De-Dollarisation: BRICS as a Catalyst for Change
Egypt, Ethiopia, Iran, and the United Arab Emirates have joined the ranks of the BRICS group, which stands for Brazil, Russia, India, China, and South Africa.One of the most pressing issues on the agenda at the latest BRICS summit is the bloc’s plan to reduce global reliance on the US dollar, especially in foreign exchange (FX) reserves and fuel trade. This article explores the key areas where BRICS is making strides in de-dollarisation and its potential impact on the global economy.
Key Takeaways
- With 42% of the world’s foreign exchange reserves under its control, BRICS+ is a key actor in the de-dollarization process. Gold is emerging as a key alternative to the US dollar, although it currently makes up only 10% of BRICS+ reserves, compared to the global average of 20%.
- De-dollarisation in FX reserves may benefit developed markets more than emerging market currencies.
- BRICS+ plays a crucial role in fuel trade, accounting for 37% of the emerging market (EM) fuel trade, a critical area for de-dollarisation.
- Despite efforts, BRICS+ has limitations, including its 30% share in global oil production and a relatively modest share in global trade compared to developed markets (DM).
- BRICS+ is actively reducing its dependence on the US dollar in financial flows, as seen in declining US dollar shares in cross-border bank claims and international debt securities.
BRICS+ and Global FX Reserves
One of the most prominent areas for de-dollarisation is foreign exchange reserves. BRICS+ nations collectively control approximately 42-44% of global central bank reserves, and the bloc has shown a growing preference for gold as an alternative to traditional currency reserves. Since the Global Financial Crisis, BRICS+ has outpaced global trends, purchasing 6.6 thousand tons of monetary gold, boosting their share of global gold holdings from 5% to 22%.
However, the bloc’s gold reserves still represent only 10% of their total reserves, compared to the global average of 20%. If BRICS+ central banks were to double their gold holdings, it could result in an additional 8,000 tons of gold demand, although global production capacities may limit such an increase.
Potential Alternatives to the US Dollar in FX Reserves
Apart from gold, other developed market (DM) currencies have gained traction in global FX reserves. These currencies now account for a combined 35% share. However, BRICS+ faces obstacles in expanding the global use of its currencies as reserves, including the bloc’s modest external debt, which accounts for only 6% of the global total, compared to the US’s 21%.
BRICS+ in Global Trade
In terms of global trade, BRICS+ maintains a steady 20-21% share, equivalent to $10 trillion in annual trade turnover in 2023. However, the bloc’s growth in global trade has slowed since the financial crisis, and its influence is mainly concentrated on internal trade between member countries, particularly China.
Despite this, BRICS+ has made significant strides in fuel trade, increasing its share from 20% in 2008 to 37% in 2023. This sector presents the greatest potential for de-dollarisation, especially as non-OECD oil demand now accounts for 55% of global oil consumption. Emerging markets such as China, the UAE, and India have already begun using local currencies like the renminbi and Indian rupee to pay for energy imports, further advancing de-dollarisation efforts.
Limitations of De-Dollarisation in Trade
While BRICS+ controls 30% of global oil production, this is comparable to the 30% share held by the USA, Canada, and Mexico. Moreover, 95% of foreign trade in the Americas is conducted in US dollars, presenting a significant challenge to global de-dollarisation. Additionally, while BRICS+ accounts for twice the volume of US trade, it represents only one-third of developed markets’ trade volume, limiting its overall influence in global trade.
Financial Flows: De-Dollarisation on the Rise
BRICS+ has made substantial progress in de-dollarising financial flows, particularly in cross-border bank claims and international debt securities. The share of US dollar-denominated cross-border lending by BRICS residents fell from 67% in 2016 to 55% by the end of Q1 2024. Similarly, the share of US dollar-denominated international debt securities dropped from 83% to 75% in the same period.
The New Development Bank (NDB), established by BRICS in 2015, has played a key role in this process, with 30% of its lending now conducted in local currencies. However, 70% of its lending remains in hard currencies, reflecting investor preferences.
Despite these efforts, BRICS+ still relies heavily on the US dollar for cross-border financial flows. BRICS resident banks account for only 9% of global international claims, and the bloc’s bond issuers represent just 3% of international debt securities outstanding.
Central Bank Digital Currencies’ (CBDCs’) Function
Another potential avenue for de-dollarisation is through central bank digital currencies (CBDCs), such as the m-Bridge project. This initiative, led by the BIS Innovation Hub and central banks from China, the UAE, and Thailand, aims to facilitate cross-border payments using CBDCs.
While the project shows promise for reducing reliance on the US dollar in global payments, experts believe its short-term impact may be limited. However, the long-term potential for CBDCs to disrupt the current US dollar-dominated global payments system is significant, especially as it could allow transactions to bypass the US banking system altogether.
The Emergence of BRICS Currencies on the Global Stage
BRICS currencies have gained some traction in global financial markets, particularly in FX derivatives and SWIFT payment volumes. As of 2022, BRICS currencies accounted for 6.8% of global OTC FX derivatives turnover, with the Chinese yuan (CNY) and Hong Kong dollar (HKD) contributing 4.8 percentage points of that share. Similarly, BRICS currencies now make up 6.6% of SWIFT transaction volumes, primarily driven by the rising use of the Chinese yuan.
However, BRICS currencies still face challenges in achieving widespread adoption. For instance, the CNY accounts for only 2% of global FX reserves, and the bloc’s overall presence in global financial markets remains modest.
Can BRICS Currencies Challenge the US Dollar?
Given the low base of BRICS currencies in global reserves and financial markets, it seems unlikely that the bloc will pose a direct challenge to the US dollar in the near future. However, BRICS+ currencies could compete with other developed market currencies, particularly as the bloc continues to expand its influence in emerging markets.
Global De-Dollarisation: Progress and Challenges
While BRICS+ is making strides in de-dollarisation, the process is far from complete. The US dollar remains dominant in key areas such as international debt securities and interest rate derivatives, and its market capacity and favourable interest rate environment continue to support its global dominance.
Nevertheless, the role of the US dollar in global FX reserves and FX derivatives is gradually declining, with emerging market currencies, including those of BRICS+, gaining ground. However, the most likely competitors to the US dollar in the long term are other developed market currencies, rather than BRICS currencies.
Conclusion: The Future of De-Dollarisation
BRICS+ has made notable progress in de-dollarisation, particularly in FX reserves and fuel trade, but significant challenges remain. The bloc’s modest share of global financial flows and trade, as well as its reliance on the US dollar for cross-border financial transactions, limits its ability to fully de-dollarise the global economy.
However, with continued efforts, particularly in the areas of CBDCs and regional trade, BRICS+ could challenge the dominance of other developed market currencies in the future. While the US dollar is unlikely to lose its global preeminence anytime soon, the gradual shift towards a more diversified global currency landscape is underway, with BRICS+ playing a key role in this transition.
BRICS Currency Proposal Sparks Controversy Over Taj Mahal Imagery
Recent reports suggest that BRICS nations are considering launching a unified currency banknote, a move expected to challenge the dominance of the US dollar. During the Kazan summit, Russian President Vladimir Putin was presented with a symbolic ‘BRICS banknote,’ a gesture highlighting the collective work being done within the BRICS framework. The proposed currency, backed by gold and reserves of member countries, could potentially reshape the global financial landscape. However, this idea was not well-received by Russia’s Central Bank chief, Elvira Nabiullina.
The symbolic BRICS note features the flags of the five founding nations—Brazil, Russia, India, China, and South Africa—on its front, with reports suggesting it might be named ‘the unit.’ A closed-door discussion on creating a common BRICS currency was also held during the summit. The Jerusalem Post earlier speculated that this currency could be backed by 40% gold and 60% reserves from member states’ currencies, although no official statement has confirmed these rumors yet.
Taj Mahal on BRICS Currency Triggers Outrage
The unveiling of the mock-up BRICS currency note has sparked debate on social media, particularly over the inclusion of India’s Taj Mahal. Many Indians voiced their disapproval, arguing that the Taj Mahal, a Mughal-era mausoleum, does not represent India’s identity in the modern world. Critics suggested that more fitting symbols, such as the newly constructed Ram Temple in Ayodhya or the Ashoka Chakra, should be used to represent India.
One social media user stated, “The Taj Mahal, although a beautiful monument, should not symbolize India on an international currency.” Another added, “The Ram Mandir would be a better representation of India’s cultural revival and unity.” The debate underscores the complexities of selecting national symbols for global representation, especially when aiming to reflect a nation’s modern identity.
With the potential to challenge the US dollar’s dominance, the proposed BRICS currency has already generated significant attention. However, the public backlash over symbolic representation may prompt further discussions within BRICS nations regarding how each member country should be portrayed.
for more click here BB