- Operational barriers will probably stall progress
- But even talk of a Brics currency reveals a desire to de-dollarise
The early 2000s seem to be making a comeback: ‘Y2K’ fashion is all the rage, and even flip phones are back. And so is another 2000s buzzword: Brics.
The acronym was first coined over 20 years ago by former Goldman Sachs chief economist Lord Jim O’Neill to highlight the growth potential of the Brazilian, Russian, Indian and Chinese economies (South Africa was a later addition). After a Covid-imposed hiatus, the bloc is planning to convene in person again this August at the 15th Brics summit. Interestingly, the issue of currency is on the agenda.
The Brics have long sought to reduce their reliance on the dollar, but sanctions on Russia seem to have accelerated the process. The US debt ceiling stand-off did little to enhance the dollar’s credibility – leaving an alternative looking all the more enticing. In a March article, O’Neill said that “obviously, if there comes a time when the US ceases to be the world’s largest economy, the dollar’s status will be called into question”. He added that if the US was no longer globally dominant, it couldn't be optimal for other economies to remain “so dependent on the American monetary system and the Federal Reserve’s domestically driven priorities”.
Looking at the long horizon, there could be appetite for a Brics currency. In a June survey, the Official Monetary and Financial Institutions Forum (OMFIF) think tank, found that few central banks expected to increase their holdings of dollars over the next decade, while almost 40 per cent expected to add to their renminbi holdings in the next 10 years (see chart).
But 2033 is a long time away – and things look markedly different over the short term. According to the OMFIF survey, the share of respondents looking to increase renminbi holdings in the next two years has more than halved to 13 per cent, and most expect the currency’s share in global reserves to increase to only around 6 per cent by 2033. Nikhil Sanghani, OMFIF managing director of research, said that “at this stage, central banks don’t expect the greenback to be toppled as the dominant reserve currency although its influence is likely to wane”.
A Brics currency would need to overcome some significant operational barriers. At its most ambitious, a Brics currency could look something like the euro: a single currency adopted by all member states. But this seems unlikely: Mihaeto la Papa, adjunct assistant professor at Tufts University, said that “negotiating a single currency would be difficult given the economic power asymmetries and complex political dynamics within Brics”. She adds that the Brics would also need a well-regulated and stable financial market and a strong track record of joint currency management “to convince others that the new currency is reliable”. La Papa thinks that a more realistic goal is an integrated payment system for cross-border transactions as a first step towards a new currency.
But even this scaled-back plan could prove a challenge. O’Neill wrote in March that meaningful cooperation between India and China looks like wishful thinking. “Until that changes, it is fanciful to think that Brics or even an expanded grouping could mount any serious challenge to the dollar”, he said.
The issue of capital controls could also prove thorny. O’Neill said that for a new currency to have any credibility, the Brics would need to abandon Chinese-style capital controls, and allow foreign and domestic investors to decide for themselves when to buy and sell the new currency. He added that “until the Brics and potential Brics-Plus countries can find a credible alternative to the dollar for their own savings, the greenback’s dominance will not really be in doubt”.
But by focusing on details, are we missing the wood for the trees? “Talk of a new Brics currency is in itself an important indicator of the desire of many nations to diversify away from the dollar,” Papa said. She added that even if progress is slow, a new currency “can potentially emerge out of Brics’ commitment to coordinating their policies and innovating – something this currency initiative represents”.
