Johannesburg, The recent proposal for a common currency within the BRICS group, voiced by Brazilian President Luiz Inacio Lula da Silva during the Johannesburg summit last month, has reignited the global conversation on de-dollarisation. As nations around the world increasingly explore alternatives to the US dollar for international trade, the question of whether a single currency is the best approach for the BRICS nations – Brazil, Russia, India, China, and South Africa – takes center stage.
The United States dollar’s longstanding dominance has faced growing scrutiny since the 2008 global financial crisis. Various countries, including Brazil and several Southeast Asian nations, have sought to reduce their dependence on the dollar. However, it is crucial to contextualize this trend. Recent data from the International Monetary Fund reveals that the dollar maintains its supremacy, accounting for 59 percent of global foreign exchange reserves in the first quarter of this year.
De-dollarisation involves the process of diminishing reliance on the dollar as a reserve currency, a medium of exchange, or a unit of account in the global economy. This shift holds significant implications for international trade and financial markets, considering the United States’ predominant role in the global economic system. Moreover, it carries substantial political consequences, as some nations seek to reduce their vulnerability to US policies by diminishing the dollar’s influence on their economies.
President Lula’s call for a common currency at the BRICS summit has generated discussion but presents numerous challenges. While the specific form of this currency remains undefined, experts suggest options ranging from a basket of currencies from BRICS nations to using gold as a peg, or even exploring digital currencies, such as stablecoins or a common central bank digital currency.
Nevertheless, experts acknowledge that creating a common currency would be an arduous task, given the economic and political disparities among the five BRICS members. At the recent summit, leaders did not elaborate on Lula’s proposal. President Xi Jinping emphasized the need to promote “reform of the international financial and monetary systems,” while South Africa indicated that a BRICS currency was not on the agenda.
The feasibility of a common BRICS digital currency exists but faces considerable hurdles. Discussions on a digital token among BRICS nations began in 2019 and have evolved alongside de-dollarisation efforts. However, such an initiative would necessitate the establishment of a banking union, a fiscal union, and macroeconomic convergence.
Additionally, a single BRICS currency would potentially place the bloc under China’s predominant influence, raising questions about why smaller member nations would want to link their monetary and fiscal policies to China’s economy. An alternative, and arguably more feasible, approach could involve each BRICS country launching its central bank digital currency and subsequently working toward interoperability.
Several projects are already exploring such interoperability, including the Bank for International Settlements’ Project mBridge, which aims to connect economies through central bank digital currencies. Participating central banks include Thailand, Hong Kong, mainland China, and the United Arab Emirates, with the goal of establishing a common platform for efficient, low-cost cross-border digital payments.
While the widespread adoption of central bank digital currencies remains a future prospect, Hong Kong stands as a key player with its expertise in this domain. The Hong Kong Monetary Authority’s involvement in digital yuan trials, the launch of an e-HKD pilot project, and collaboration with the Bank of Israel and the Bank for International Settlements through Project Sela position it favorably for advancing interoperability.
In summary, despite the growing trend of de-dollarisation, the prospect of a common BRICS currency, whether digital or otherwise, appears premature. Instead, the more practical approach may involve each member launching its central bank digital currency and subsequently working toward interoperability. As China leads the way with its digital yuan, the potential for greater global use of the yuan in initiatives like the Belt and Road Initiative and the Regional Comprehensive Economic Partnership becomes increasingly likely, potentially paving the path for other Asian central bank digital currencies. While the trajectory of de-dollarisation remains uncertain, it is a trend poised to gain further momentum.
