BRICS and non-BRICS nations are lining up to escape the dollar hegemony.  The BRICS (Brazil, Russia, India, China, and South Africa) are among the world’s largest economies.  They have been exploring the possibility of launching a new currency to challenge the dominance of the US dollar in international trade.  

The BRICS ran a trade surplus, also known as a balance of payment surplus, north of $387 billion, with China being the largest contributor.

This move towards a BRICS-issued currency is seen as a challenge to the traditional financial hegemony of the United States and its currency, the US dollar. 

Is the world ready to de-dollarize?  While some see the BRICS currency as a viable alternative to the US dollar, others argue there may be better solutions. Let’s explore the pros and cons of a BRICS-issued currency and answer the most greenback question.

Reasoning for a BRICS-issued currency

One of the primary reasons for a BRICS-issued currency is the desire to reduce dependence on the US dollar.  The US dollar has long been the dominant currency in international trade, and it is used for nearly 85 percent of cross-border trades. 

However, the BRICS countries believe that the dollar’s dominance has led to instability in the global financial system.  For example, when the US Federal Reserve decided to raise interest rates in 2018, it caused a ripple effect in emerging markets. 

Countries with large amounts of dollar-denominated debt, such as Turkey and Argentina, faced severe economic problems.  The BRICS countries believe that a new currency could provide more stability and reduce the impact of US monetary policy on other economies.

Moreover, the United States of America and its leaders, both Republicans and Democrats, sometimes use the dollar and financial sanctions to try to advance its security interests.

Another reason for a BRICS-issued currency is to increase economic ties between the member states.  The BRICS countries have a combined GDP of over $16 trillion, accounting for nearly 25% of global gross domestic product (GDP). 

Despite this, there is limited intra-BRICS trade.  A new currency could promote trade amongst the member states and reduce reliance on the US dollar.  This would enable the BRICS countries to develop stronger economic ties, benefiting all members.

Finally, a BRICS-issued currency could reduce transaction costs.  When two countries engage in international trade, they often have to use a third currency, usually the US dollar.  This can result in additional transaction costs and exchange rate risks. 

A new currency widely accepted among the BRICS countries could reduce these costs and make trade among member states more efficient.

Alternative perspectives

While there are several reasons for a BRICS-issued currency, there are also some alternative perspectives to consider.

One alternative perspective is that a BRICS-issued currency may not be necessary.  The US dollar is currently the dominant currency in international trade, but other currencies could challenge it. 

For example, the euro is the second-most widely used currency in international trade, and the Chinese yuan is becoming increasingly popular.  Some argue there is no need for a new currency when viable alternatives exist.

Another alternative perspective is that a BRICS-issued currency may need to be more practical.  The BRICS countries have different economic structures, and their currencies have different levels of convertibility. 

This could make it challenging to create a new currency widely accepted among all the member states.  In addition, a new currency would need to be backed by a strong central bank and a stable economy, which could be challenging for some member states.

On top of their different economic structures, the BRICS nations have some geopolitical issues that they need to be worried about.  

For example, the geopolitical issue between China and India, two of the wealthiest and most populous BRICS nations.  The de-dollarization is their shared interest, which might need to be more.

Pros of a BRICS-issued currency

One of the main advantages of a BRICS-issued currency is that it would reduce dependence on the US dollar.  This could provide more stability to the global financial system and reduce the impact of US monetary policy on other economies. 

A new currency could promote economic ties between the member states and reduce transaction costs.

Another advantage of a BRICS-issued currency is that it could provide an alternative to the US dollar.  This could increase competition in the international currency market and potentially lead to lower transaction costs for all countries.  It could also provide a more stable reserve currency.

Cons of a BRICS-issued currency

One of the main concerns with a BRICS-issued currency is that it may need to be more stable and widely accepted than the US dollar.  The US dollar is currently the world’s reserve currency and is backed by the US government, one of the world’s largest economies. 

In contrast, a new BRICS currency must be backed by a strong central bank and stable economy, which may be challenging for some member states.  

Most central banks have the same dual mandate to maintain maximum employment and keep prices stable while keeping long-term interest rates at moderate levels.  Because of their economic differences and their idiosyncratic issues, not all BRICS nations might benefit from the execution of that dual mandate,

Another concern is that a new currency could increase volatility in the global financial system.  If the new currency is not widely accepted or stable, it could lead to currency fluctuations and increased risk for investors.  This could hurt the global economy.

Finally, a new currency could increase tensions between the BRICS countries and the United States.  The US has long been the dominant player in the global financial system, and moving towards a new currency is challenging its authority. 

This could increase geopolitical tensions and potentially harm diplomatic relations between the United States and the BRICS countries.

Conclusion

In conclusion, the possibility of a BRICS-issued currency is an exciting development in the global financial system.  While there are certainly advantages to such a currency, there are also significant challenges and potential risks. 

Considering all perspectives and carefully weighing the pros and cons before deciding is essential for all BRICS nations. 

Ultimately, whether a BRICS-issued currency is, the best solution will depend on various factors, including the stability of the member states’ economies, the level of international acceptance, and the potential impact on the global financial system. 

Fortunately or unfortunately, depending on which side of the spectrum you reside, the fall in the dollar is not as near as you think.