BRICS + reserve currency: an alternative or a failure for Africa?

By Chris Erasmus

The Brics+ geopolitical alliance has recently emerged as a way out of what is perceived as Western, mainly American, monetary hegemony. And these countries, particularly Russia, have recently discussed the creation of a new global reserve currency alternative to the US dollar.

It is far from certain that the initiative will succeed, some analysts say. The BRICS, which originally consisted of Brazil, Russia, India, China and South Africa, have expanded since late last year to include more African countries such as Ethiopia and Egypt.

Iran, Saudi Arabia and the United Arab Emirates have also joined the organization.

At the BRICS summit in South Africa last year, no fewer than 20 states expressed interest in joining the bloc, spurred by the desire to have a Plan B, whenever Western-style economies proved difficult.

The summit decided that the Chinese renminbi (yuan) would be the main currency for trade, payments and settlements within the BRICS+ formation.

Read: BRICS bank considers financing projects of non-member states

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The BRIC+ now account for around 37.3% of global GDP, double that of the EU. But beyond economic power, the arrival of new members has also led to longer policy decision-making times, according to a recent report prepared for the European Parliament.

Given that the new members will contribute only about 4% to the group's combined GDP, the significance of the expansion should be considered beyond the purely economic effect, the paper said.BRICS Expansion: A Quest for Greater Global Influence?

This could take the form of greater influence by the group and by developing countries as a whole in international organisations such as the United Nations, the World Trade Organisation and the Bretton Woods institutions (World Bank and International Monetary Fund).

Dr Richard J Grant, professor of finance and economics at Cumberland University in Tennessee, US, says none of the BRICS founding members were initially looking for an alternative currency, at least not publicly.

Certainly, each member country has an interest in maintaining and extending the reach of its own national currency, explains Professor Grant in a political and economic analysis produced for theFree Market Foundation thinking group.

Each currency serves as a national unit of account, a medium of exchange, an instrument of policy, and a potential source of government revenue called seigniorage.

So for the BRICS+, those pushing for an alternative currency are actually pushing for acceptance of their national currency abroad, which could mark a turning point in political influence.

Those who use a currency do so to facilitate trade, that is, to reduce the cost of doing business. The more a currency is perceived to have this effect, the more widely it will be used. And the more widely it is used, the more effective it is at facilitating more trade, he explained.

The US dollar has enjoyed these advantages for years, which may explain why some countries have adopted it as their de facto local currency. Moreover, some BRICS+ powers have benefited from the dollar’s ​​global acceptance. The US dollar has maintained its position because its users trust it.

In a world of fiat currency and extensive financial regulation, this implies trust in a government. None of the BRICS+ currencies are currently favored to replace the dollar for this reason, the researcher explained.

The main danger to the US dollar today is US inflation, which hit 9% after surging in early 2021 following Covid-19 relief measures, but has since eased to just over 3%.

BRICS+ members, particularly Russia, have been pushing for alternative trading currencies as they were hurt after recent US sanctions froze some $300 billion of Russian assets in Western banks for invading Ukraine in February 2022.

At the end of last year, Russia reported holdings of 68.7 billion yuan, but it still had about $64.7 billion in U.S. dollars.

Russia knows that it cannot succeed if other powers like India, China and even Brazil do not follow it in their anti-dollar policy.

Russia claims that 90% of payments with China are made in rubles or yuan, their local currencies. And about 60% of trade with India is settled in national currencies.

“This is a serious choice,” Russian Foreign Minister Sergei Lavrov said at a forum in Moscow in June.

Both China and India are much more involved in the Western globalization system, in terms of the volume of financial agreements, investments, trade and many other things. But the fact is that, just like us, the People's Republic of China and India are fully aware of the discriminatory nature of Western practices.

If they can tip the balance, he argued, BRICS+ members could influence decisions all the way to the IMF and the World Bank.

Traditionally, the alternative currency for most countries has been gold reserves, incidentally valued against the dollar.

The question for Africa is whether it can abandon the US dollar and still remain stable. One reason it is looking for an alternative currency is to facilitate trade, but also to stabilize inflation. If the latter is achieved without an alternative currency, some countries may prefer to stay in the country rather than venture into uncharted territory.

Last week, Ethiopia agreed to devalue its currency, the birr. This was one of the conditions imposed by the IMF before it would support the country's fight against inflation. Ethiopia has also liberalized its financial markets and allowed foreign currency exchange.

Read: Ethiopia devalues ​​birr to secure external funding

More than twenty years ago, the South African rand was pegged to the value of a basket of 20% gold, 40% US dollars and the euro.

The rand would have continued to circulate normally, but would have reflected the valuations of its three component reserve currencies, Grant explained.

Inflation would have been reduced to negligible levels and interest rates would have reflected the reduced exchange rate risk.

An alternative currency, he said, would still rely on gold reserves as non-fiat money.

Fiat currencies are those, including the US dollar, that are not pegged to the value of gold.

As a unit of account, the BRICS currency would not need to circulate as a medium of exchange, but would facilitate pricing and contracting, Professor Grant stressed.

The US dollar does, however, retain one weapon: it attracts confidence in interstate financial infrastructures such as payment-versus-payment (PvP) arrangements, which help reduce costs and increase confidence in trading certain currency pairs.