Delegates walk past the BRICS Summit logos at the 2023 BRICS Summit at the Sandton Convention Center in Johannesburg, South Africa on August 23, 2023. GIANLUIGI GUERCIA/Pool via REUTERS acquire license rights
JOHANNESBURG, Aug 23 (Reuters) – Brazil’s president on Wednesday urged the BRICS countries to create a common currency for trade and investment among themselves in a bid to reduce their vulnerability to dollar exchange rate fluctuations.
Luiz Inacio Lula da Silva made the proposal at a BRICS summit in Johannesburg.
Officials and economists have pointed out the difficulties such a project poses given the economic, political and geographic differences between Brazil, Russia, India, China and South Africa.
WHY DOES LULA WANT A BRICS CURRENCY?
Brazil’s president doesn’t believe countries that don’t use the dollar should be forced to trade the currency, and he has also advocated a common currency in the Mercosur bloc of South American countries.
A BRICS currency “expands our payment capabilities and reduces our vulnerabilities,” he said at the summit’s opening plenary session.
WHAT ARE OTHER BRICS LEADERS THINK?
South African officials had said that a BRICS currency was not on the summit’s agenda.
In July, India’s foreign minister said, “There is no idea of a BRICS currency.” Before leaving for the summit, his foreign minister said that promoting trade in local currencies was under discussion.
Russian President Vladimir Putin said the meeting, which he attended via video link, will discuss switching trade between member countries away from dollars to national currencies.
China has not commented on the idea. President Xi Jinping spoke at the summit of promoting “the reform of the international financial and monetary system”.
WHAT ARE THE CHALLENGES OF LAUNCHING A BRICS CURRENCY?
Building a BRICS currency is a “political project,” South Africa’s central bank governor Lesetja Kganyago told a radio station in July.
“If you want it, you need banking union, you need fiscal union, you need macroeconomic convergence,” Kganyago said.
“Importantly, you need a disciplining mechanism for countries that don’t agree with that… They also need a common central bank… where do you want it to be located?”
Trade imbalances are also a problem, Herbert Poenisch, a senior fellow at Zhejiang University, wrote in a blog for the think tank OMFIF.
“All BRICS member countries have China as their main trading partner and hardly trade with each other.”
Is the US Dollar in Trouble?
BRICS leaders have said they want to use their national currencies more frequently instead of the dollar, which appreciated sharply over the past year as the Federal Reserve hiked interest rates and Russia invaded Ukraine, eliminating dollar debt and many imports became more expensive.
Last year’s sanctions-imposed sanctions banning Russia from global financial systems also fueled speculation that non-Western allies were turning away from the dollar.
“The objective, irreversible process of de-dollarization of our economic relations is gaining momentum,” Putin said at the summit on Tuesday.
According to the International Monetary Fund, the greenback’s share of official foreign exchange reserves fell to a 20-year low of 58% in the last quarter of 2022 and to 47% on a constant currency basis.
However, the dollar still dominates world trade. According to data from the Bank for International Settlements, it is on one side of nearly 90% of global foreign exchange transactions.
De-dollarization would require countless exporters and importers, as well as borrowers, lenders, and currency dealers around the world to independently choose to use other currencies.
Reporting by Rachel Savage, additional reporting by Ethan Wang in Beijing, Marcela Ayres in Brasilia, Gabriel Stargardter in Rio de Janeiro and Naomi Rovnick, Libby George and Marc Jones in London, editing by John Stonestreet
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