FRANCOIS FOUCHE: Brics currency: Not so fast

If I offered you a currency to hold for the next decade, what would it be? Some rogues would shout bitcoin. The Swiss franc would be a sound call. But most of us would choose the dollar without much hesitation.

Would emerging-market currencies such as those of the Brics group have any takers? Some. South Africa’s rand is liquid, but our economy is relatively small.

India, even with its large population, growing economy and increasing international political relevance, can’t boast a currency with worldwide gravitas. New Delhi is also closely allied with Washington as a partner in trade and growth.

The immediate concerns with Brazil’s real are the country’s volatile economy, reputation for inflation and political tension. And Russia’s involvement in a war, and the sanctions against it, make the rouble a non-starter.

Even the dominant challenger to the dollar, China’s renminbi, accounts for only about 4.5% of global transactions and even less than that in global reserves.

We could go on. But no national currency in this bloc has a logical starting point as a challenger to the dollar’s dominance. This informs the intention to create an aggregate currency, as Brics leaders are attempting.

Basket currency or basket case?

Surely, one might argue, a unified basket currency (tipped to be named “the unit”) backed by the expanded Brics group has the muscle to become a lingua franca of international trade and settlements?

Some fundamentals support this. Several Brics nations are among the world’s fastest-growing economies. They represent major energy-producing regions. And the Brics brand is gaining traction.

The nations represent nearly half of the world’s population and more than a third of global output.

I should add that the dollar is showing signs of fallibility. Chiefly, the number of dollars being created is astronomical. People rightly worry about the impact on the dollar’s value and the growing debt-to-GDP ratio in the US.

However, hard economic and political realities mean that any Brics currency is at best a long way from becoming a serious global currency.

For starters, currencies need institutions. The dollar is deeply embedded in global finance with powerful institutions. The US Federal Reserve, the US Treasury and bodies such as the International Monetary Fund and World Bank are not entities that can be replicated fast.

The US has its own political divides, but Brics is almost schizophrenic in its search for geopolitical identity. Members reflect a vast range of political structures. They are geographically spread across the globe. Populations are diverse in their languages and cultures. This makes it hard to discern a straightforward goal beyond the blunt “challenge the dollar” statement.

Money as narrative

Ian Macleod, my colleague at the Gordon Institute of Business Science Centre for African Management & Markets (CAMM), captures the issue through the lens of narrative economics. Quoting psychoanalyst David Tuckett, Macleod argues: “The currency of financial decision-making is narrative. At its heart, money is a shared story. R100 has a certain value to me because I believe that enough other people buy into a similar story. We naturally boil down physical currency, central banks, prices in stores and myriad other information into a story.

“As it stands, the story of ‘the unit’ amounts to an announced intention and a mock-up bank note. At best this is dozens of years away from a reliable belief that a store in Lagos will accept my 25,000 units and send me a quantity of oil that we all agree 25,000 units reasonably equates to.

“Despite stories spreading faster than ever with social media, rumours, memes and TikTok dances are not the keystones of a currency. Before a board signs off on the purchase of 1,000 barrels of oil, it needs, at a minimum, reliable stories of successful transactions of the same type. A politician and central bank saying so can’t build sufficient comfort. Zimbabwe’s central bank recently told us that the new gold-backed currency was sound.”

None of this should mean it is impossible to create a new currency that eventually becomes a reliable reserve. In fact, we’ve seen this movie before. If you were a trader in 1750, you’d expect to transact in the Dutch guilder. A merchant in 1850 would calibrate gold, coal and wheat into pound sterling. Today’s norm of mental accounting happening in dollars only emerged after World War 1.

For now — and likely our lifetimes — the mighty greenback, not the unit, is set to be the default unit of account, store of value and medium of exchange on the world stage.

* The CAMM conducts academic and practitioner research and provides strategic insight on African markets. Fouche is an economist and research fellow at the centre