A former Bank for International Settlements (BIS) economist has shed light on the possibility of a BRICS currency functioning alongside the U.S. dollar. He highlighted that all BRICS nations engage heavily in trade with China and suggested, “Tying their currency to the renminbi and coordinating their individual exchange rates would be a crucial first move.”
BRICS Currency versus U.S. Dollar
Herbert Poenisch, a senior fellow at Zhejiang University and an ex-senior economist at the Bank for International Settlements (BIS), examined the feasibility of a BRICS currency in an opinion article released on Tuesday by the Official Monetary and Financial Institutions Forum (OMFIF).
The expert pointed out that foreign ministers from the BRICS countries (Brazil, Russia, India, China, and South Africa) assembled last week with ministers from numerous countries, including Iran, Egypt, the UAE, and Saudi Arabia. “The principal subject of debate was the formulation of a unified BRICS currency,” he remarked, adding that officials also explored expanding the BRICS membership. More than 19 nations have reportedly applied or expressed interest in joining the economic consortium.
Poenisch clarified that Russia, Brazil, and China currently use their individual currencies for bilateral trade payments, but this system faces hurdles when imbalances arise. Although he acknowledged that the concept of a common BRICS currency “is not novel,” he suggested:
While it’s feasible that such a currency might be established, it’s unlikely to dethrone the dollar — it would exist in parallel to the existing dollar-centric global monetary framework.
“It will be a regional endeavor, akin to the euro,” he elaborated, stressing, “In Europe’s case, the transition from bilateral settlements to a common currency spanned almost half a century.”
Tying to the Renminbi
Poenisch elaborated that while China is the primary trading partner for all BRICS members, trade amongst member countries themselves remains comparatively limited.
“Linking their currency to the renminbi and coordinating their individual exchange rates would be a significant initial move,” he proposed. “Simultaneously, a mechanism would be necessary to provide renminbi credit to countries running trade deficits, like India and South Africa.” He expressed that an entity akin to the European Payments Union (EPU) and a managing agent like the Bank for International Settlements (BIS) would need to be constituted.
“China would have to take on the responsibility to keep such a clearing system operational,” he emphasized. “This implies establishing the mechanism and institutions, offering enough funds to cover a liquidity deficit, and providing a reserve facility to deposit surplus funds. Moreover, it would need to eliminate barriers to the renminbi’s fungibility, as surplus supply of other currencies should be freely convertible into renminbi and utilized by other nations.” The economist explained:
This would propel the internationalization of the renminbi and intensify the push for China to liberalize its financial account. Both have significant implications for the nation’s domestic monetary policy.
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Frequently Asked Questions (FAQs) about BRICS Currency
What is the main suggestion by the economist about a potential BRICS currency?
The economist suggests that a potential BRICS currency could coexist with the U.S. dollar and that the initial step towards this could be pegging the currency to the Chinese Yuan.
Who is the economist giving these insights about the BRICS currency?
The economist is Herbert Poenisch, a senior fellow at Zhejiang University and a former senior economist at the Bank for International Settlements (BIS).
What challenges were mentioned about the current system of bilateral trade payments among BRICS countries?
The economist highlighted that the current system of using individual currencies for bilateral trade payments among BRICS countries faces challenges when trade imbalances occur.
According to the economist, what steps would need to be taken for the BRICS currency pegging to the Chinese Yuan?
The economist suggested that a mechanism would need to be set up to provide renminbi credit to BRICS countries that run trade deficits. Additionally, an organization similar to the European Payments Union (EPU) and a management agent like the Bank for International Settlements (BIS) would need to be established.
What would be the implications of this BRICS currency initiative for China?
The economist mentioned that the initiative would increase the internationalization of the renminbi and increase pressure on China to liberalize its financial account, with significant implications for the country’s domestic monetary policy.
More about BRICS Currency
- BRICS Information Portal
- Bank for International Settlements (BIS)
- Official Monetary and Financial Institutions Forum (OMFIF)
- European Payments Union (EPU) – Historical Context
- Understanding the Renminbi