During a BRICS summit in Johannesburg, the President of Brazil urged the member nations to establish a shared currency dedicated to trade and investment. The aim behind this initiative is to minimize their susceptibility to fluctuations in the value of the US dollar.
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This proposition was put forth by Luiz Inacio Lula da Silva. Nevertheless, experts and officials have highlighted the substantial challenges associated with this endeavor. The economic, political, and geographical differences among the BRICS countries – Brazil, Russia, India, China, and South Africa – present significant obstacles to the feasibility of such a currency unification.
WHAT DRIVES LULA'S DESIRE FOR A BRICS CURRENCY?
The president of Brazil holds the view that nations abstaining from the use of the US dollar should not be compelled to engage in trade exclusively using the dollar. Furthermore, he has actively proposed the adoption of a unified currency within the Mercosur bloc comprising South American nations.
Lula expressed during the opening plenary session of the summit that a BRICS currency would expand the array of payment choices and alleviate vulnerabilities.
HOW DO OTHER BRICS LEADERS RESPOND?
Statements from South African officials indicated that a BRICS currency was not a focal point of the summit's agenda.
In a statement made in July, India's foreign minister asserted that the concept of a BRICS currency was not under consideration. The country's foreign secretary, before departing for the summit, mentioned that discussions would revolve around enhancing trade using respective national currencies.
Russian President Vladimir Putin remarked that the virtual assembly would delve into the possibility of transitioning trade among BRICS nations from the dollar to their respective national currencies.
China's stance on this concept remains undisclosed. During the summit, President Xi Jinping highlighted the objective of advancing "reforms within the international financial and monetary system."
WHAT OBSTACLES DOES ESTABLISHING A BRICS CURRENCY ENTAIL?
Crafting a BRICS currency constitutes a "political endeavor," as stated by South African central bank governor Lesetja Kganyago in a July radio interview.
Kganyago elaborated, stating that its realization would necessitate the establishment of a banking union, fiscal union, and the achievement of macroeconomic convergence. He emphasized the need for a mechanism to oversee adherence, especially for countries deviating from the established norms. Additionally, the requirement for a collective central bank arises – a query posed by Kganyago: "where should it be located?"
Addressing trade imbalances, Herbert Poenisch, a senior fellow at Zhejiang University, noted in a think-tank OMFIF blog that all BRICS member states predominantly engage in trade with China, while trade amongst the member countries remains limited.
IS THE U.S. DOLLAR FACING CHALLENGES?
BRICS leaders have expressed their intention to enhance the utilization of their respective national currencies instead of relying heavily on the dollar. The dollar's considerable surge in value last year, attributed to interest rate hikes by the Federal Reserve and the Russian-Ukrainian conflict causing elevated costs for dollar-denominated debt and numerous imports, prompted this shift.
The imposition of sanctions that led to Russia's isolation from global financial systems further sparked conjecture that non-Western allies would seek alternatives to the dollar.
During the summit on Tuesday, Putin emphasized that the irreversible process of reducing reliance on the dollar in economic connections is gathering momentum.
Statistics from the International Monetary Fund indicate that the dollar's share of official foreign exchange reserves descended to a 20-year low of 58% during the final quarter of 2022, and 47% when adjusted to account for exchange rate fluctuations.
Notwithstanding, the dollar continues to dominate global trade, engaging in almost 90% of worldwide forex transactions, as documented by Bank of International Settlements Data.
A transition away from the dollar would necessitate an extensive array of exporters, importers, borrowers, lenders, and currency traders worldwide to autonomously opt for alternative currencies.
