The BRICS currency brouhaha could be just a pipe dream

Daniel Makina, University of South Africa

Recently, there has been a flurry of media reports of BRICS countries mulling about the creation of a BRICS currency to challenge the US dollar dominance in international trade. On a lighter note, the intensity of the brouhaha of the idea of a BRICS currency reminds me of an old folklore story that goes as follows. Once upon a time, rats convened a meeting to discuss strategies on how to deal with the cat that was continuously killing their number with impunity. During the discussions, one rat came up with a suggestion of tying a bell around the cat’s neck so that whenever it tries to pounce on them, the sound of the bell would alert them. The suggestion was greeted with ululation and overwhelming happiness. It was such a brilliant idea to their plight that the gathering started partying. At the height of the happiness, one thoughtful rat called for order to pose a question. This is the question it posed: “Who is going to tie the bell around the cat’s neck?” Immediately there was dead silence. There was a realization of the magnitude of the problem. Then suddenly, the cat, which probably had detected the gathering from the noise of the earlier partying, pounced on them. The rats fled for their lives in different directions.

Let’s hope the idea of a BRICS currency won’t turn out to be another folklore story. Historically, the idea of a currency was initiated by private people, particularly merchants and not by governments. Before the advent of money or currency, trade was entirely through barter. Private traders adopted some form of money to overcome the limitations of barter trade, such as the need for a “double coincidence of wants’ between two parties, indivisibility of some goods, lack of standard for deferred payments and problems in storing wealth. The limitations of barter trade gave birth to money but did not entirely eliminate barter trade to this day. Governments have been always slow followers of the adoption of money, and declaring themselves sole issuers of it – just as they are doing today in the face of privately owned crypto currencies. Central bank digital currencies (CBDCs) are clearly a response to privately created crypto currencies.

One could argue that BRICS currency concept takes its cue from the economic principle of an Optimum Currency Area (OCA) although there is no attempt in media reports to argue for it on this basis. The idea of an optimum currency area as developed by a Canadian  economist, Robert Mundell, based on earlier work by Abba Lerner, speculates that sharing a currency can benefit a geographic region by significantly increasing trade. However, this trade must outweigh the costs of each country giving up a national currency as an instrument to adjust monetary policy. Typically, such a geographic region would be characterized by an integrated labour market that allows workers to move freely throughout the area and smooth out unemployment in any single zone, price and wage flexibility (a convergence of these among the countries), similar business cycles and timing for economic data to avoid a shock in any one area, and a centralized budget or control to redistribute wealth to parts of the area which suffer due to labour and capital mobility. Let us briefly go through the existing OCAs before examining the potential of a BRICS optimum currency.

Perhaps, the oldest optimum currency area was the British Empire whereby colonies of Britain utilized the Pound as a medium of exchange. One could argue that theoretically it was not an OCA, but one politically enforced and justified to simplify and facilitate trade between Britain and its colonies. Similarly, another old OCA is the CFA of African French speaking countries (former colonies of France) originally based on the French franc currency and now on the Euro but still called the CFA currency area. The CFA currency area, although modelled along the same lines as the sterling currency area, is different from the latter in the sense that it is within the same geographic region in which countries share a lot of characteristics to this day, especially in terms of labour mobility which has been operationalized by the Economic Community of West African Countries (ECOWAS)’s free movement protocol. But it should be noted that not all ECOWAS countries are in the CFA currency area by virtue of being former French colonies; Ghana, The Gambia and Nigeria are examples.

Another aborted OCA in Africa was the Shilling currency area of the East African Community (EAC). Though aborted, the original members of the currency area – Kenya, Tanzania, and Uganda – still use the Shilling as their currency, although the currency of each of these countries is not convertible at par against each other. The expanded East African Community still aspires to have a common currency in the future.

The third notable OCA in Africa is the Rand Common Monetary Area in Southern Africa comprising South Africa, Lesotho, Eswatini and Namibia, where the South African Rand is a common currency and sharing of revenue through the South African Custom Union arrangement. Note that Botswana was initially a member but opted out in 1976 when it adopted the Pula as its own currency. The Rand Monetary Area has been quite enduring and ideally could be a viable basis of the envisaged SADC monetary union.

Among developed countries, the well-known OCA is the Euro currency area. The Maastricht Treaty signed on 1 December 1991 in the Netherlands paved the way for a single currency for Europe. Following a decade of preparation, the Euro was launched on 1 January 1999. The Euro was meant to promote economic integration, facilitate trade, and provide a stable currency for member states and has since become one of the most widely used currencies globally along with the dollar, the pound, the yen, and the renminbi. Whilst the Euro has endured over time, it has faced challenges such economic disparities among member states and arguments over fiscal policies.

The question is whether the BRICS countries satisfy the requirements for an OCA to adopt a single currency. The term “BRIC” was coined by Jim O’Neill when he was an economist for Goldman Sachs in 2001 to describe a group of fast-growing emerging economies of Brazil, Russia, India, and China. When South Africa joined in 2010 the acronym was changed to BRICS. This grouping of countries formalized themselves with the aim to foster cooperation in various areas, such as trade, finance, and development as well political and security issues. Their notable achievement so far is the establishment of the New Development Bank in 2014 to provide financial assistance for infrastructure and development projects to member countries. Recently, there have been reports that the grouping is considering having a common BRICS currency to rival the dominant US dollar. Having a common currency makes one question whether BRICS countries have the ingredients of an OCA, namely, labour mobility among countries, price and wage flexibility (a convergence of these among the countries), similar business cycles, and fiscal integration among countries.

Firstly, regarding labour mobility, the BRICS comprise mostly heterogenous countries that do not have mobility in any significant way, if we examine migration trends among them. This could partly be due to the countries being in different regions, and cultural and language reasons. Brazil is in Latin America and its official language is Portuguese; Russia is partly in Europe and Asia and its official language is Russian; India is in Asia and its official language is English; China is in Asia and its official language is Mandarin; and South Africa is the in the southern tip of Africa and its official (business) language is English. Therefore, it is evident that among the BRICS countries only two countries – India and South Africa – share the same official language, English.

Secondly, regarding price and wage flexibility, there is no evidence that BRICS countries share anything on his issue, and neither has a debate been opened to explore the potential of having convergence on the matter as was done in the early years of the European Union monetary integration.

Thirdly, BRICS countries cannot be considered as a grouping with similar business cycles. The only discernible similar aspect is that as members of emerging economies, their currencies tend to move in sync against the US dollar in response to global economic cycles.

Fourthly, there is no evidence that BRICS countries intend to integrate their fiscal policies as is required in a currency union. During the conceptualization of the Euro, this aspect was a thorny issue and has not been comprehensively resolved to date. Being heterogenous as sand and sugar, it will be a miracle for BRICS countries to achieve just a semblance of integrated fiscal policies.

In essence, BRICS countries are so far away from being an Optimum Currency Area that the debate of a BRICS currency is simply a bar talk-shop. Apparently, the idea of the BRICS currency is being confused with de-dollarization and conducting bilateral trade with another currency other than the US dollar. A grouping of countries can have a common currency but still conducts trade in the US dollar. That is what is happening to some extent with those countries belonging to existing currency unions. The choice of the US dollar is a rational decision that makes business sense because its value is not as volatile as emerging currencies. However, this does not prevent a government agreeing with another government to conduct trade in their national currencies. It happens often by agreement, especially by countries like Iran and Russia that are under financial sanctions by the US. On the other hand, governments cannot prescribe the choice of a trading currency by private agents and these make their decisions based on enhancing the value of their exported goods between the time the goods are sold and the time payment is made, and not on sentimental value.

Rather than BRICS countries preoccupying themselves with debates over a too distant and probably utopian BRICS currency, they are advised to focus on laying the foundation for an economic and monetary union. It took Europe nearly sixty years to do so as it involved coordinating economic and fiscal policies and having a common monetary policy leading to a common currency. There is no evidence that the BRICS countries have started this process. There is also a need for a role model in the countries seeking a currency union. For instance, the Euro was anchored on the credibility of the German central bank – the Deutsche Bundesbank – whereas the Rand Monetary Area was anchored on the credibility of the South African Reserve Bank. In this regard, central banks of BRICS countries should be reformed so that they are truly independent to conduct monetary policy without political interference, in addition to coordinating economic and fiscal policies. These are issues they should be discussing in their annual summits if they want to dream about having a common currency.

Otherwise for now the noise about a BRICS currency is simply a distant pipe dream. The US dollar reserve currency status seems as safe today as it has been over the past decades. Its marginal decline over the years is attributed to countries preferring currency diversification in reserve holdings rather than doubting its reserve status.  According to the IMF’s Currency Composition of Foreign Exchange Reserves (COFER) data, in the fourth quarter of 2022 the US dollar accounted for 58.36% of global foreign reserves, the Euro coming second at about 20.5% and the Chinese Yuan a distant fifth at just 2.7% (after the Pound, 5.5% and the Japanese Yen, 4.9%) of global foreign reserves[1]. China, which is regarded as the main competitor, is now mired in a real estate slump, precarious job market, and looks to be entering deflation. Given high debt levels both within its government and banking system, deflation raises the real cost of debt and puts tremendous pressure on borrowers.  Couple these macroeconomic issues with questions around China’s capital controls, the road to an economic and monetary union for the BRICS countries will be a sore-foot journey.