BRICS Could Move Beyond Dollar, But Not Towards A Single Currency

The 18^th BRICS Summit has stopped short of creating a common currency or linking the central bank digital currencies (CBDCs) of its member countries, despite growing calls for the grouping to reduce its dependence on the US dollar.

The New Delhi Declaration instead focused on more practical steps, including greater use of national currencies for trade, easier cross-border payments and financing in local currencies.

The approach reflects the significant economic and political differences among the 11 BRICS members, which make a single currency far more difficult to achieve.

A common BRICS currency has attracted considerable attention because it could, in theory, offer members an alternative to the dollar for international trade.

However, creating such a currency would require countries to coordinate their monetary and economic policies much more closely than they currently do.

Why A Common BRICS Currency Is Difficult

A common currency is not simply a new way of making payments. Countries sharing a currency effectively give up the ability to independently control important parts of their monetary policy, including interest rates and exchange rates.

For instance, lets take the mechanics of euro. Countries using the euro no longer have their own national currencies or independent exchange-rate policies, while monetary policy is handled by the European Central Bank.

BRICS economies are nowhere near that level of integration. China’s economy is heavily driven by manufacturing and exports, India has a different growth and consumption structure, while Brazil is strongly linked to commodities.

Russia has a very different economic and financial environment, and the newer BRICS members also have their own inflation, currency and capital-market conditions.

A single monetary policy could therefore have very different effects across the bloc. An interest-rate decision designed to control inflation in one country could potentially slow economic growth in another.

Local-Currency Settlement Is More Practical

Instead of creating one currency, BRICS is increasingly looking at ways to allow countries to conduct more trade using their existing national currencies.

Under such an arrangement, two countries can agree to settle a transaction in their respective currencies rather than converting the payment into US dollars first. This could reduce the number of currency conversions involved in a transaction and potentially lower costs for businesses.

Currency swaps could also help provide liquidity when countries want to increase trade in their own currencies. In simple terms, a currency swap allows two central banks or financial institutions to make currencies available to each other, helping businesses access the currency required for cross-border transactions.

However, creating a workable local-currency system across BRICS is not without problems.

Currency Controls Add To The Challenge

The differences between BRICS currencies are another obstacle. Some emerging-market currencies are subject to capital controls or are not as freely convertible as major currencies. This means businesses may face restrictions or additional procedures when moving money across borders or converting it into another currency.

For local-currency settlement to become widely used, companies need confidence that they can receive payments, hold the currency and convert or use it when required.

That means BRICS would need to work not only on payment connections but also on issues such as currency liquidity, financial regulations, capital controls, customer verification and cross-border compliance.

Why The Dollar Is Still Difficult To Replace

Despite the push for de-dollarisation, the US dollar remains deeply embedded in global finance. One of its biggest advantages is the size and liquidity of dollar markets. There is a huge global market for dollar-denominated assets, allowing companies, banks and investors to move money relatively easily.

The dollar also benefits from what economists call network effects. The more businesses and countries use it, the more useful it becomes to everyone else. Many major commodities, including oil, are priced in dollars, while companies across the world already have banking, accounting and payment systems built around the currency.

The US financial system also provides deep and liquid capital markets, making dollar assets an important destination for global investors, particularly during periods of financial uncertainty.

Replacing this ecosystem would therefore require much more than launching another currency.

BRICS Is Building An Alternative, Not Replacing The Dollar

The approach emerging from BRICS is consequently more gradual. Rather than attempting to create a single currency immediately, member countries are looking at ways to make the dollar less necessary for transactions between them.

That could mean expanding trade in national currencies, connecting domestic payment systems, using currency swaps to provide liquidity and encouraging development banks and financial institutions to offer more local-currency financing.

For businesses, such arrangements could eventually reduce currency-conversion costs and make some cross-border transactions less dependent on dollar-based financial channels.

The broader objective is therefore not necessarily to end the dollar's role in global trade. BRICS is seeking to create more alternatives to it.