BRICS & De-dollarisation: the proposed new Currency

BRICS & De-dollarisation: the proposed new Currency
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The BRICS grouping comprising Brazil, Russia, India, China, and South Africa (and recently some new member countries) has been a significant economic player in the global sphere over the past two decades.

One of the key issues that has gained prominence within this alliance in recent years is the quest for de-dollarisation via the creation of a new BRICS currency.

Let’s take a look at the drivers behind this strategy.

Why de-dollarisation?

Historically, all commodity market trading has been denominated in US dollars, creating an underpinning demand which led to its status as “the world’s favourite reserve currency”. The BRICS countries share a common concern regarding their over-reliance on the US dollar for international trade and financial transactions.

This dependency exposes them to the US dollar and at times, to US monetary policies that may not align with their own economic objectives. It also serves to prop up the value of the US dollar.

To counter this, BRICS nations have been actively seeking alternatives to the dollar and a more diversified international monetary system. An alternative currency is one of the mechanisms they are exploring.

The new BRICS currency

The concept envisions a currency that would facilitate trade and investment among BRICS nations, making it easier to circumvent the dollar-dominated global financial system.

While it is still in the early stages of development, a BRICS currency would reduce the alliance’s dependence on the dollar and promote economic sovereignty.

The creation of a BRICS currency would certainly be a significant step toward de-dollarisation, but disrupting a global system that has been denominated in dollars for many years won’t be plain sailing.

What challenges lie along the path to de-dollarisation?

There are several challenges that need to be addressed for this ambitious goal to become a reality:

  • First, establishing trust among the BRICS nations is paramount, as it requires them all to coordinate their monetary policies, exchange rates, and foreign exchange reserves.
  • Additionally, creating a new currency demands a stable economic and political environment which could be challenging, considering the political and economic diversity within the BRICS group.
  • Another significant challenge is the potential opposition from Western countries, particularly the United States. The dollar has been a dominant global currency for decades, and any shift away from it would affect US economic and geopolitical influence. It’s unlikely that the US would not accept this without pushing back, in the form of diplomatic pressure on the BRICS nations.

What are the potential benefits of the new BRICS currency?

  • The new BRICS currency could reduce exposure to the dollar and enhance the buying power of the BRICS.
  • It could foster economic growth and trade within the BRICS alliance as transactions among member nations would be conducted in their own currency, reducing exchange rate risk and transaction costs.
  • With a shared currency, the BRICS nations would have more leverage in international negotiations, potentially reshaping the balance of power in international organisations like the International Monetary Fund (IMF) and the World Bank.

Should we be braced for imminent announcements?

Talk of creating the new currency has created a reasonable amount of hype, particularly as South Africa hosted the most recent BRICS summit. However, if history has anything to reveal, a brief study of the rollout of the euro and the subsequent consequences (intended and unintended) for many of the EU partner economies suggests that the road to a BRICS currency could be a long and winding one.

By Morné Bezuidenhout, CFP®