I. Introduction
The global economic landscape is ever-evolving and in recent years we have witnessed a growing interest in the establishment of a common currency among BRICS member nations—Brazil, Russia, India, China, and South Africa.
BRIC was first established in the year 2006 with South Africa joining in 2010 to make it BRICS. Since then, the bloc has become an important platform for economic cooperation among emerging markets and developing countries.
Beginning this year on 1st January 2024, BRICS admitted more countries to the Bloc—Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates – which are estimated to add a trillion-plus dollars to the overall BRICS GDP. It appears that this is a strategic approach to building the BRICS’s overall financial power.
On 23rd August 2023, BRICS held its Alliance summit in Johannesburg during which the proposition of a common currency among member countries gained traction as an alternative to the dominance of the US dollar. Beyond the need to lessen the reliance on the US dollar in international trade, member countries seem to have deeper reasons to adopt a common currency as a way of encouraging trade and investment within the Bloc. On one hand, these member states seek to protect the Bloc against dollar weaponization since the US has appeared to employ financial sanctions as a foreign policy tool, and on the other hand, they wish to promote economic integration within the Bloc given that shared currency can facilitate economic cooperation.
However, while the BRICS member countries could potentially make inroads in multilateral trade and investments for some member countries within the Bloc, establishing a common currency among BRICS member countries poses significant challenges owing to the stark differences in history, economies, and political structures. That is what this paper examines.
II. Economic and political challenges facing the proposed common BRICS currency.
One of the key challenges in establishing a common currency among BRICS countries is their inherent diversity. These nations boast a range of political systems, from China’s communist regime to Russia’s federal democratic state. India, Brazil and South Africa are democracies, each with its unique governance challenges. This diversity extends to how decisions are made at the domestic level thereby impacting regional economic policy and cooperation.
The political arrangements in the various countries mean that leaders such as Putin in Russia and Xi Jinping of China are more assured of their stay in office for the foreseeable future than the other leaders who are subject to elections every so often.
Additionally, the issue of the free movement of labour, a cornerstone of a common currency, is complicated by the vast differences in labour supply and demand across these nations. What we have seen in the Euro Zone is the effects of the ability of Europeans to travel and work in different countries depending on their labour needs. In the BRICS ‘zone’, what is the effect of demand and supply of such labour by the various countries? The movement of labor is one issue that must be addressed comprehensively for the proposed common BRICS currency to succeed.
The BRICS countries exhibit remarkable economic diversity, each with its unique challenges and advantages. China’s economic might, for instance, stands in stark contrast to South Africa’s smaller and less developed economy compared to other members.
To appreciate the complexities involved, one can draw parallels to the European experience with its Euro currency. While the Euro has significant benefits, it has also created disparities among member states. A case in point: Germany, the European economic powerhouse shares the same currency as less economically developed members leading to imbalances in competitiveness and wages across various countries.
The economic prerequisites for a successful common currency, as outlined by Nobel laureate Robert Mundell appear distant for BRICS nations. Presently, the proposed common currency ignores the optimal currency factors: labor mobility, price flexibility, fiscal transfer mechanisms and synchronized business which are critical to ensure that economic shocks do not disproportionately affect one member at the expense of others.
These prerequisites are not trivial. For instance, the correlation of business cycles among BRICS countries is notably strong particularly due to China’s central role as an export destination. However, India, the second-largest economy in the BRICS group, stands as an exception as it aims to seize global manufacturing share from China through a ‘Made in India’ effort recently unveiled by Prime Minister Narendra Modi.
The BRICS’ diversity and different economic directions present a formidable challenge to a common currency. While some propose a gold-backed BRICS currency to anchor its value, practical challenges arise particularly given China’s dominance in global gold trading. Balancing the distribution of gold resources among BRICS nations could prove contentious and the diversity in the BRICS countries presents so much difficulty for the smooth adoption of common currency.
III. Is common currency more likely to work for BRICS member states than East Africa’s?
The feasibility of a common BRICS currency therefore remains a complex and multifaceted issue. The economic and political challenges facing these nations are substantial and cannot be underestimated. While the BRICS nations consider adopting a common currency, retaining domestic currencies as a transitional step could offer benefits. However, such an approach still carries its own set of challenges including potential friction in setting exchange rates and monetary policy.
The idea of a synthetic BRICS currency, one that exists alongside domestic currencies may not also be a compelling option. It could create confusion and undermine the goal of reducing dependence on the US dollar. As BRICS nations continue to explore the possibility of a shared currency, it is essential to consider the lessons that can be drawn by the East African Community to deepen economic integration within its member countries.
Drawing parallels to East Africa where common policies exist drawing from political homogeneity, particularly in areas like taxation, highlights the significance of political similarity for a successful common currency. Unlike BRICS member nations, East African nations have common borders which could smoothen free labor movement. By comparison, where there is demand for labor in Brazil, and the labour is in China, the movement of labor is problematic owing to lack of shared borders and accompanied transport costs.
Besides, East Africa has a history of collaborative endeavors. For instance, East African Airways Corporation, more commonly known as East African Airways was jointly run by Kenya, Tanzania, and Uganda. It was set up on 1st January 1946 and operated until 1977. The mutual operation of the airline coupled with a shared Central Bank demonstrates that a common currency is possible, especially in the presence of political likeness. The close economic and political ties between East African countries provide a unique context for success which is not feasible for the BRICS member countries as they are geographically dispersed.
IV. What is the way forward?
As we have outlined above, economic, and political realities pose critical challenges to the BRICS idea of common currency. The diversity in political systems coupled with the geopolitical landscape renders the creation of a BRICS currency a distant dream. While the idea of a BRICS currency is attractive, it remains daunting in terms of implementation considering the described hurdles.
It is instructive to note that economic and political diversity among member states coupled with the need for rigorous prerequisites that collide with inherent differences in these nations make its implementation a daunting task.
In response to geopolitical pressures, BRICS nations must carefully assess their objectives. Reducing US dollar dominance, guarding against dollar weaponization, and fostering economic integration are key goals. However, a more practical and immediate solution may lie in a deeper economic and monetary union between China and Russia given their shared borders, economic synergies, and the potential to take on the US weaponization of the dollar. In the struggle between a unipolar and multipolar world, a successful union between China and Russia could significantly bolster the prospects of a multipolar future compared to the immediate adoption of a common BRICS currency.
Even prior to the expansion of the BRICS, there appears to be jostling among some member states given that, since mid-2023, India’s purchase of Russian oil has been falling. The present oil trade position is informed by the fact that it would not make economic sense for India to import Russian oil, which is delivered over large geographical distances when instead, local purchases by India from countries like Iraq would be more profitable. Besides, challenges related to the preferable currency to settle oil purchases have arisen as Russia faces sanctions from the West thereby demanding to be paid in Rubles as an alternative to the dollar, whereas India prefers to make payments in Rupees. No permanent concession has been reached for the Chinese Yuan or UAE Dirham to be used as an alternative currency in multilateral trade which serves as a confirmation that, coupled with geographical dispersion challenges, the proposed common currency by the BRICS member states may turn out to be untenable.
Mr. Tom Onyango is a Senior Partner in Tripleoklaw LLP Advocates. Nyaga Dominic was a Trainee Advocate in the same firm.