The agreement to welcome six new members – Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, and the UAE – who will formally join the organisation on January 1, 2024, was the main accomplishment of the 15th BRICS summit. The bloc’s most ardent supporter, Chinese President Xi Jinping, called the membership expansion “historic.” “It demonstrates the BRICS countries’ commitment to cooperation and unity with the larger developing countries.”
The group’s commitment to work towards a different multilateral currency to replace the dollar was another key summit result. This new currency, known as the “bric” by some cheeky observers, is anticipated to expand the range of payment options available to emerging markets and developing economies (EMDE) and lessen their sensitivity to changes in the dollar exchange rate. Bric will undoubtedly face competition from the euro and special drawing rights (SDRs), two other widely used currencies on the global market. The excitement surrounding a BRICS shared currency may be premature and unworkable, but trading in national currencies is growing more widespread.
What propelled the BRICS countries to fight for their own currency and start this quest to knock the dollar from its throne? How likely is it that BRICS will succeed in removing the dollar from the world’s financial system? There are many elements influencing the dedollarization project.
Both a reserve currency and a medium of exchange, the US dollar is used. Countries keep reserves for a variety of purposes, including as a safety net against economic shocks, to cover import costs, pay for debt repayment, and restrain the value of their own currencies. The dollar is the most widely held currency, making about 59 percent of the world’s foreign exchange reserves, followed by the euro, at about 20 percent.
The most common currency used globally is the dollar. By one metric, it currently accounts for 84.3 percent of cross-border trade, compared to the Chinese yuan’s only 4.5 percent.
The demand for dedollarization was not unexpected. Since the 1960s, world leaders and economists have voiced a desire to dethrone the dollar. At the Jackson Hole Symposium in 2019, former Bank of England governor Mark Carney stated to central bankers that the dollar’s dominance is the “destabilising asymmetry” emerging “at the heart of international monetary and financial system.”
While there hasn’t been much advancement in that area, the urgency has recently grown. The need for dedollarization is becoming more urgent as a result of severe US sanctions that have forced some nations to conduct business in other currencies. The US uses “coercive economic statecraft” to punish its enemies and maintain the dollar as the world’s dominant currency.
Following Russia’s invasion of Ukraine, an increasing number of nations, including US allies like India, have looked for alternatives to using the dollar in their trade with Russia. In the meanwhile, Russian traders prefer to use Chinese yuan.
UN Secretary-General Antonio Guterres has long advocated for significant changes to the global banking system. As a sign of the group’s expanding power, Guterres was present for the BRICS expansion announcement. He reiterated the BRICS’s repeated demands that the UN Security Council, the International Monetary Fund, and the World Bank be reformed.
“Today’s global governance structures reflect yesterday’s world,” he declared. “Multilateral institutions must change to reflect the power and economic realities of today if they are to remain truly universal.”
Other issues are also being exacerbated by the dollar’s hegemony. Smaller economies, as well as the rivals, are significantly impacted by US political and monetary policy actions.
China is extremely susceptible to these “dollar shocks.” The chaos in China’s real estate market has made the People’s Bank of China, the country with the second-largest economy in the world, face a turbulent future. In contrast to the US Fed’s efforts to raise rates, the People’s Bank is cutting rates. Since the start of 2022, the yuan’s value relative to the dollar has decreased by 13%.
In 2022, the dollar rose to a 20-year high. Speculators were banking on its decrease earlier this year, but the Fed’s decision to maintain the rates stable on September 20 is unlikely to diminish its position in the foreign exchange markets. The US Dollar Index, which measures its value against six other major currencies, has increased by more than 5% since July 2023.
In a study published by the Brookings Institution titled “US interest rate increases and crisis probabilities in developing economies,” it was shown that shocks that caused the US interest rate to rise in 2022 were particularly likely to cause financial crises in developing countries.More widespread currency hardship could emerge from further increases in US interest rates.
The bric would shield adopters against depreciation as the dollar rose, according to supporters. Others are being enticed to de-dollarize by developing economic and geopolitical factors. The media and others are already strongly opposing the notion that the BRICS countries are attempting to free themselves from the dollar’s shackles. Joseph Sullivan, a staff economist of the White House Council of Economic Advisers during the Trump Administration, goes into detail on the advantages of the BRICS currency in an excellent piece in Foreign Affairs, but he predicts that the road ahead will be difficult. He warned that “the dollar’s reign isn’t likely to end overnight.” One factor is that the BRICS nations are quite different, and there are differences in their economies, politics, and geographic locations.
Dedollarization would need several exporters, importers, borrowers, lenders, and foreign exchange traders to individually elect to utilise different currencies on a global scale. However, it seems that is how things are going. According to a BRICS spokesperson, BRICS contributed more to the world’s GDP than the G7 nations combined in 2023, making up close to one-third of global economic activity. According to data from the International Monetary Fund, the percentage of US dollars in official foreign exchange reserves hit a 20-year low of 58 percent in the fourth quarter of 2022 and 47 percent when adjusted for exchange rate fluctuations. According to reports, BRICS accounts for approximately 16 percent of global trade and 24 percent of global GDP.
According to Bank of International Settlements Data, the dollar continues to be the currency of choice for international trade, accounting for 90% of all transactions on foreign exchange markets. However, the creation of the New Development Bank, the Contingent Reserve Arrangement, and numerous other financial coordination mechanisms show that the BRICS’ greatest successes have been in the area of financial cooperation. These institutions are crucial building blocks for the development of a global financial system that is independent of the dollar.