Why a common BRICS currency might have to wait

BRICS leaders mulled expanding the group as they met in South Africa’s Johannesburg today (23 August). The 15th BRICS summit is being held from 22-24 August, the first in-person meet since 2019. As leaders of Brazil, Russia, India, China and South Africa participate in the talks, the push for a common BRICS currency seems to have been put on the back burner for now. However, boosting the local currencies of the member nations in trade and financial transactions and reducing dependence on the US dollar is on the agenda. Let’s understand why the creation of a new BRICS currency may take some time to become a reality. Varied opinions and interests For now, India does not seem very thrilled about the prospect of a common BRICS currency. Speaking to reporters, foreign secretary Vinay Mohan Kwatra said recently, “The substantive part of trade and economic exchanges and discussions that have been a part of BRICS discussions, have so far, in a major way, focused on how to increase trade in respective national currencies which… is considerably different from a common currency concept”. “You would know that common currency discussions have several prerequisites before you can even talk about a common currency framework. The discussion framework in BRICS and the substance of that discussion framework in BRICS have focused principally on trade within national currencies," Mint quoted him as saying. A senior BRICS diplomat in South Africa earlier confirmed that the leaders of the bloc will not raise the issue of a common currency during the summit , reported Reuters. On the other hand, Russia and Brazil have been vocal about creating a common BRICS currency. In April, Brazil’s president Luiz Inacio Lula da Silva reportedly said, “I am in favor of creating, within the BRICS, a trading currency between our countries, just like the Europeans created the Euro”. [caption id=“attachment_13032572” align=“alignnone” width=“640”] BRICS nations have different views on creating a common cuurency for the bloc. Reuters (Representational Image)[/caption] Russia, which has been hit by Western sanctions following its Ukraine invasion, is also vehemently in favour of a BRICS currency. Last year, Russian president Vladimir Putin proposed creating “alternative transfer mechanisms” with BRICS partners and an “international reserve currency”, noted The Hindu. While China is keen on de-dollarisation, according to ThePrint, it may eventually “push for inducting the Chinese yuan as the trade settlement currency” rather than a common BRICS currency. BRICS countries, which account for 40 per cent of the global population and 26 per cent of the global economy, are more interested in encouraging the use of local currencies of its members for bilateral trade and lessening the dollar’s dominance. The dollar accounts for 58 per cent of global foreign exchange reserves. The idea of reducing an economy’s reliance on the US currency, or de-dollarisation, for international trade and finance has been on the rise after Russia’s invasion of Ukraine last February. China has called the dollar’s global dominance “the main source of instability and uncertainty in the world economy.” ALSO READ: Is something amiss? Why did China’s Xi Jinping not show up at BRICS Business Forum? Roadblocks in forming a BRICS currency Developing an EU-like common currency currently seems a distant dream for the BRICS nations. Mihaela Papa, Assistant Professor at United States’ Tufts University, in her piece for The Conversation pointed out that agreeing on a common currency would be difficult given the divergent economies comprising the bloc and the political dynamics within the group. India and China have been embroiled in a border standoff since 2020. While Russia and China have tense relations with the United States, this is not the case with the other three nations of the bloc. [caption id=“attachment_13032582” align=“alignnone” width=“640”] The idea of de-dollarisation has increased since Russia’s Ukraine invasion. Reuters (Representational Image)[/caption] “And for a new currency to work, BRICS would need to agree to an exchange rate mechanism, have efficient payment systems and a well-regulated, stable and liquid financial market. To achieve a global currency status, BRICS would need a strong track record of joint currency management to convince others that the new currency is reliable,” she wrote. According to Papa, a Euro-like currency for BRICS does not seem likely for now as none of the member nations have shown any interest in discontinuing their local currencies. What are experts saying? Macroeconomist Lyn Alden has expressed doubts about BRICS members creating a common currency. In an interview with Cointelegraph, she said it would be “very hard” for the bloc of emerging economies to form a gold-backed currency for extensive use. “Backing a fractional-reserve banking system with gold only works temporarily, because the currency units multiply more quickly than the gold does,” Alden said. Former Goldman Sachs economist Jim O’Neill also dismissed the idea of a common BRICS currency. “The dollar’s role is not ideal for the way the world has evolved. You’ve got all these economies who live on this cyclical never-ending twist of whatever the US Federal Reserve decides to do in their own interest,” he told Australian Financial Review. He also dubbed the notion of a common currency for the bloc “ridiculous”. “Are they going to create a BRICS central bank? None of these things will ever happen until those countries want to have their currencies used by people in other parts of the world,” Jim O’Neill was quoted as saying by TheSouthAfrican.com. According to professor William Gumede, author of South Africa in BRICS, the more urgent concern for the bloc should be adding new members. “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,” Gumede told South African newspaper The Citizen. Gumede also underlined that BRICS is a trade grouping and not a political alliance. “China and Russia want to make it a political union, but the other three members must push back." Adriaan Pask, chief investment officer at South Africa-headquartered PSG Wealth, also shot down the idea of a BRICS currency as a viable reserve currency option. “Currently 84 per cent 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”, Pask told The Citizen.  With inputs from agencies