BRICS and the bars to dedollarising the world

A common currency between BRICS (Brazil, Russia, India, China and SA) countries is not practical, feasible or implementable in the short term given their divergent monetary regimes, the poor convertibility of individual country currencies and that intratrade areas are still relatively small.

More recently India has expressed its opposition to the formation of a BRICS common currency, adding to scepticism that the group will in the near future be able to create an alternative trading currency to the dollar.

India says it wants to rather strengthen its own currency, the rupee. This is understandable considering that the country now has the most dynamic economy — with the highest annual economic growth rate — within the BRICS trading alliance. India’s foreign strategy is to maximise trade with both the US (and the West in general) as well as its Brics partners, not just one or the other.

While a partner with China in BRICS, India is also a fierce rival of the Chinese dragon, and fears that China wants to turn its own currency, the yuan, into a BRICS common currency so that it can dominate new BRICS monetary institutions. India’s concern is that a BRICS common currency would bolster the Chinese economy in much the same way the dollar has the US economy in its function as the global reserve currency.

India’s external affairs minister, Subrahmanyam Jaishankar, said recently that his country would insist on well-defined criteria for accepting new members, with new entries restricted based on trade, alignment on global institutional reforms needed, and geographical considerations. India’s trade with the US and Europe brings it billions in income, which it does not want to risk by dismissing the dollar in favour of an untested BRICS currency.

Proponents of a BRICS common currency say it would initially be used to settle trade deals between members, while the countries continue to use their domestic currencies for home use. Over time the currency is envisaged to be used in trade with non-members, and eventually replace the dollar in this context. If launched, the currency is likely to be backed by gold (and other commodities), meaning such a currency will be convertible into gold.

Mismatched regimes

However, SA Reserve Bank governor Lesetja Kganyago has cautioned over the practicality of establishing a common currency in a trade bloc in which the members are spread over vastly different geographical locations. The success of the euro, the common currency of the EU, has been partially based on geographical proximity, similarity in economic and political institutions and regimes, and individual economies giving up their national currencies.

A BRICS currency will also require a BRICS central bank, commonality in monetary policy, alignment of fiscal policies, and synergy between political regimes across the trade bloc. Yet as things stand the BRICS currencies have mismatched central banking regimes and are not easily convertible — unlike the EU when the euro was established. China and Russia’s central banks are also state controlled, whereas SA, India and Brazil have independent central banks. A big question is whether China or Russia would surrender sovereignty over their national currencies, which would be crucial to the success of a common currency.

This article first appeared on Business Day Live.