…Insights from BRICS and implications for Africa’s common currency
The global economic landscape is witnessing a gradual shift away from the dominance of the U.S. dollar in international trade and finance. This phenomenon, commonly referred to as de-dollarisation, has gained significant attention in recent years. Among the frontrunners of this movement are the BRICS nations, comprising Brazil, Russia, India, China and South Africa. These emerging economies have been actively exploring alternative currency strategies to reduce their reliance on the U.S. dollar. This article aims to delve into the geopolitics of de-dollarisation, analyse the currency strategy of BRICS nations, and assess the potential lessons for Africa’s pursuit of a common currency.
Foreign nations’ pursuit of independence from the U.S. dollar is not a new phenomenon. However, recent developments have added urgency to these efforts. Currently, the U.S. dollar is used in a staggering 84.3 percent of global transactions, compared to just 4.5 percent for the Chinese yuan, despite the latter’s rise as a global economic powerhouse. The 2022 Triennial Survey report from the Bank for International Settlement (BIS) reveals that foreign exchange trades is still dominated by the US dollar with 88 percent of all trade, followed by the euro, yen, pound, and the renminbi. According to the International Monetary Fund data on currency composition of official foreign exchange reserves (COFER) in 2022, over 58 percent of global reserves are denominated in U.S. dollars, which is more than twice the proportion held in euros – the second most widely held currency globally. The Chinese renminbi holds a marginal fraction of 2.8 percent of foreign reserves. This data highlights the continued dominance of the U.S. dollar in the international reserve system.
This lopsided reliance on the dollar poses risks to countries that find themselves vulnerable to geopolitical tensions, economic penalties, and the alleged hegemony of the U.S. dollar in the international financial system. Consequently, countries – such as Brazil – have raised questions about the justification of using the dollar as the primary currency for global trade.
The role of BRICS
The BRICS nations have emerged as trailblazers in the pursuit of de-dollarisation. These five regional economies, initially identified by Jim O’Neill – a Goldman Sachs economist – as the ‘BRICs’ in 2001, have since grown in importance, with South Africa joining the group in 2010. Their collective effort to reduce reliance on the U.S. dollar stems from a desire to establish a more equitable and balanced global financial system.
Russia, in particular, has taken a leading role in spearheading the development of a new currency for cross-border trade among BRICS nations. This move has triggered a reevaluation of traditional currency strategies and sparked discussions on the potential benefits and implications of a shift away from the U.S. dollar.
The Chinese yuan is gaining momentum as a preferred currency for international trade settlement. As China’s economy grows and its influence on the global stage expands, more countries and businesses are increasingly willing to use the yuan for cross-border transactions. First half of 2023 has witnessed a monumental increase in the use of the yuan in international settlement. Cross-border payments and receipts in yuan rose to a record US$549.9billion in March from US$434.5billion a month earlier, according to Reuters calculation based on data from the State Administration of Foreign Exchange. The yuan was used in 48.4 percent of all cross-border transactions, Reuters calculated, while the dollar’s share declined to 46.7 percent from 48.6 percent a month earlier. Again, in April 2023, Pakistan’s energy sector received a crude oil shipment from Russia that was paid for in Chinese currency. The move marks a departure from the traditional practice of conducting oil transactions in U.S. dollars, indicating a shift toward alternative currencies in international trade.
The geopolitics of de-dollarisation
The geopolitics of de-dollarisation extends beyond the BRICS nations and have far-reaching implications for the global economic order. The increasing diversification of currencies used in international trade and finance reflects a desire among nations to safeguard their economic interests, enhance monetary sovereignty, and reduce vulnerability to external shocks. As countries explore alternative currency strategies, the balance of power in the international financial system could undergo significant shifts, with potential ramifications for trade patterns, investment flows, exchange rates, and global financial stability.
Over the past 500 years, the major trading currencies have changed as the global economic landscape and geopolitical dynamics have evolved. Starting from the 16th century, the Spanish real – the currency of the Spanish Empire, was widely used for international trade due to the extensive colonial territories controlled by Spain. This was followed by Dutch guilder in the 17th century. In the 18th and early 19th Century, the British pound was the dominant currency during this period due to the economic and colonial influence of the British Empire. The gold standard was widely adopted during the latter part of the 19th century alongside the British pound. The politics and economics of World War I and II shifted economic powerhouse to the United States, and the U.S. dollar became the dominant currency throughout the 20th century. In this 21st century, the U.S. dollar has remained the dominant trading currency, backed by the economic and financial influence of the United States. But the U.S. dollar is threatened by the shadows of the European euro and the Chinese yuan.
Historical evidence spanning 500 years indicates a recurring pattern in currency development, where dominant currencies tend to have a lifespan of approximately one century before giving way to the emergence of new ones. If history repeats itself, then the euro or the yuan may take over from the U.S. dollar soon; and the latter is more feasible due to the size of its economy,
Implications for africa’s common currency
The pursuit of a common currency has long been a topic of discussion in Africa as the continent seeks to enhance regional integration, promote trade, and foster economic stability. By analysing the experiences and challenges faced by the BRICS nations in their currency strategies, Africa can glean valuable insights for the viability and implementation of its own common currency. Assessing advancements made by African regional economic communities in terms of trade integration, monetary policy harmonisation, and the establishment of monetary institutions is essential. By drawing upon case studies from past currency unions, such as the Eurozone, African policy-makers can navigate the complexities associated with establishing a unified currency and develop effective mechanisms to ensure its success.
The BRICS currency, if developed, will increase currency options for international trade, facilitate trade with BRICS nations, and destabilise the geopolitical dominance of the dollar. In the short term, it may minimise African countries’ exposure to dollar exchange rate risk due to a possible decrease in the demand for the dollar. However, over-reliance on the BRICS currency could trade off U.S. dollar FX risk for BRICS currency FX risk.
Africa’s economy can be properly integrated into the BRICS economy that could foster trade and foreign direct investment. But integrating into the BRICS regional bloc can create a new dependency. If the BRICS currency development leads to stronger economic ties with limited diversification, African nations may be more vulnerable to economic shocks originating from the BRICS countries, such as changes in their monetary policies or economic downturns. Additionally, the promotion of the BRICS currency for bilateral trade within the BRICS framework may divert attention and resources away from existing trade relationships and agreements that African countries have with other regions and countries. This could disrupt established trade routes, partnerships and preferential trade arrangements, impacting Africa’s trade diversification efforts.
The BRICS currency development may not offer much hope for Africa, but an addition to the stockpile of international currencies if inter-Africa trade does not increase beyond the current levels. A common currency in Africa will be timely as it has potential to increase regional trade, reduce transaction costs, and improve economic coordination between African countries.
The writer is a Senior Lecturer, Banking and Finance Department – University of Professional Studies, Accra
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