The Free Market Foundation recently took a well-aimed swing at the BRICS currency proposal. As with most things related to BRICS, we have to look below the surface to determine if the criticism is valid.
Nicholas Woode-Smith says the BRICS currency proposal is “a misguided venture doomed to fail”. He writes that BRICS is a nonsensical trade alliance that really shouldn’t exist at all, much less be proposing a shared digital currency.
“A concerted adoption of a BRICS currency would lock South Africa out of trade with some of our biggest and most profitable trade partners; the European Union, United Kingdom and United States are unlikely to look kindly on such an unnecessary project, as the cost of trading in an arbitrarily formed new international currency would not be worth their time,” he says.
Instead, the author proposes a Southern African Development Community (SADC) currency as a more sensible option.
But here is why I think both currency ideas are completely nuts.
The BRICS currency idea received a lot more attention after Russia was swiftly removed from the Society for Worldwide Interbank Financial Telecommunication after its invasion of Ukraine.
Swift you see, has the US dollar at its heart. There are all those small economies, who find the cost of transacting in dollars high (it is). If you want to export from Ethiopia to Angola, the Angolan buyer will have to convert their Kwanza into dollars, which the Ethiopian seller would need to convert to Birr before they can use it locally. This makes trade more expensive than it should be.
The Pan-African Payment and Settlement System (Papss) was established to address this problem. It is a cross-border, financial market infrastructure enabling payment transactions across Africa in distinct local currencies. Papss benefits businesses by reducing transaction costs, streamlining cross-border trade, and providing access to a broader customer base. The reality of making this work is a lot more difficult than advertised by the politicians, but it is an important step. Viva Papss!
The BRICS currency is a considerably more difficult nut to crack. Money is not just paper with the faces of dead politicians. It needs to be a medium of exchange (removes the need for barter), a store of value (you can keep it under your bed and it’s worth roughly the same tomorrow) and a unit of account (allows you to compare prices).
The US dollar remains popular because there are a lot of dollars around, so you can access them easily and the US government completely stands behind its currency. The dollar’s value is relatively stable, and everyone accepts it, making it an obvious reserve currency. It’s not clear how a BRICS currency could provide anything like that value because there is so little in common with the economies, which make up BRICS. This would likely make the BRICS currency a face-lifted Renminbi.
Even assuming the BRICS currency is used only for trade between BRICS states, I’m not sure how this solves the dollar-dependency problem. Presumably, the countries won’t forgo their own currencies, which means most traders would still prefer to transact in dollars, which most of the world accepts.
But what about the SADC currency? Yes many currencies are pegged to the rand, but many are not. In SADC we have Zimbabwe, whose leadership loves nothing more than printing money, causing hyperinflation and then renaming the currency and starting over again. How do we reconcile their central bank strategy with South Africa’s very conservative approach to inflation?
Despite the SADC states being in close proximity, there is little intra-SADC trade and almost no intra-SADC investment. I’m struggling to see the case here. Even the EU, by far the world’s most integrated economy, which is not one country, still uses eight currencies.
We are not going to have an SADC or BRICS or African currency soon, if ever, but we do need to fix the high costs of exchanging currency. Crypto is one way to do this, but when you look under your bed the next morning it could have doubled or disappeared, so hardly a store of value.
Perhaps we’ll see some version of a Papss stable coin for intra-African trade, but as with all currency solutions, at some point you need to trade outside your bloc and that is when the real value of the currency is tested.
Donald MacKay is founder and chief executive of XA Global Trade Advisors. MacKay has been advising local and foreign companies on global trade issues for more than two decades. X handle: XA_advisors; email: donald@ xagta.com; website: xagta.com. The views in this column are independent of Business Report and Independent Media.
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