Jaya Josie
IT HAS been 29 days since I landed at Shanghai Airport to continue with unfinished work at Zhejiang University International Business School (ZIBS), where I was a visiting Professor in 2019.
Unfortunately, the Covid-19 pandemic and subsequent lockdowns put paid to returning to ZIBS in 2020 and 2021. Arriving at the campus in Haining in Zhejiang Province, I was met with a completely new environment.
Now, in 26 more days, or as my granddaughter, Lolwethu (or Lolu for short) keeps reminding me every day how many more sleeps before I return home. I miss my three grandchildren, and especially Lolu. As I prepare to return home, I must think about buying gifts. I thought about the Duty-Free shop in Dubai and found out that I cannot use my local China mobile payment system. Despite the attempts by the BRICS and other emerging economies, it seems that without the dominating foreign currencies, it is difficult to pay for goods in most countries without access to foreign currency.
At all the BRICS summits, there were statements that the BRICS would introduce its own currency or some alternative means of payment, especially for cross-border trade. China’s Renminbi is now an accepted international currency and perhaps can be used for purchases internationally. The South African Rand, the Brazilian Real, the Indian Rupee and, until recently, the Russian Rouble are all convertible currencies to a certain degree.
In a preview of its hosting the 2023 BRICS Summit, the South African Minister of Foreign Affairs bemoaned the fact that BRICS countries were so dependent on the US dollar. However, despite the convertibility of all the BRICS currencies, it will be difficult to create a single BRICS currency.
A recent report in the Highbrow Magazine (25 April 2023) by Antonia Graceffo reasoned why this approach could not be feasible.
The sanctions against Russia following the Ukraine conflict raised fears among developing and emerging market economies that dependence on the hegemonic US dollar will lead to exposure to vulnerability for local currencies. The US dollar apparently accounts for about 90% of currency trading and under 60% of all foreign currency reserves held by central banks. Until recently, when Saudi Arabia, Russia, India, and China decided to do oil trades using their own currencies, almost 100% of oil traders were traded using the US dollar.
In addition, over 74% of all foreign trade uses the US dollar. Given this background, Graceffo argues that abandoning the dollar faces many obstacles. The US dollar is considered the world’s most useful currency and is used everywhere for trade, investment, and servicing foreign debt. Notwithstanding these seemingly insurmountable obstacles the BRICS and other emerging economies have continued looking for viable alternatives as they fear the weaponisation of the US dollar.
In a speech in California at the Milken Institute on May 1, the managing director of the IMF, Kristalina Georgivea, noted that while there is no viable alternative among global currencies to replace the dollar in the foreseeable future, there has been a gradual shift away from the dollar. She reported that the US dollar has slipped from 70% of reserves to now slightly under 60%. The IMF managing director remarked that there may be a possibility of migrating to the use of cross border central bank digital currencies (CBDCs). However, this is highly unlikely in the near future. Nevertheless, she admitted that recently the world is experiencing major economic shocks following the Covid-19 pandemic, the Russia-Ukraine conflict, and a rapid increase in interest rates after many years of loose monetary policy.
These events surprised the IMF and exposed the US banking sector to a massive crisis that has since seen the collapse of major banks in the US. Of course, such a collapse is already eroding global confidence and trust in the US banking sector and consequently, the US dollar.
Many arguments have been advanced as to why a BRICS currency is not feasible at this stage despite BRICS countries recognising their vulnerability to the US dollar.
However, BRICS countries have been grappling with this dilemma since the formation of the group. At BRICS summits, the heads of state have proposed several alternatives to dependence on the US dollar for intra-BRICS trade, especially with regard to currency risks due to exchange rate volatility. The first alternative is to enter into currency Swap Agreements within the BRICS group. As China is the biggest trading partner with all other BRICS countries, it has entered into Swap agreements with each of the other members of the group.
In the case of the BRICS, a Currency Swap agreement is a contract between two countries to exchange a specific amount of one currency for an equivalent amount of another currency.
The purpose of the swaps is to reduce currency risk and achieve lower financing costs or gain access to a foreign currency. In the currency swap, the two countries will agree to exchange national amounts of currencies at an agreed upon exchange rate and then, at a specified future date, reverse the transaction at a prearranged rate.
The swap rate is the difference between the two exchange rates, and it represents the cost of borrowing one currency compared to the other. Many multinational companies in different countries enter into Swap agreements to mitigate against risks and currency and currency volatility. To ensure against volatility, they can sometimes issue bonds in the national currencies of partners using a fixed interest rate. Similarly, the BRICS countries have all maintained stable monetary policies and are in a good position to issue treasury bonds to support their comparative trading advantages in any Swap agreement.
The second alternative is to use their own currencies for trade amongst BRICS countries. To do this, BRICS countries will have a pre-determined fixed exchange rate or a Swap agreement for trading in goods and services.
In 2013, China and Brazil signed an agreement to use their own currencies for trade.
n 2015, China and South Africa entered into a Swap agreement to facilitate trade between the two countries. Since the Ukraine-Russia conflict and the imposition of sanctions against Russia. The Russian, Chinese, and Indian governments have all agreed to trade using their own currencies. Both Russia and China have set up alternatives to the SWIFT messaging system for international payments. For facilitating infrastructure investment in BRICS and Asian countries, the New Development Bank (NDB) and the Asian Infrastructure Investment Bank (AIIB) are taking decisions to use national currencies for investment in their member states.
For now, it looks like I will have to wait for the South African BRICS Summit for some major decision on the use of foreign exchange among BRICS and emerging economies. In the meantime, I must use my South African credit card or use Renminbi in China to buy gifts for my grandchildren.
Josie Visiting Professor, Zhejiang University International Business School (ZIBS) & Professor Adjunct University of Venda