JOHANNESBURG —
Brazil, Russia, India, China and South Africa formed their economic partnership as part of a drive to counter traditional western economic and political supremacy. The group, known as BRICS, plans to form its own development bank at this year’s summit in South Africa. But can they afford to turn their backs on the West’s most powerful ambassador - the dollar? Experts don’t think so.
The U.S. dollar drives development around the world, as the currency of choice of major lending institutions like the World Bank and the International Monetary Fund.
BRICS says it wants its development bank to fill the gaps left by those major banks and reach out to the developing world. BRICS representatives have said their funds will be loaned out for infrastructure projects in developing nations. Preliminary reports suggest each of the five nations will put $10 billion into the bank.
But what currency will this new bank use? That, experts say, is the $50 billion question.
Anil Sooklal, South Africa’s ambassador to BRICS, said details are still being finalized. But he noted that the bloc had previously agreed to trade, when possible, in local currencies - the real, the ruble, the rupee, the renminbi and the rand.
“Well, as you know, last year at the summit in [New] Delhi, we signed an agreement, an interbank agreement, on trading in local currencies among BRICS countries," he said. "So you already have an agreement on trading in local currencies. But in terms of the currency to be used by the BRICS bank, that is also an issue that will be put to the finance ministers to take a decision on.”
But none of those currencies has the chops to hold up a bank, as none are considered international reserve currencies. Those include the U.S. dollar, the British pound and the euro - which are often held in reserve by governments and major financial institutions.
Nigeria, the continent’s second-largest economy after South Africa, gave China’s currency a vote of confidence last year, by becoming the first African nation to invest significantly in the renminbi, by adding $500 million worth - or more than 3.1 billion renminbi - to its reserves.
Standard Bank analyst Simon Freemantle said he thinks China will try to use the BRICS bank to push the status of its currency. “I think very core to the bank from China, at least, has been the desire to use it as a means to continue the internationalization of the renminbi," he said.
"The idea would not be not to host it in a single currency. … But there will also be benefits in removing the dollar from bilateral trade between, say, South Africa and Brazil, South Africa and India, if that can happen. But I think principally, it’ll be a push for RMB internationalization," Freemantle added.
But he said it is unlikely that this move will unseat the major reserve currencies. He also said trade within the BRICS group makes up a small portion of international trade - which is mainly in dollars.
“I think it’ll be a very long time before the dollar’s status at the global reserve currency is offset, or diminished," he said. "This would really just be an ambition to lower the costs of trading and investing between BRICS members and between China and Africa … So, it’ll be some time, and I expect that the effect on the dollar will be very minimal, at least for the foreseeable future.”
But the future trends are undeniable. Chinese investment in Africa reached nearly $20 billion last year.
And the renminbi is playing an increasingly larger role here. Freemantle estimates that as much as 40 percent of China-Africa trade could be conducted in renminbi in the next two years, up from about 10 percent now.
The U.S. dollar drives development around the world, as the currency of choice of major lending institutions like the World Bank and the International Monetary Fund.
BRICS says it wants its development bank to fill the gaps left by those major banks and reach out to the developing world. BRICS representatives have said their funds will be loaned out for infrastructure projects in developing nations. Preliminary reports suggest each of the five nations will put $10 billion into the bank.
But what currency will this new bank use? That, experts say, is the $50 billion question.
Anil Sooklal, South Africa’s ambassador to BRICS, said details are still being finalized. But he noted that the bloc had previously agreed to trade, when possible, in local currencies - the real, the ruble, the rupee, the renminbi and the rand.
“Well, as you know, last year at the summit in [New] Delhi, we signed an agreement, an interbank agreement, on trading in local currencies among BRICS countries," he said. "So you already have an agreement on trading in local currencies. But in terms of the currency to be used by the BRICS bank, that is also an issue that will be put to the finance ministers to take a decision on.”
But none of those currencies has the chops to hold up a bank, as none are considered international reserve currencies. Those include the U.S. dollar, the British pound and the euro - which are often held in reserve by governments and major financial institutions.
Nigeria, the continent’s second-largest economy after South Africa, gave China’s currency a vote of confidence last year, by becoming the first African nation to invest significantly in the renminbi, by adding $500 million worth - or more than 3.1 billion renminbi - to its reserves.
Standard Bank analyst Simon Freemantle said he thinks China will try to use the BRICS bank to push the status of its currency. “I think very core to the bank from China, at least, has been the desire to use it as a means to continue the internationalization of the renminbi," he said.
"The idea would not be not to host it in a single currency. … But there will also be benefits in removing the dollar from bilateral trade between, say, South Africa and Brazil, South Africa and India, if that can happen. But I think principally, it’ll be a push for RMB internationalization," Freemantle added.
But he said it is unlikely that this move will unseat the major reserve currencies. He also said trade within the BRICS group makes up a small portion of international trade - which is mainly in dollars.
“I think it’ll be a very long time before the dollar’s status at the global reserve currency is offset, or diminished," he said. "This would really just be an ambition to lower the costs of trading and investing between BRICS members and between China and Africa … So, it’ll be some time, and I expect that the effect on the dollar will be very minimal, at least for the foreseeable future.”
But the future trends are undeniable. Chinese investment in Africa reached nearly $20 billion last year.
And the renminbi is playing an increasingly larger role here. Freemantle estimates that as much as 40 percent of China-Africa trade could be conducted in renminbi in the next two years, up from about 10 percent now.