A leading political economy expert has slammed the idea of Brics setting up its own currency, saying it came from “political ideologues who have no clue how money markets work”.
Pan-African Capital Holdings chair Iraj Abedian said while it’s understandable for Brics member states to want to reduce exposure to the dollar, “hating the greenback” would not be enough to supplant it.
“There is no question that de-dollarisation is a global necessity, for many technical, financial and social reasons. However, to find a substitute currency is a long-term game. The Europeans have been at it for years and the euro is nowhere close to being able to replace the dollar.”
Abedian said Chinese banks had a high bankruptcy rate, Russia was bankrupt and new Brics member Argentina was heavily indebted.
“None of these countries have a platform to create a credible currency now. The use of other Brics member currencies in their counterpart markets exposes that the existing currencies are not credible enough for their own market, let alone global reserves.”
He said emotion must be taken out of the debate about a Brics currency as the process was technical and would have major implications.
Speaking at the heads of state summit on Wednesday, Brazilian President Luiz Inácio Lula da Silva called for a common currency for trade and investment but warned that it should not displace national currencies.
“The creation of a currency for trade and investment transactions between Brics members increases our payment options and reduces our vulnerabilities,” he said.
Adriaan Pask, chief investment officer at PSG Wealth, said deciding on and implementing a Brics reserve currency was far from straightforward.
“Implementing cross-regional policies introduces considerable complexity. The Brics countries exhibit notable variations in their policy deployment, GDP generation, currency management, interest rates and inflation policies. Achieving the required level of integration would be exceedingly complex.
“Furthermore, it is necessary to evaluate whether the effort invested in creating a Brics reserve currency would even be worthwhile. One could simply opt to hold the individual Brics currencies as reserves if needed,” he said.
About 84% of the world’s trade is done in the US dollar, but Pask said this didn’t mean it would 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. However, if you ask how realistic it is for a Brics currency to ultimately dethrone the dollar as the primary reserve currency, I think we’re still a very long way off from that,” he said.
The National Treasury and the Reserve Bank have also expressed reservations about a Brics currency, noting the complexity of starting one, including the need for the bloc to set up a central bank to manage it.
While the final Brics declaration “recognised the widespread benefits of fast, inexpensive, transparent, safe and inclusive payment systems”, it was silent on the creation of a common currency.
There was a push at the summit for member states to reduce their reliance on the dollar when trading with each other.
Though South Africa is pushing for a new international switching system and supports increased trading in local currencies, it is cautious on talk of a Brics currency.
It’s going to be difficult for countries that are trading largely with the Western world, like South Africa, to say ‘I can displace the dollar’
— Finance minister Enoch Godongwana
Finance minister Enoch Godongwana told Business Times that moving away from the dollar, a desire expressed by the leaders of Russia and China, would be extremely difficult.
“We have no ambitions to unseat the dollar, we want to place that on record ... our ambition is to pay in terms of your currency. If you buy things in South Africa, you pay us in rands. So we have no intention to displace the dollar.”
Godongwana continued: “It’s going to be difficult for countries that are trading largely with the Western world, like South Africa, to say ‘I can displace the dollar’ because I still trade with them heavily.”
Minister in the Presidency Khumbudzo Ntshavheni said there was support for the creation of a Brics payment system that would make it possible for Russia to participate in international banking transactions.
Russia, a key member of the bloc, had its banks kicked out of the Society for Worldwide Interbank Financial Telecommunications (Swift) system in 2022 after Western countries slapped it with sanctions over the war in Ukraine. The Swift system is a vast messaging network that powers international money transfers, allowing financial institutions to securely receive money transfer instructions.
“Russia is now excluded from Swift, though there are no UN sanctions against the Russian Federation. As Brics members, we are entitled to look at mechanisms of trading with each other without being hindered by interests outside our own national interests and UN interests,” Ntshavheni said.
“For instance, now if you are going to pay using the switching system that is in existence, Russia is not able to participate. So we need a switching system that can include all members of Brics so that our trade with each other is easier,” Ntshavheni said.
Brics members have set up a payment task force to advise them on cross-border payment systems. They said this would help facilitate the use of local currencies in trade and financial transactions among Brics members and their trading partners.
Independent economist Duma Gqubule said reducing reliance on the dollar was a sensible move that would reduce vulnerability to one currency. But he warned that South Africa should safeguard its own currency.
“We have to de-dollarise as the world, but we, as a country, should never surrender our currency sovereignty. There is no reason we shouldn’t start trading among ourselves in our own currencies,” he said.
Gqubule said since the advent of the war in Ukraine, many countries had localised their means of payment for cross-border trade.
“This is basically Monopoly money the US created out of thin air. Why can’t we do the same? We can’t have excessive reliance on the dollar.”
In his address on Wednesday, President Cyril Ramaphosa said member states were concerned that global payment systems were increasingly being used as instruments of geopolitical contestation.
“Global economic recovery relies on predictable global payment systems and the smooth operation of banking, supply chains, trade, tourism and financial flows. We will continue discussions on practical measures to facilitate trade and investment flows through the increased use of local currencies,” Ramaphosa said.
Stavros Nicolaou, head of the Brics Business Council, said on Friday they were happy to have started a conversation about uneven trade patterns within Brics.
“We were looking to have a conversation to turn deficit into opportunity. There was a lot of interest in that topic.”
He said the summit provided a platform to connect the Brics community with the African business community.
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