The viability of BRICS currency coexisting with the U.S. dollar has generated discussion among economists. Insights provided by experts like Herbert Poenisch shed light on the steps needed to establish a common BRICS currency, with China’s role being of particular importance.
A former Bank for International Settlements (BIS) economist has shared thoughts regarding the coexistence of a BRICS currency alongside the U.S. dollar. Emphasizing the significance of China’s role as a key trading partner for all BRICS countries, the economist proposed that the initial crucial measure would involve establishing a peg to the renminbi and aligning the bilateral exchange rates.
A comparison between the BRICS currency and the U.S. dollar.
In an opinion piece published on Tuesday by the Official Monetary and Financial Institutions Forum (OMFIF), Herbert Poenisch, a senior fellow at Zhejiang University and former senior economist at the Bank for International Settlements (BIS), examined the feasibility of a BRICS currency.
During a recent gathering, the economist drew attention to the participation of foreign ministers from the BRICS countries (Brazil, Russia, India, China, and South Africa), as well as ministers from other nations such as Iran, Egypt, the United Arab Emirates, and Saudi Arabia. The primary focus of their discussions revolved around the establishment of a shared viability of BRICS currency, according to the economist. Additionally, the officials deliberated on potential expansions of BRICS membership, with over 19 countries purportedly submitting applications or expressing their interest in joining the economic bloc.
Challenges of Bilateral Trade Payments and the Potential for a Common BRICS Currency
According to Poenisch’s explanation, Russia, Brazil, and China presently rely on their own currencies for conducting bilateral trade settlements. However, this payment mechanism faces difficulties when imbalances arise. Poenisch acknowledged that the concept of establishing a unified BRICS currency is not novel, expressing his opinion by stating:
“But if such a currency is ever achieved, it is unlikely to replace the dollar — it would exist in addition to the established dollar-based global monetary system.”
Continuing his remarks, he likened the proposed endeavor to the regional initiative of the euro and stressed, “Similar to Europe, transitioning from bilateral settlements to a shared currency could take nearly five decades.”
Adopting a fixed exchange rate with the renminbi
Poenisch provided additional insights by highlighting China’s prominent role as the primary trading partner for all BRICS member nations, although inter-member trade remains relatively limited.
He proposed that the initial crucial measure would involve pegging their currencies to the renminbi and aligning the bilateral exchange rates. Furthermore, he suggested the necessity of establishing a mechanism that offers renminbi credit to countries with trade deficits, such as India and South Africa.
To facilitate this process, Poenisch recommended the creation of an organization akin to the European Payments Union (EPU) and the appointment of a management agent similar to the Bank for International Settlements (BIS).
China’s Role and Responsibilities in Sustaining a BRICS Clearing System
Highlighting the responsibility that would fall on China, he emphasized the necessity of China taking on the responsibility to sustain such a clearing system. This entails establishing the required mechanisms and institutions, allocating adequate funds to address liquidity shortages, and establishing a reserve facility to deposit excess funds. Moreover, China would need to eliminate barriers to the fungibility of the renminbi, enabling surplus supplies of other currencies to be freely converted into renminbi and utilized by other countries. Describing this process, the economist stated:
“All this would boost the internationalization of the renminbi and increase the pressure on China to liberalize its financial account. Both have major ramifications for the country’s domestic monetary policy. “
In conclusion, the viability of a BRICS currency and its coexistence with the U.S. dollar have been subjects of discussion. Economists like Herbert Poenisch have shed light on the potential steps towards realizing a common BRICS currency, such as pegging to the renminbi and aligning bilateral exchange rates. They have emphasized the need for mechanisms and institutions to support the system, with China playing a crucial role in shouldering the responsibility.
The establishment of a clearing system, addressing liquidity shortfalls, and ensuring the fungibility of the renminbi are important considerations. While the journey towards a unified BRICS currency may take time, the idea continues to be explored as more countries express interest in joining the economic bloc.
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