What would a BRICS currency mean for SA?
The United States’ global political and economic dominance may be shrinking. As a result, new players have sprung up to disrupt the status quo – primarily the People’s Republic of China.
The hegemony that had been established by the United States is slowly eroding and many other states are seeking opportunities to establish a new global order that is representative of different values and ideals. One of the main means of challenging this established authority is by creating a new currency to end dollar diplomacy.
With the change in global relations and dynamics, states have had to pick a side between East and West, and others have sought means of destabilising the global system entirely by turning to organisations like BRICS.
There have been rumblings that a new currency is the next step for BRICS. However, the CFO of the New Development Bank (NDB) – a BRICS institution – has dispelled these rumours by stating that there is no current plan for such a currency.
If this currency were to be established, what would it mean for South Africa and the rest of the world?
For a country to become and maintain superpower status on the global stage, like the US and former superpower Britain, there is a process of immersion that needs to occur.
This is where, as a superpower, there is a need to create and maintain socio-political and economic relationships. The United States has been a high level contributor and initiator of institutions across the globe. This includes the UN and NATO.
Despite this status, America has been seen by some as a bully in the pursuit of power, notably through destabilisation of regions through the Iraq War or the Chilean crisis of the 1970s. However, more countries are trying to turn away from the US, and some have suggested BRICS as the alternative.
BRICS was founded in 2009, a move that initially assembled the fastest growing economies – Brazil, Russia, India and China – and later adding South Africa. The organisation has been beneficial to member states, from providing economic, technological, and political information sharing, to establishing financial institutions such as the NDB. BRICS has also enabled greater economic participation between member states. The NDB has loaned money to the South African government for projects.
There is no denying that the BRICS infrastructure has greatly expanded and there is an attempt for domestic integration with this infrastructure. This includes the NDB, and the Contingent Reserve Arrangement (CRA) which provides liquidity to members. BRICS members also participate in cultural festivals.
BRICS is powerful because the member states are the superpowers of their regions. For instance, South Africa is currently aiding in resolving ongoing conflicts in the Democratic Republic of the Congo and Mozambique. Another example is China’s Belt Road Initiative (BRI) which is intended to foster global trade networks.
As a result of this positioning, it was only natural for BRICS to come together to use this influence to reshape the current global order. Due to distrust of the West, countries in the global south are keen to interact with BRICS. Most recently, Egypt, Uruguay, and the United Arab Emirates have joined the NDB. The UAE’s membership is important as it may be a tool for the removal of the dollar.
Petrodollars are a result of a policy where US dollars are the only means of payment for oil. Since the UAE joined the NDB, there have been further rumblings that oil may be used to back the prospective currency of BRICS. This is notable, as the main means that the US has established dollar diplomacy has been through transactions such as oil. A BRICS currency backed by oil would force the world to no longer buy the precious resource in dollars but in the new currency.
The UAE is among the world’s top oil producers; if the UAE were to come together with BRICS to create an alternative global currency, it could potentially crush the dollar. Further, the UAE has a sovereign wealth fund of over $500 billion, which is the money that the government invests. What does this mean for the rest of the world?
Should this currency be established, BRICS will be in control of 60% of the world’s gas reserves, a GDP 30% higher than that of the United States, and control 50% of the world’s population.
A perceived upside of a new international currency would be that threats by the United States could be safely ignored, such as the United States’ threats of sanctions due to South Africa’s close ties to Russia. Especially at this point in time, when South Africa is trying to guide its national policy regarding the ongoing Russian invasion of Ukraine. The United States has made threats against South Africa’s ostensibly ‘neutral’ policy – which would carry less weight should South Africa no longer be reliant on the petrodollar.
Similar to the African Continental Free Trade Area (AFCFTA), a new shared currency has the potential for greater mobility for the factors of production which includes labour and recourses. This is beneficial, as South Africa’s economy has in recent years slowed down and, alternatives for economic growth are being sought.
A shared currency will result in symmetric economic shocks for member states. A shared currency can be detrimental. It restricts a country's ability to control its monetary policy, hindering flexibility in response to economic conditions. Monetary policy includes affixing interest rates. Secondly, it can exacerbate economic imbalances among participating countries, as each nation's unique needs and circumstances may not align with a unified monetary policy.
The BRICS member states, despite being the fastest-growing economies, have different systems of governance and domestic socio-political economic structures. Policy that may be applicable in one state may not be applicable in another.
South Africa is a developing country that requires trade and global economic participation to establish a strong economy.
As it stands, SA would benefit in the short-term from a shared currency, due to the free flow of the factors of production. When there is a single currency accepted across a country or region, it eliminates the need for currency conversion, reducing transaction costs and simplifying trade. This facilitates economic integration, encourages cross-border investments, similar to the EU.
Furthermore, a centralised currency promotes social cohesion and reduces economic disparities. By ensuring that the value of money remains relatively stable, it protects the purchasing power of citizens, particularly the most vulnerable.
Further, should South Africa not change its governance systems in the long term, these benefits will be short-lived. These governance system reforms include reducing government intervention. There needs to be greater encouragement of private sector participation which requires reducing state-owned enterprises and regulation.
Lower taxation is another mechanism to enjoy the benefits of a shared currency, as this incentivises business growth and job creation.
Unfortunately, the current conditions of South Africa do not allow for the full enjoyment of a prospective shared currency.