RUFARO MAFINYANI: Reimagining Brics — economic sovereignty versus a unified currency

The expanded Brics group of nations has been making headlines with discussions about a common currency. This group, representing a substantial portion of the world’s population and economic output, has prompted debates on whether a unified currency is feasible given the vast economic disparities among its members. 

The idea of a common currency for such a diverse group is ambitious. However, significant challenges could overshadow potential benefits. The absence of a monetary union, a foundation Brics has explicitly decided against, is a crucial concern. Even with a monetary union, maintaining a common currency is an enormous task. The eurozone crisis of 2009-12 is a prime example, in which disparities in economic fundamentals created severe strains on the currency union. 

A key issue lies in the vast economic differences among Brics nations. China’s GDP is $17.7-trillion, while Ethiopia’s economy is about $126bn. These stark differences in economic structures, growth rates and monetary policies make a one-size-fits-all currency approach challenging and potentially detrimental. The gap between the largest and smallest Brics economies exceeds the difference between the US and tiny Luxembourg, underscoring the scale of economic divergence a Brics currency would need to accommodate. 

Another concern is the loss of monetary sovereignty. Each Brics nation uses its currency to manage domestic economic challenges. Brazil has used monetary policy effectively to combat inflation, reducing it from more than 10% in 2021 to 4.6% by end-2023. This achievement is particularly significant given Brazil’s history of hyperinflation, which peaked at 6,821% in April 1990. Relinquishing control over monetary policy could leave nations vulnerable to economic shocks and limit their ability to respond to domestic needs. 

The potential for worsening trade imbalances is critical. China, as a net exporter to many Brics nations, could experience a concentration of currency reserves in its central bank under a common currency system. In 2022 China’s trade surplus with Brics nations reached $155bn, highlighting the risk of economic distortions under a shared currency regime. This could lead to economic tensions similar to those observed in the eurozone, in which Germany’s persistent trade surpluses have been a source of debate. 

Contrary to popular belief a common currency does not necessarily enhance trade. The ability to reflect true economic conditions through flexible exchange rates often proves more beneficial for facilitating trade. Recent growth in intra-Brics trade, which reached $422bn in 2022 — a 36% increase from the previous year — occurred without a common currency, suggesting that other factors are more crucial for trade enhancement. 

Promising idea

Given these challenges it seems the Brics nations may not need a common currency but a more innovative and flexible payment system. A promising idea could be a blockchain-based digital currency system tailored specifically for intra-Brics trade. Such a system could address many issues associated with a common currency while still facilitating seamless trade among Brics nations. 

This concept could involve the creation of special-purpose central bank digital currencies for each nation, designed exclusively for intra-Brics trade. These digital currencies could operate on a shared blockchain infrastructure, potentially managed by the Brics Development Bank. 

Each nation would retain control over its domestic monetary policy, using its traditional currency for internal and non-Brics transactions. Meanwhile, the Brics-specific digital currencies could facilitate smoother, more cost-effective trade within the bloc. This could benefit smaller Brics economies, such as Ethiopia, whose currency depreciated more than 30% against the dollar in 2022. A digital currency system could help stabilise Ethiopia’s trading relationships within the Brics network. 

A blockchain-based system could offer unprecedented transparency and efficiency. Real-time adjustments of these digital currencies’ relative values based on actual trade flows and economic indicators could ensure a true reflection of economic realities. This would be an improvement over traditional currency systems, which are often influenced by speculative forces rather than real economic output. For example, the daily trading volume in the foreign exchange market reached $7.5-trillion in 2022, far exceeding the value of global trade in goods and services, which was about $25-trillion for the entire year. 

The recent freezing of Russian assets, estimated at about $300bn, and the country’s exclusion from the Society for Worldwide Interbank Financial Telecommunications (Swift) system, have highlighted vulnerabilities in the current global financial system. A Brics-specific digital currency system could offer member nations more economic security and independence, shielding them from similar actions in the future. 

Such a system would not need to replace existing financial structures entirely. Instead, it could integrate seamlessly with current banking infrastructure. Businesses and individuals could continue to conduct transactions in their local currency while central banks handle the Brics-specific settlements behind the scenes. This approach is reminiscent of the Asian Clearing Union, established in 1974, that has successfully facilitated regional trade settlements while allowing member countries to maintain their individual currencies. 

Co-operation

Beyond facilitating trade, this approach could pave the way for more equitable economic co-operation among Brics nations. By providing a more accurate representation of economic value based on real trade and economic output, it could help balance the interests of larger economies such as China, and smaller ones such as Ethiopia, within the bloc. This would be impactful given the disparities in economic size, in which China’s economy is about 140 times larger than Ethiopia’s. A well-designed digital currency system could help bridge this gap in terms of trade facilitation. 

Implementing such a system would require co-operation among Brics nations and careful consideration of regulatory frameworks. While only 21 countries have launched a central bank digital currency, 130 countries are exploring it. However, given that several Brics nations — such as China with its e-CNY and India with its e-rupee — are already at the forefront of central bank digital currency development, the group is well positioned to pioneer such an innovative system. 

While a common currency may not be the answer for Brics, a carefully designed digital currency system could offer a path forward that balances national interests with the benefits of economic co-operation, and the merits warrant serious consideration. 

• Mafinyani is risk advisory & financial modelling partner at DiSeFu, a specialised financial technology and risk advisory firm operating in the sub-Saharan region.