BRICS Common Currency

The BRICS Summit, a gathering of five key emerging economies, is set to happen from August 22 to 24 in a city in South Africa. These countries, which contribute to 24% of the global GDP, are considering a BRICS Common currency. Some think BRICS Currency might replace the US dollar in these nations.

The idea of BRICS was first suggested by economist Jim O’Neill in the early 2000s. As the summit nears, the discussion of a common currency has sparked a debate. However, Jim O’Neill, who first came up with the BRICS term, dismissed this idea as “ridiculous”.

BRICS Common Currency Explained

What is the proposal for a common BRICS currency?

First revealed by Alexander Babavov, the Deputy Speaker of the Russian Parliament in April 2023, the notion of a common currency among the BRICS nations has been a topic of intense discussion. This proposal also extends to African nations.

Subsequently, this concept received backing from Brazil’s President, Lula da Silva. He advocated for this common currency as a viable alternative to the dominance of the US dollar.

What’s the reason BRICS countries are considering having their own currency?

The main point of this idea is to rely less on the US Dollar, the main currency reservoir globally. This idea of de-dollarisation aligns with the BRICS group’s Development Bank (NDB) plans – they aim to decrease the use of the Dollar in finance, offering an alternative to the traditional Bretton Woods financial institutions.

The push to move away from the Dollar has been growing stronger lately, mainly because of high US Federal Reserve interest rates.

India, for example, is looking to use its national currency or others for transactions. A recent example is India and the United Arab Emirates choosing to use their currencies to pay for oil trade.

The Russia-Ukraine conflict also plays a role in the push for a BRICS currency. After Russia invaded Ukraine, sanctions were put on Russia’s banking system. This closed Russia off from global finance. Restrictions on Russian reserves worth $330 billion and Russia’s blocked access to SWIFT, the system used for central bank transactions, have increased the push for de-dollarisation.

What is India’s Position on BRICS Currency?

India has dismissed the idea of a common BRICS currency. In July 2023, India’s external affairs minister, S Jaishankar, clarified that India has no intentions of pursuing a BRICS currency. This was confirmed by South African officials who stated that such discussions are currently not taking place.

In a July 2023 press conference, Jaishankar emphasised India’s ambition to strengthen its own currency rather than pursuing the idea of BRICS Currency. His statements revealed a focus on empowering the Rupee as a top priority for the Indian government.

Is it possible for BRICS to establish a common currency?

The US dollar is deeply embedded in global transactions, as it’s used in 88% of them and makes up 58% of the world’s foreign exchange reserves. The US, therefore, has a great deal of influence over other economies.

The appeal of de-dollarisation has grown in response to Russia’s invasion of Ukraine. Every BRICS nation has expressed concerns about the dominance of the dollar for various reasons.

Russia, in particular, has been promoting the idea of moving away from the dollar to mitigate the effects of sanctions.
A unifying currency similar to the Euro could be the most far-reaching solution.

However, reaching an agreement for such a currency could be challenging due to the unequal distribution of economic power and complex political relationships among BRICS countries. Furthermore, there’s no indication that any of these countries want to abandon their national currencies.

Comparing The Economic Impact: US Dollar And BRICS Common Currency

Economic Size

The US Dollar holds a dominant position in global foreign exchange transactions, with the Bank for International Settlements reporting its involvement in nearly 90% of these transactions.
The economic magnitude of the United States, the world’s largest economy, contributes to this dominance, with a substantial GDP of approximately US$25.46 trillion, which is 24% of the world’s GDP.
This economic size correlates with an increased demand for the nation’s assets, leading to a greater necessity for its currency.
In contrast, the combined GDP of the BRICS nations (Brazil, Russia, India, China, and South Africa) exceeds US$32.72 trillion, amounting to 31.59% of the world’s GDP.
This means that, collectively, the BRICS countries present a significantly larger economic scale than the United States.

Expanding Monetary Influence Of BRICS

The United States boasts a complex and developed financial system involving a variety of institutions such as banks and investment firms, equipped to manage comprehensive international operations.
Globally, investors lean towards purchasing securities denominated in dollars, attributable to their assured safety and superior liquidity.
An alternative to the World Bank (WB) and the International Monetary Fund (IMF), the New Development Bank (NDB) was founded by BRICS in 2014.
The NDB’s Contingent Reserve Arrangement (CRA) was particularly appealing to developing countries struggling with insufficient dollar reserves and failing to pay off their international debts.
The implementation of the IMF’s structural adjustment program compelled these nations to reduce government spending, increase privatisation, and deregulate their economies. As a result, their ability to formulate independent policies was compromised, ultimately steering them towards seeking financial support from the NDB.
The NDB has started issuing bonds in local currencies, demonstrating how BRICS is expanding its monetary influence by utilising its liquid assets. This move also hints at the possibility of a BRICS currency emerging as a strong contender against the dollar.

Comparative Military Capabilities

The U.S. has significant global influence due to its powerful military and dominant role in world politics. This strength further solidifies the position of the dollar as a leading global currency.
The BRICS nations, namely Russia, China, and India, also possess strong military power, ranking second, third, and fourth respectively on the Global Firepower Index.
However, a military alliance within the BRICS bloc was dismissed in 2018, with a focus instead on improving cooperation with developing countries.
The prospect of such an alliance is unlikely, particularly due to the ongoing border tension between India and China and their differing views on many current and emerging geopolitical and geostrategic issues.
Therefore, in terms of military strength, the U.S. dollar holds a stronger position compared to a potential BRICS common currency.

Why India Is Opposed To BRICS Common Currency

India stands unique among BRICS nations, as it has expressed disinterest in the proposed idea of a shared currency. This stance was clearly articulated by Dr. S Jaishankar, the Minister of External Affairs, in a press conference on July 3, 2023.

In his statement, Jaishankar confirmed that India has no intention to support the formation of a BRICS currency. He signalled that India might withdraw from any related discussions, with the country choosing instead to concentrate on strengthening its national currency, the Rupee.

The primary reasons for this decision include:

The Indian economy is performing well, showing a healthy GDP growth rate. This, it is argued, means that India can thrive without the support of a BRICS common currency.
India maintains robust relationships with Western powers such as the U.S. and Europe, with trade and military contracts worth billions. India is cautious not to jeopardise these relationships by embracing BRICS common currency.

Other Reasons India Should Reject the BRICS Common Currency Proposal

Political intentions behind de-dollarisation might lead to conflicts within the BRICS bloc. For example, Russia may favour transactions in China’s Renminbi more than the Indian Rupee despite India’s arrangement with Russia. This could cause disagreements, disrupting the transition to national currencies and hindering the exploration of a possible common currency.
The introduction of a common currency among the BRICS nations could create a heightened reliance on China. Considering China’s substantial contribution to the BRICS GDP, it is possible that trade within the BRICS bloc could become more liberalised, potentially resulting in reduced or eliminated tariffs on imports from member countries.
This, in turn, could lead to an increase in trade deficits, particularly with China. Consequently, China may gain greater influence and assume a dominant role in establishing trade regulations, thereby ushering in a new form of hegemony.

Conclusion

There are concerns about India’s readiness to use a common currency with the other BRICS countries. The benefits of using a common currency might not be enough to make up for the potential problems. While this new currency could make international payments easier by avoiding dollar conversion costs, the BRICS countries need to be careful. The diverse motivations behind supporting this new initiative could potentially compromise the individual foreign policy goals of each country involved.