South Africa

Is a Brics currency possible? Experts say it’s not an option

Experts have weighed in on the idea of a collective Brics currency, saying it is not an option

Russia and China want a Brics currency possibly to sidestep sanctions, while Brazil is rather looking at a South American currency and India seems to be more focused on strengthening its own currency, the rupee.

Where does this leave South Africa?

According to prof. William Gumede, author of South Africa in BRICS, Reserve Bank governor Lesetja Kganyago has already cautioned about the establishment of a common currency in a trade bloc where the members are spread over vastly different geographical locations.

Gumede said the Russia-Ukraine war is likely to increase the de-dollarisation of the world and Russia is therefore increasingly pushing the Brics alliance to increase the use of Brics currencies in trade between members, reduce the use of the US dollar and ultimately speed up the formation of a Brics currency.

The analyst, who prepared a paper on the rising de-dollarisation of the world for the Inclusive Society Institute, does not see any benefit for the rand and points out that it is a well-traded for a developing currency.

“So far our biggest trading partners are in the West and any change will knock our currency harder than others. Our currency will suffer the most.”

“India indicated a few weeks ago it would rather strengthen its own currency and engage with Brics members, Asia and the West. The country has a diverse economic policy and is not prepared to put all its eggs in one basket with a Brics currency.”

Gumede said what is needed for a Brics currency is an expansion of its membership. The current Brics meeting is the first where new members can ask to join.

“If Brics can get the oil-producing countries to join, it will be a game changer, as Russia is the only Brics member that has oil. If Brics can get a country such as Saudi Arabia to join, it will change the way currency discussions are pursued.”

If new countries with significant trade join Brics, it will increase its sustainability, but the Brics members must trade more with each other.

“The fly in the ointment is that India will not just accept any new member.

“Russia and China want the process to continue for new countries to apply, while India wants to discuss the criteria for new members first and only when there are new criteria, assess applications. Brazil also changed its mind and also wants to discuss the criteria first. This selective entry approach will slow down the idea of building a currency.”

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Too many differences among current Brics members

Gumede pointed out there are differences between the members’ central banks, with the central banks in Russia and China owned by the state. The Brics Development Bank is not set up to be a central bank and was downgraded due to its trade with Russia.

Brics foreign reserves show none of the members have much confidence in their partners. During the Covid-19 pandemic, not one of them diversified its foreign holdings. Instead, they chose safe currencies, such as the Swiss franc and US dollar. Gumede claimed members not holding each other’s currencies show a lack of confidence in them.

Gumede also emphasised Brics is a trade alliance and not a political one.

“China and Russia want to make it a political union, but the other three members must push back. Brazil extracted hard bargains from Russia and negotiated a massive fertiliser discount. India did the same with Russian oil. South Africa must look at this. Our foreign policy is not competitive enough. India and Brazil always craft foreign policy to benefit their countries first.”

He said the global challenge remains that using the US dollar as the world’s only reserve currency makes developing countries prone to negative spillovers from US monetary policies, and economic and political crises. But what is not in question is the likelihood of the Russia-Ukraine war toppling the US dollar as the global reserve currency is very slim, although the power of the dollar is likely to decline gradually.

Gumede said it is very unlikely that an envisaged Brics currency will replace the US dollar, but it is likely the Brics alliance will create a trading currency pool that will offer an alternative to the dollar.

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This is why US dollar is reserve currency

Adriaan Pask, chief investment officer at PSG Wealth, also did not think a Brics currency is a viable reserve currency option.

“The US dollar serves as the world’s reserve currency, primarily due to the petrodollar system, where oil transactions are conducted in dollars and the proceeds are reinvested in US bond and treasury markets.

“The reserve currency’s purpose is to facilitate efficient trade by providing a widely accepted medium of exchange and sufficient reserves for seamless transactions across regions. This efficiency also extends to investments and debt settlements,” he explains.

For investors, the credibility and trustworthiness of the reserve currency are crucial factors, Pask said.

“Currently, the US possesses a stable democratic system, a mature economy, robust governance, transparent fiscal and monetary policies and a globally open trade environment. These attributes contribute to the trust placed in the US dollar.”

He said Brics countries often lack these characteristics, making them distinct from the US in terms of stability, economic maturity, governance and openness to international trade.

Tensions between the US, China and Russia, a broader emerging-market impact, and most emerging market countries also having significant amounts of dollar-denominated debt also stand in the way of a Brics currency.

Implementing cross-regional policies is also considerably complex and the Brics countries exhibit notable variations in their policy deployment, GDP generation, currency management, interest rates and inflation policies.

“Currently 84% of the world’s trade is done in the US dollar, but that does not mean that it will remain the world’s reserve currency indefinitely. Financial development across the globe has paved the way for easier entry of alternatives, for example, the Euro has started to take a bigger share of global reserves since its introduction.

“If you ask me how realistic it is for a Brics currency to ultimately dethrone the dollar as the primary reserve currency? I think we are still a very long way off from that.”