In a recent opinion piece published by the Official Monetary and Financial Institutions Forum (OMFIF), Herbert Poenisch, a senior fellow at Zhejiang University and former senior economist at the Bank for International Settlements (BIS), delves into the prospects of a BRICS currency.
Poenisch discusses the recent meeting of foreign ministers from the BRICS countries (Brazil, Russia, India, China, and South Africa), along with ministers from other nations, where the creation of a common BRICS currency was a central topic of discussion.
He acknowledges that while the idea of a BRICS currency is not new, its feasibility as a replacement for the dollar-based global monetary system is unlikely.
Instead, Poenisch suggests that a BRICS currency would likely exist alongside the established system, similar to the regional initiative of the euro in Europe.
This article explores the challenges associated with a BRICS currency and highlights the need for alignment among member countries.
The Viability of a BRICS Currency
Poenisch highlights that currently, Russia, Brazil, and China utilize their respective currencies for settling bilateral trade payments.
However, this system encounters challenges when imbalances occur. To establish a common BRICS currency, Poenisch suggests that the first major step would be pegging to the renminbi and aligning bilateral exchange rates.
This alignment would require a mechanism to provide credit in renminbi to countries that run trade deficits, such as India and South Africa.
Similar to the European Payments Union (EPU), an organization would need to be established to facilitate this process.
Poenisch emphasizes that China would bear the responsibility of setting up the clearing system and institutions, providing sufficient funds to support liquidity shortfalls, and offering a reserve facility to deposit surplus funds.
Additionally, China would need to remove obstacles to the fungibility of the renminbi, allowing surplus supply of other currencies to be freely converted into renminbi and used by other countries.
These steps would boost the internationalization of the renminbi and increase pressure on China to liberalize its financial account, thereby having significant ramifications for the country’s domestic monetary policy.
Challenges and Considerations
The establishment of a BRICS currency poses several challenges. First, there is a need for enhanced trade among BRICS member countries.
While China serves as the main trading partner for all BRICS nations, trade between the member countries themselves remains relatively limited.
Strengthening intra-BRICS trade would be crucial for the success of a common currency.
Another challenge lies in coordinating economic policies and regulations among the member countries.
The BRICS countries have diverse economic structures, fiscal policies, and levels of economic development. Aligning these policies and regulations to support a unified currency would require significant efforts and compromises.
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Moreover, the global perception of the BRICS economies would play a vital role in determining the success of a common currency.
Confidence in the stability and strength of the economies would be essential to garner trust in the new currency.
Therefore, fostering transparency, good governance, and stable economic growth within the member countries would be crucial.
In conclusion, Herbert Poenisch’s analysis provides valuable insights into the viability of a BRICS currency. While it is unlikely to replace the U.S. dollar as the global reserve currency, a BRICS currency would likely coexist with the existing monetary system.
The establishment of such a currency would require concerted efforts, including aligning exchange rates, establishing a clearing system, and boosting the internationalization of the renminbi.
Overcoming challenges related to trade, economic policies, and global perception will be crucial.
Nevertheless, the pursuit of a BRICS currency represents a significant step toward enhancing economic cooperation and integration among these emerging economies, signaling their growing influence on the global stage.
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Samridhi holds a Bachelor’s degree in Economics. Her research interests lie in examining the intersection of the social sector with poverty and inequality,
Along with this she is keen in understanding the systemic and structural issues that governs growth and development with an interdisciplinary focus.