BRICS push for dollar alternatives is not a threat but a positive development

Amid growing concern about dollar risks, BRICS is increasingly pushing the use of local currencies like the yuan and rupee
A stable, reliable non-Western alternative currency system would benefit a multipolar world and be a major milestone towards an Asian century

Bharti ChhibberandWing Lok Hung

Published: 6:15am, 16 Jul 2023

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With the International Monetary Fund predicting that China and India will contribute to half of global economic growth this year, and Goldman Sachs forecasting that their economies will each be bigger than America’s in decades, we seem to be moving towards a multipolar world and an “Asian century”.

With this has come growing concern that the economic powerhouses of China and India could challenge the US-led international order.

This is a good time to reflect on BRICS, the bloc comprising Brazil, Russia, India, China and South Africa. In particular, India’s Prime Minister Narendra Modi has just had a high-profile reception in Washington – how India interacts with the United States and China in the next decades will profoundly shape our global political economy.

But when economist Jim O’Neill coined the BRICs acronym at the beginning of this century to refer to Brazil, Russia, India and China – South Africa joined later – the combined economic size of the four emerging economies was far behind that of the wealthy G7 nations.

Since then, the global political economy has experienced the 2007-2008 global financial crisis, seemingly never-ending Brexit chaos and a drastic economic downturn caused by the Covid-19 pandemic. In particular, it was difficult for the world-leading economies to build a consensus on a coordinated global effort during the pandemic.

Post-pandemic, both developed and developing economies are looking for a new direction for globalisation and regionalisation to boost domestic economic growth. The economic potential of BRICS cannot be overlooked, as the five countries now contribute more to the world’s gross domestic product based on purchasing power parity than the G7.

Naledi Pandor, South African Minister of International Relations and Cooperation, speaks to the media at the BRICS foreign ministers’ meeting in Cape Town, on June 2. The BRICS summit in August is proving problematic for host South Africa as Russian President Vladimir Putin is the target of an International Criminal Court arrest warrant. Photo: AFP

The initial four members of the bloc had their first meeting as a grouping in 2006, and in 2010, with economic cooperation as the bloc’s foundation, they invited South Africa to join them, making the bloc officially BRICS. That same year, the BRICS interbank cooperation mechanism was launched to facilitate cross-border payments between BRICS banks in local currencies.

At the ninth BRICS summit in 2017, the bloc agreed to promote the development of BRICS local currency bond markets and jointly establish a local currency bond fund. It also approved the acceleration of the process to encourage the use of local currencies. It required every member to communicate closely to enhance currency cooperation consistent with each country’s central bank legal mandate, including currency swaps, local currency settlement and local currency direct investment.

Since then, geopolitical tensions have stoked talk of “de-dollarisation”. The issue is a serious point of discussion among BRICS members.

For China, the internationalisation of the yuan has advanced as countries seek an alternative currency in response to dollar risks. Offshore yuan demand is expected to increase with the recent launch in Hong Kong of Swap Connect – giving foreigners access to the Chinese mainland’s interest swap markets – and a dual-counter model that allows share trading in both the Hong Kong dollar and the yuan. The Middle East and Russia could be important potential investors.

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India also started allowing its trading partners to settle payments using its rupee last year and its latest trade policy aims to build on the rupee payment system.

India’s Commerce Secretary Sunil Barthwal, announcing the policy in March, said: “If there are countries where there is any currency failure or they are having dollar shortages or international currency shortages, we are willing to trade in rupee with them, which will take not only our exports forward but also disaster-proof those countries.” At least 18 countries now trade in rupees.

China also has agreements with Brazil, India and Russia to conduct trade in their local currencies, with Indian oil refiners reportedly using the yuan for Russian crude imports. As Russia, China and India develop their own payment systems to smoothen cross-border transactions, there is some hope that BRICS could become a good platform to launch a new global multicurrency system.

Although BRICS members have been discussing the creation of an alternative currency to the US dollar for a “diversified international monetary system” since 2009, the Russia-Ukraine war and Western sanctions on Russia have given new impetus to the process. High inflation, interest rates and the recent US debt ceiling crisis have raised further concerns among other countries regarding dollar-dominated debt.

However, given the complex political issues and economic asymmetries among BRICS members, it will be difficult to launch a euro-like common currency any time soon.

As the latest IMF data shows, 59 per cent of the world’s reserves are still held in the US dollar. De-dollarisation, it seems, remains a distant scenario.

But the renewed focus on BRICS creating a non-Western alternative currency system that is stable and reliable is positive. Such a system can benefit many other countries keen to diversify from the dollar given the global dynamics. If this alternative currency system develops, it could be a new path towards a more balanced and sustainable economic growth, and will a major milestone towards an Asian century.

Dr Bharti Chhibber teaches foreign policy at the University of Delhi, India

Dr Wing Lok Hung teaches Greater China in the Global Political Economy at the Chinese University of Hong Kong