Since the recent BRICS summit in South Africa, where a decision was made to extend invitations to six new for memberships starting in January 2024, a prominent question has emerged: What could be the potential ramifications of BRICS on the global financial system, especially concerning the prospect of introducing a common currency for the group?
Lessons from the Euro
There is no short answer to this question, but it is clear that the notion of a “unified” currency for BRICS countries is a distant prospect. The reasons are numerous, but most importantly is that previous international experiences have shown that more homogeneous nations have failed to accomplish that objective without making significant concessions. Crafting such a currency would entail a protracted and challenging process that underpins the surrender of national sovereignty over the national currency.
Drawing parallels to the "Euro" experience, many challenges still face that single European currency, especially those related to the disparity in the relative economic weights of the EU countries, with the Federal Republic of Germany playing a major role in achieving the union’s monetary balance. However, this role has come at a considerable cost, negatively impacting the German economy and casting doubts on its long-term sustainability.
On the other hand, BRICS, which is awaiting the inclusion of Egypt, UAE, and KSA and to incubate seven countries from the G20, stands a chance to gradually defuse dollar dominance over the global financial system. That dominance currently supports the system’s bias towards the advanced North at the expense of the developing South. This South has been challenged by continuous and deep-rooted historical obstacles, the repercussions of which continue to undermine its capabilities, primarily stemming from centuries of colonization, which served to accumulate wealth in the North while exploiting the resources and wealth of the less affluent South.
Navigating Financial Independence
The USD exerts its dominance over the global financial landscape, controlling approximately 80% of global trade volume, 90% of the valuation of debt instruments, and 60% of the global reserves of countries. In addition, the US control extends to advanced financial markets, navigation and trade, payment and settlement systems, credit rating companies, and the Breton Woods institutions like the World Bank Group and International Monetary Fund. Any major shock to the green currency would cause a massive economic tsunami, the repercussions of which would likely hit the developing and emerging countries, probably with a higher magnitude than the developed nations. Large economic interdependencies can make this happen.
The financial contagion channels, rooted in economic globalization, also pose significant challenges to countries striving to break free from the dollar's dominance. Particularly, those that depend in their trade on the current system, where the US dollar and US treasury bonds and bills constitute the majority of their reserves.
To realize the aspiration of financial independence within BRICS, or more broadly, to establish a financial balance between the South and North, a multifaceted approach is imperative. This approach can be outlined through the following key points:
First: Promoting balanced trade and investment:
BRICS must announce a comprehensive strategy to grow trade balances and mutual investments among BRICS member states. This strategy must have plans and milestones monitored through specialized and independent platforms, established by the group. For instance, the volume of intra-trade should increase at a rate of 2% annually for five years, then 5% annually during the following five years. Within the framework of that plan, it should be aimed at increasing the share of local currencies in trade and investments (capital denominated in the national currencies of members) with less ambitious targets.
Second: Introducing a BRICS digital currency:
BRICS should announce the issuance of a digital currency for the group, commencing in 2024. The digital currency shall be issued by the New Development Bank and will be collateralized by a basket of member states’ currencies, gold, and some energy products and natural resources. It is crucial to emphasize that this currency will not replace any of the member states' national currencies in the foreseeable future. It is only a parallel currency that can be used to settle some financial transactions, and its value can be used as a reference exchange rate when using national currencies in transactions instead of using the US dollar as a benchmark. This currency plays a role closer to that of the Special Drawing Rights (SDR) issued by the International Monetary Fund.
However, it is imperative to recognize that using member states' currencies as a reserve base for the Development Bank and as a significant component of the new currency's reserves may not suffice to achieve genuine independence from the dollar. This is especially pertinent since the dollar serves as the primary reserve currency for most of these nations, with some adhering to rigid pegs to the US dollar (as seen with the Saudi riyal and the UAE dirham). Consequently, the influence of the dollar extends indirectly to the BRICS digital currency through fluctuations in member states' national currencies. This underscores the importance of pursuing a parallel path, which will be elaborated upon in the subsequent point.
Third: Diversifying reserves and embracing flexible exchange rates:
BRICS nations must embark on a deliberate course of action to gradually reduce the weight of the USD within their reserves. This entails adopting exchange rate regimes that are less dependent on the USD as the single currency. The strategy here necessitates a clear plan to modify their foreign exchange reserve baskets so that the relative weight of the US dollar in those baskets is reduced, and thus, the impact of shocks in the US economy is less passed on to the economies of those countries, avoiding occurrences similar to the subprime crisis over the period 2007-2009.
The exchange rate regimes in the BRICS countries must also shift towards systems that are more flexible and less linked to the USD so that the exchange rate is calculated based on indicators, in which the weight of gold and the prices of a package of energy materials and basic commodities are represented with significant percentage. Gradual dilution of the US dollar's and G7 currencies' presence within these indicators is paramount to achieving this objective.
This step cannot be achieved effectively without taking into account the importance of pricing energy and natural resources, in which the BRICS countries have clear comparative and competitive advantages. The bloc’s states must join forces to develop their own mechanism for pricing these products, away from the absolute Western dominance on commodity markets. Here comes the importance of the next point.
Fourth: Establishing the "BRICS" Commodity Exchange (COMMODEX):
The creation of a “BRICS” commodity exchange (COMMODEX) dedicated to future contracts and options. This exchange might host a spot market platform as well, but its real importance stems from exploring and achieving fairer balanced prices for energy products, minerals, and agricultural commodities, which are most dependent on water (the highly exposed to climate change risks). This new commodity exchange will certainly be supported by an increasing share of the group's global trade (currently just over 18%).
Access to this COMMODEX will not be limited to the BRICS countries, as it will be a global exchange open to various traders, including brokerage firms and clients from everywhere. However, the management and regulation of the market, and behind it, the trading and settlement mechanisms, and the calculation of closing prices... will be controlled by the BRICS members, who alone have the right to appoint management and oversight bodies for that exchange, and they also have the ability to use the trading, disclosure and surveillance systems developed in member states markets.
Ultimately, it is possible to observe and evaluate the experience of issuing a parallel digital currency for the “BRICS” by monitoring the volume of transactions, settlements, and debt issuances that are denominated in that currency and its contribution as a component of the reserves of some member states. If its size reaches certain pre-targeted percentages, it can be announced that any country will be allowed to use it as an alternative to its national currency and, at a later stage, adopt it as a unified currency for the group.
Certainly, it is necessary to realize that the monetary issuance of the BRICS digital currency will depend on the volume of economic activity of the member states, especially what is related to the intra-state transactions of those countries. Therefore, any success of the experience of issuing this parallel currency and any monetary achievement of the group depends largely on the success of the real economy of the BRICS countries. The issuance of bonds and treasury bills in the “BRICS” currency helps the establishment of independent rating agencies sponsored and financed by the “BRICS” countries, which has already begun in India.
In conclusion, there is no need to re-stipulate the necessity of overcoming the challenges of BRICS arising from many disputes and disagreements among its members and from a possible premature confrontation with the West, prior to taking steps to activate the above-mentioned road map. Nevertheless, these challenges represent opportunities for success if the forum can introduce efficient dispute settlement mechanisms through its platforms, and if it is able to formulate common positions among its members regarding the most prominent global issues such as global debt, climate change, and fighting pandemics, in a way that enhances the ability of the South to achieve a degree of balance compared to the dominant North.
