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  • Thando Ngozo

De-dollarisation and the Practical Realities of a BRICS Common Currency

The de-dollarisation frenzy appears to have captured the imagination of emerging markets. While diversifying currency reserves may seem sensible, the reality of implementing de-dollarisation policies reveals a host of daunting hurdles for these economies. For an extended period, the U.S. dollar has reigned supreme as the unrivaled global vehicle currency, playing a critical role in international trade, investment, and financial markets. The US dollar also accounts for a significant portion of the global reserve currency market and trade invoicing in various regions. Moreover, the US dollar continues to be widely used for cross-border transactions and is known for its high liquidity.

The sheer scale of global transactions denominated in dollars necessitates the existence of a robust and liquid market for any alternative currency. Yet, creating such a market is a staggering undertaking that demands unwavering commitment and a delicate balancing act. Failure to establish the necessary liquidity, depth, and stability in this new currency market would result in rampant volatility, inefficiency, and a loss of confidence, effectively sabotaging the very purpose of de-dollarisation.

Furthermore, the vast number of existing dollar-denominated contracts, debts, and financial instruments presents a mind-boggling puzzle to solve. Untangling these intricate threads and renegotiating agreements on such a colossal scale is a painstaking process bound to be protracted and complex. While the desire to reduce dependence on the U.S. dollar is understandable, the harsh reality is that the de-dollarisation process is fraught with peril. It demands an unwavering commitment, meticulous planning, and finesse that is rarely seen in economic policy.

The global financial landscape has long been marred by the hegemony of the US dollar, an arrangement that undeniably favours the United States and perpetuates an unjust power imbalance. The US dollar has also been weaponised, leading to a search for alternatives like the SPFS and CIPS payment systems to replace the dominant SWIFT system. Economic sanctions on Russia and the trade war against China also push for de-dollarization.

The BRICS countries have grown increasingly interested in forging a common currency among these emerging markets. This move is a symbolic gesture of unity pursued by these nations and a strategic attempt to assert their economic independence and reduce their vulnerability to the whims of the U.S. dollar. However, the viability and effectiveness of such a currency arrangement remain highly questionable, given the diverse economic conditions and policy priorities of the BRICS countries.

The notion of a BRICS common currency may appear alluring at first glance, but it is imperative to acknowledge its numerous hurdles. Foremost, the BRICS nations exhibit contrasting economic structures, developmental levels, and policy frameworks. The arduous task of harmonizing monetary policies and coordinating exchange rates within a common currency framework looms large. Reaching a consensus on monetary policy decisions, exchange rate coordination, and fiscal responsibilities would be daunting. The European Union's experience with the euro is a poignant reminder of the complexities of managing a common currency amidst divergent economies.

The BRICS countries also exhibit economic size, inflation rates, capital flows, and fiscal policy disparities. These discrepancies can generate tensions and pose challenges in upholding the stability and effectiveness of a common currency. The task of macroeconomic policies and establishing robust institutions for monetary governance would be indispensable yet intricate.

Furthermore, forming a BRICS currency necessitates vital institutional and financial prerequisites. The imperative of achieving a consensus among all member countries to establish a common currency is the foremost among these requirements. This arduous process would entail protracted negotiations, exhaustive discussions, and formal agreements about the currency's objectives, rules, and governance structure.

Another crucial aspect to consider is establishing a BRICS central bank entrusted with overseeing the proposed common currency's monetary policy, issuance, and regulation. A central bank of this nature would demand a resilient governance structure and a decision-making framework that guarantees transparency and accountability.

Moreover, developing a comprehensive legal framework becomes imperative to delineate the rights and obligations of member countries concerning the common currency. This entails formulating provisions that address currency convertibility, capital controls, exchange rate arrangements, and dispute resolution mechanisms. Such a framework ensures a coherent and functional system for the proposed common currency.

The financial requirements of a common currency for the BRICS nations demand a critical analysis. Firstly, the expectation that each member exhibits macroeconomic stability, encompassing low inflation rates, fiscal discipline, and sustainable economic growth, raises concerns. While these requisites may sound reasonable, attaining such stability is far from assured in practice. The diverse economic landscapes and policy priorities of the BRICS nations make maintaining uniformity in these areas challenging.

Secondly, the requirement for aligning monetary policies to prevent divergent economic cycles and ensure bloc-wide stability is a lofty goal. It requires extensive coordination and cooperation among the member countries, which may prove arduous given their differing priorities and policy preferences. The complexities of managing interest rates, exchange rates, and reserve management in a synchronized manner across diverse economies cannot be underestimated. The practical challenges of achieving and sustaining such coordination should be thoroughly examined.

Thirdly, establishing adequate foreign exchange reserves and liquidity arrangements to support the stability of the BRICS currency raises questions about its feasibility and effectiveness. Creating a shared reserve pool or bilateral/multilateral currency swap arrangements may seem appealing in theory, but their practical implementation entails numerous challenges. The allocation and management of reserves and establishing trust and cooperation among member countries are significant hurdles that must be addressed.

De-dollarisation and the proposal for a common currency among BRICS nations may appear enticing for emerging markets. Still, a closer examination reveals a host of formidable obstacles. The successful realization of such endeavours necessitates meticulous strategising, phased execution, and unwavering regional collaboration. Drawing upon the experiences of other nations and regions that have ventured down comparable paths can furnish invaluable wisdom and cautionary tales. Ultimately, the arduous journey towards diminishing reliance on the dollar and forging a shared currency mandates a comprehensive evaluation of the intricate economic, financial, and political forces in motion.

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