Financial experts have weighed in on the ongoing discussion about the potential introduction of a BRICS common currency, backed by gold, between Brazil, Russia, India, China and South Africa, saying it was not a straightforward process and could backfire reducing trade and investment.
There has been considerable discussion about a new BRICS currency that could challenge the US dollar as the world's reserve currency or, at the very least, provide an alternative.
This comes as South Africa’s ruling party, the African National Congress (ANC), on Monday confirmed that the upcoming BRICS Summit will discuss the proposal of a common currency between the global south countries as part of “de-dollarisation” and strengthening trade.
ANC first deputy secretary-general Nomvula Mokonyane said the BRICS countries wanted to do away with the dominance of a single currency as against many as the world’s reserve currency.
Chief Investment Officer at PSG Wealth, Adriaan Pask yesterday said that deciding on and implementing a BRICS reserve currency was very far from straightforward, despite the significance of these structural “pain points” for the BRICS countries.
Pask said currently, 84% of the world's trade was done in the US dollar, but that did not mean that it would remain the world’s reserve currency indefinitely.
However, Pask said 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,” Pask said.
“Furthermore, it is necessary to evaluate whether the effort invested in creating a BRICS reserve currency is even worthwhile. One could simply opt to hold the individual BRICS currencies as reserves if needed.
“That being said, I think it's a good discussion and debate to have because it forces the hand of some emerging markets to adopt more global investor-friendly policies.”
The official announcement about the new currency is expected to be made during the BRICS Summit in August in Johannesburg, but its development could be years in the making.
The US dollar serves as the world's reserve currency primarily due to the petrodollar system, where oil transactions are conducted in dollars, and the proceeds are reinvested in US bond and treasury markets.
The reserve currency's purpose is to facilitate efficient trade by providing a widely accepted medium of exchange and sufficient reserves for seamless transactions, investments and debt settlements across regions.
A shift away from the US dollar as the world’s reserve currency represents a significant realignment in geopolitical forces, which is assisted, of course, by talk that up to 80 countries are lining up to join the new currency.
Old Mutual Wealth investment analyst Izak Odendaal likened the idea of replacing the dollar with trying to replace the English language as a common business language with a newfound language everyone still had to learn.
Odendaal said forcing a move away from the dollar was a bit like forcing people to stop using English, saying it would reduce, not facilitate global trade and investment.
He said the reason dollar use was so widespread was not because of an American plot, but because it made life a lot simpler for trade and investment when there was a single currency.
“As for a common currency, economic theory and experience in the Eurozone shows that there must be a great degree of integration and convergence between countries for it to work, Odendaal said.
“In other words, there needs to be similar inflation and interest rate regimes, similar laws and financial regulations, and a common fiscal policy to ensure macroeconomic stabilisation.
“Needless to say, none of these conditions hold for the BRICS countries. There isn’t even a BRICS free trade area. The idea of a BRICS currency, therefore, makes no sense.
“Our focus as South Africa should be on trade and investment integration in sub-Saharan Africa, which will require two or three decades of work on building the necessary infrastructure and common institutions at the end of which we might see a common currency.”