According to an economist with experience at the Bank for International Settlements (BIS), there is a chance for a new currency called BRICS to exist alongside the U.S. dollar. The BRICS currency would be used by Brazil, Russia, India, China, and South Africa, collectively known as the BRICS nations.
The economist pointed out that China plays a significant role in the trade activities of all these countries. To begin this process, the economist suggested that the BRICS nations should link their currencies to the Chinese currency, the renminbi, and ensure that their exchange rates with the renminbi are similar. This would be a crucial initial step towards the establishment of the BRICS currency.
BRICS Currency vs U.S. Dollars
In a recent article published by the Official Monetary and Financial Institutions Forum (OMFIF), Herbert Poenisch, a former senior economist at the Bank for International Settlements (BIS) and current senior fellow at Zhejiang University, shared his thoughts on the possibility of a BRICS currency. The BRICS currency would be used by the countries of Brazil, Russia, India, China, and South Africa. Poenisch’s opinion piece discussed the feasibility and potential benefits of such a currency arrangement.
During a recent meeting, the foreign ministers of the BRICS countries (Brazil, Russia, India, China, and South Africa) gathered with ministers from other nations like Iran, Egypt, the United Arab Emirates, and Saudi Arabia. One of the main topics of discussion was the potential establishment of a shared currency for the BRICS countries. This information was highlighted by the economist who previously worked at the Bank for International Settlements (BIS). The officials also engaged in talks regarding the expansion of BRICS membership, as more than 19 countries have reportedly expressed interest in joining or have applied to become part of the economic bloc.
According to Poenisch, there are already existing arrangements where Russia, Brazil, and China use their own currencies for conducting trade between each other. However, this system faces difficulties when imbalances arise.
Poenisch pointed out that the idea of establishing a common currency for the BRICS countries is not new. He expressed his opinion on the matter, suggesting that a common BRICS currency could potentially address the challenges faced by the current payment system and promote greater economic stability among the member nations. But if such a currency is ever achieved, it is unlikely to replace the dollar — it would exist in addition to the established dollar-based global monetary system
Pegging to the Renminbi
According to Poenisch, China is the most important trading partner for all the countries in BRICS, which stands for Brazil, Russia, India, China, and South Africa. However, the trade among the member countries themselves is not very extensive.
“Pegging to the renminbi and aligning their bilateral exchange rates would be the first major step,” he suggested. “At the same time, a mechanism would have to be set up to provide credit in renminbi to countries that run trade deficits, such as India and South Africa.”
Poenisch suggests that a new organization similar to the European Payments Union (EPU) and a management agent like the Bank for International Settlements (BIS) should be created. These institutions would help facilitate financial transactions and oversee the economic cooperation among the BRICS member nations.
“China would have to shoulder the burden to keep such a clearing system afloat,” he stressed. “This means setting up the mechanism and institutions, providing sufficient funds to support a liquidity shortfall and providing a reserve facility to deposit surplus funds. In addition, it would need to remove obstacles to the fungibility of the renminbi as surplus supply of other currencies should be freely converted into renminbi and used by other countries.” The economist described:
All this would boost the internationalization of the renminbi and increase the pressure on China to liberalize its financial account. Both have major ramifications for the country’s domestic monetary policy.
