The South African rand would take the biggest knock from a sudden shift to a BRICS common currency as the bulk of its trade is with the West.
This was according to William Gumede, an associate professor from the School of Governance at the University of the Witwatersrand, speaking at a webinar held yesterday titled, “A new BRICS currency? De-Dollarisation.”
He said the differing scales of foreign reserves of the BRICS member countries told a different story from the current sentiments of a common currency.
He said South Africa’s Achilles tendon was the weakest growth amongst the bloc members and the rapid de-industrialisation faced by the economy.
"We are losing growth very fast. The BRICS countries do not hold each other's currencies, but prefer ‘safe' currencies. In the peak of Covid-19 for example, some went as far as to hold the Swiss franc and even the Australian dollar, but not each others’ currencies. It is only now following the Russia/Ukraine conflict that we saw a change,“ Gumede said, pointing out that BRICS members were geographically too far placed versus the Euro economies.
He stressed that there was more likelihood of bilateral currency arrangements between the BRICS countries than as a bloc as it was currently only a trade partnership without deep-rooted political affiliations, affected not only by distance but divergent economic policies.
China’s economy, though showing a growth trajectory, has been hampered by political instability, while the return of Brazil’s President Luiz Inácio Lula da Silva faced challenges he could not easily resolve.
He said India, for example, was not keen on pursuing a common currency at the cost of its internal and external economic functions with lucrative partnerships, while China, Brazil and Russia were more amenable.
“It is all pie in the sky for some of these countries in the short-term. The central banks of some of these countries are downgraded or fear being downgraded for trading with Russia, particularly in the context of the Russia and Ukraine conflict. It is not practical for them to push for a BRICS bank,” Gumede noted.
Gumede said other than significant trade volumes among the bloc members, chasms in the number of members allowed, the process of assessing and accepting new members and criteria stipulated by some members made a short-term reality of a common currency insurmountable.
“China and Russia want as many members as possible to be in the group to respond to the influence of the West, but India is more conservative and prefers working on its own currency first,” he said, pointing out that India was not prepared to put all its eggs in one common currency basket.
This is as nine more countries, including Algeria, Argentina, Bahrain, Bangladesh, Belarus, Bolivia, Cuba and Egypt form an important pillar of the discussions ongoing in Sandton at the summit.
“The fly in the ointment is India, which is not prepared to accept just any new members. Brazil too has called for discussions on the criteria, although it is not seen as all that influential in the bloc. The selection criteria alone will slow down the idea of forming a common currency,“ Gumede said.
He said Russia was making the biggest thrust at making the bloc work because of pressure it faced from the current conflict, including sanctions implemented by the West.
“It is essential for Russia for BRICS to expand,” he said, pointing out that Brazil and Russia had been down the common currency route before in the 1980s and had failed, but would likely re-ignite a bilateral arrangement while the bloc process ground to a slow start.
Last month Nicky Weimar, the chief economist at Nedbank, told Business Report a BRICS currency might never happen and would require China to undergo enormous financial liberalisation.
She said what made the dollar the global reserve currency was that the US had the might of the US Federal Reserve behind it, which the market trusted.
“The US has never defaulted on its debt. It’s given many people scary moments, but it’s never actually defaulted on its debt. The same cannot be said for any of the countries in the BRICS grouping. That’s the first problem,” Weimar said.
The second problem was the only country in BRICS to carry such a reserve currency was China.
“But China has capital controls. You cannot have a reserve currency if you have capital controls. So China, in order to make this possible, would have to undergo enormous financial liberalisation if they really want to compete with the dollar,” she said.