight, as witnessed when the dollar overtook the pound as the global reserve currency — it took 50 years for a full switch to take place.
But even if a Brics currency is not be feasible, the global challenge remains that using the dollar as the world’s only reserve currency makes developing countries prone to negative spillovers from US monetary policies and its economic and political crises — even though the developing countries have no say in US policy-making.
The most practical step to reduce the use of the dollar — and therefore reduce trade transaction costs — in trade between Brics countries is for the members of the group to use methods such as credit receipts for bilateral transactions. A case in point: in March China and Brazil worked out an agreement to settle foreign trade between the two countries in Chinese yuan or Brazilian real, and eliminate the dollar as a third currency in trade between them.
This not only reduced the costs of foreign transactions between the two countries but also began the effort to dedollarise global trade.
Gumede is an associate professor at the Wits School of Governance and author of “SA in Brics”. This is an extract from an Inclusive Society Institute paper, “Brics: Rising De-Dollarisation of the World”.
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