2023-08-16 02:35:42 ET
Talk of a BRICS currency will likely dominate the news cycle next week as leaders from tens of countries gather in Sandton, South Africa. In addition to the original members of BRICS, leaders of additional countries like Saudi Arabia, United Arab Emirates (UAE), and Egypt will also attend the meeting.
Will the BRICS currency work?
South Africa, the rotating chair of BRICS, has said that the formation of a single currency will not be in the agenda. However, analysts believe that these leaders will deliberate on the formation of a single ‘trading currency’.
Most countries in the emerging markets have remained concerned about the growing dominance of the US dollar. These fears escalated last year when the US sanctioned Russia’s central bank after the invasion of Ukraine.
A
single currency
for the original BRICS member states would not be feasible because of how different these currencies are. However, the addition of new members, including Saudi Arabia and the UAE could have an impact because of the vast resources they hold.
Saudi and Russia are the biggest players in oil and gas globally. Therefore, they could force countries to buy these products using the single currency. As we saw in 2022, Russia succeeded in forcing European countries to buy gas in rubles.
However, the mechanics of a single BRICS currency would be more complex than that. For one, there exists some distrust among existing members, including Russia and China. At the same time, it is unclear whether these countries would be prepared to give up their currencies in exchange of a single one.
Watch here: https://www.youtube.com/embed/EVWL5D9oaE8?feature=oembed
The biggest challenge is how to set up the new BRICS central bank, which will be tasked to manage the currency. There is also the challenge on how countries will transition to the new currency. In a note, Jim O’Neill, the creator of BRICS said:
“It’s just ridiculous. They’re going to create a Brics central bank? How would you do that? It’s embarrassing almost.”
Concerns about the US dollar remains
BRICS’ concerns about the
US dollar
are valid. In the past few years, the strength of the US dollar has left many countries behind. As I have written
before
, many emerging market countries are facing a severe dollar shortage. Jim O’Neill
added
:
“The dollar’s role is not ideal for the way the world has evolved. You’ve got all these economies who live on this cyclical never-ending twist of whatever the [US Federal Reserve] decides to do in the interests of the US.”
There are also concerns about the soaring US debt. US public debt has surged to more than $32 trillion in the past few months. And there is a likelihood that the debt will jump to more than $50 trillion by 2030.
In addition, the use of sanctions has irked many countries. Sanctions against countries like North Korea, Russia, China, and Iran have risen. However, replacing the US dollar will not be easy because of its strong dominance in the global economy. A good example of this is the
euro
,
which has struggled to dethrone the dollar in the past two decades.
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“It’s embarrassing” – Analyst blasts the proposed BRICS currency
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