Johannesburg, August 23 (Reuters) – Brazil’s president has urged BRICS nations to create a common currency for trade and investments between themselves, potentially reducing the risks of fluctuations in the exchange rate of the US dollar.
Luiz Inácio Lula da Silva proposed this idea during the BRICS summit held in Johannesburg.
Governments and economic experts have considered such a project, taking into account the economic, political, and geographical differences between Brazil, Russia, India, China, and South Africa.
Why Does Lula Want a BRICS Currency?
President Lula believes that nations not using the US dollar should be encouraged to trade in a common currency, and he has even advocated for this in the Mercosur block of South American countries.
According to him, a BRICS currency “enhances our bargaining power and reduces our vulnerabilities,” as he explained during the opening session of the summit.
What Do Other BRICS Leaders Think?
South African authorities initially stated that the BRICS currency was not on the summit’s agenda.
In July, India’s foreign minister declared, “There is no proposal for BRICS currency.” The foreign secretary had previously stated that discussions at the summit would focus on increasing trade in national currencies.
Russian President Vladimir Putin suggested that the meeting, held via video link, consider moving away from the dollar towards national currencies for trade among member countries.
China has not commented on this idea yet. President Xi Jinping spoke about “international financial and monetary reform” during his address to the summit.
Challenges of Establishing a BRICS Currency
Lesetja Kganyago, Governor of the South African Reserve Bank, previously said in a radio interview in July that creating a BRICS currency would be a “political project.”
Kganyago noted, “If you want this, you have to get a banking union, you have to get a fiscal union, you have to get a microeconomic convergence.”
“The key issue is that you need an institutional framework for those countries which are outside it… do we know where it is?” he added.
Trade imbalances are also an issue, as Herbert Poenisch, a Senior Fellow at Xi’an Jiaotong-Liverpool University, wrote in a blog post for OMFIF.
“All BRICS member nations have China as their main trading partner and very little trade among themselves,” he wrote.
Is the US Dollar in Trouble?
BRICS leaders have expressed a desire to use their national currencies more than the US dollar, which strengthened significantly last year due to an increase in interest rates by the Federal Reserve and Russia’s invasion of Ukraine, causing the dollar to become more expensive and many incomes to shrink.
Last year, due to Russia’s restrictions on the global financial system, it was speculated that non-Western allies would distance themselves from the dollar.
Speaking at the summit on Tuesday, Putin said, “The steady decrease in our economic relations’ dependence on the dollar is an objective, non-reversible process.”
According to the International Monetary Fund data, 58% of Greenback’s share in government FX reserves hit a 20-year low in the last three months of 2022, and it fell to 47% due to exchange rate adjustments.
However, the dollar still dominates global trade. According to Bank for International Settlements data, it’s on one side of nearly 90% of global forex transactions.
Reducing the dollar’s dominance would require countless exporters and importers worldwide, borrowers, lenders, and currency traders to make the decision to use other currencies freely.