Key highlights
- The member countries of the BRICS economic interests bloc have proposed having their reserve currency, which could have global economic implications, with Nigeria in the fray.
- Critics argue that the economic growth trajectories of BRICS have been uneven, and the group lacks clear unifying ideological principles or a shared vision for managing the global order.
- Some experts believe that the proposed impact of a BRICS reserve currency cannot be ignored in the world, while others stress the need to diversify Nigeria’s reserves and reduce dependence on the dollar.
The proposal by the member countries of the BRICS economic interests bloc, which comprises Brazil, Russia, India, China, and South Africa, to have its reserve currency, has been touted to have global economic implications, with Nigeria in the fray.
For the first time in the past 60 years, there is a realistic plausibility of the dollar being rivalled by another currency as a reserve. The US dollar has been the world’s primary reserve currency since the 1960s.
Under the Bretton Woods system, the dollar was pegged to gold, and most other currencies were pegged to the dollar. As a result of this arrangement, dollars were used as the main intervention currency and, hence, reserve currency.
Some concerns
Critics of the policy indicate to Nairametrics that the economic growth trajectories of BRICS have been so uneven, and the group lacks clear unifying ideological principles or a shared vision for managing the global order.
The Chief Executive of Anthill Concepts Limited, Dr Emeka Okengwu, shared a similar perspective. While acknowledging that the BRICS common currency idea is good for trade and that it would undermine the strength of the dollar if it works, he caveated that it’s not going to happen overnight. He cited an example of a common African currency being on the table for the past five years, but the continent has not been able to come to a convergence point.
Dr Felix Echekoba, a Lecturer at Nnamdi Azikiwe University, argued that because Nigeria/China trade has hit $26 billion, the development would be positive for Nigerian businesses as smoother transactions and trade will be enhanced.
He said the development would reduce the pressure on the local currency because the dollar will cease to be the middle currency to trade with China, which is a growing partner of Nigeria.
More perspectives from experts
The Chief Economist of PricewaterhouseCoopers (PwC), Dr Andrew Nevin, acknowledged that there is competition for the top reserve currency. He said people have said for a long time that the US dollar was declining as a reserve currency. He said:
- “The reality is over the last 20-25 years we haven’t seen a lot of people going away from it. The BRICS makes sense by trying to form a currency that can serve as a reserve currency but I wonder how the BRICS, which is five disparate countries, can do it together. We only have one reserve currency from multiple countries, which is the European Union, and that took decades to come together, and it’s a set of contiguous countries that have a common history. But the BRICS is trying to create a reserve currency between five different nations, with five different stages of development, five different stages of history, and different historical contexts, five different languages. It’s difficult to see how that will work in practice.
- “With respect to the dollar, it has been resilient as a reserve currency, but Americans can’t take this for granted in the world financial system. I think the United States needs to continue to have a robust economy. The reason it’s a reserve currency is that people have faith in it and they’re happy to hold on to the currency. So far, the United States has shown that through the crisis caused by Covid and the increase in interest rates, the U.S. dollar strengthened and continues to show great confidence in itself. But the U.S. can’t be complacent if they want to keep the status of a reserve currency. At the same time, it remains in a very strong position.”
Commenting on how Nigeria should view the emergence of a BRICS currency, Nevin said Nigeria should have a basket of reserve currencies. He said at the Central Bank level, for example, it should have dollars, euros, Japanese yen, and some British pounds.
- “But if there is a new reserve currency there is nothing wrong with that in the basket as well. The whole point of having these reserves in the Central Bank is to create stability and resilience, and of course, having diversified reserves is a great thing in that context. As to individual Nigerians, anybody who has wealth should have it in a diversified portfolio. As the old saying goes, you can’t have all your eggs in one basket,” he added.
Also commenting on the possible emergence of a BRICS reserve currency, the chief executive of Economic Associates, Dr Ayo Teriba, told Nairametrics that the fact that China is a successful producer and may soon become the biggest economy in the world, a successful trader, the biggest exporter in the world, and attracting investments does not necessarily put it in the position to have the yuan as a reserve currency.
He noted that the United States currently attracts $11 trillion of the $44 trillion global stock of foreign direct investments (FDI), which is a quarter of the global FDI, whereas China holds just above $2 trillion, which is about 5.5% of global FDI. He added that unless an economy can attract and retain money, its ability to back a reserve currency is suspect. “Unless you attract the finance, you may not have the muscle to back a reserve currency,” he said.
He stated that before analyzing any impact it might have on the Nigerian economy and investors, you have to analyze the feasibility of that proposal. He added that you have to analyze whether it will become a significant reserve currency. He questioned the strength of BRICS countries as hosts to global financial centres.
- “If you look at the regular ratings of global financial centres, what is the position of Beijing, or Shanghai? What is the rank of the biggest financial centre in China relative to the top ten or top twenty financial centres? All of that tells us how you will weigh when you jump on a scale. I don’t know about any of the other BRICS countries that have any significance in terms of the global ranking of stock markets. The biggest financial centres in the world are in the United States, London, Tokyo, Singapore, etc. The fact that you have a big economy, or you trade big does not mean you have financial clout. Countries choose where to produce, who to trade with, and where to keep their money. Many trades in the Euro area but keep their money in London or New York”, he said.
The world can’t afford to ignore BRICS’ planned reserve currency
But a professor of Accounting and Finance and the current Head of the Banking & Finance Department at Nasarawa State University, Joseph Uwaleke, said due to the investment and economic base of the participating countries, the proposed impact of a BRICS reserve currency cannot be ignored in the world. He said it will promote the economic growth of a large population economy.
- “Already records indicate that BRICS has surpassed the G7 on a global GDP basis. So the launch of a currency, which is a bold idea at this time, will create economic consequences, particularly global trade among the participating countries and other countries that may want to depend less on the U.S. dollar as a reserve currency.
- “Its impact on the dollar may suggest a need for the redistribution of global currency reserves and the demand for the U.S. dollar. Nigeria and its policymakers may need to be more aware of current global trends to consider options best for the country. Potential economic expansion and diversification amongst the host nations can’t be ruled out if the currency formulation is credible and done transparently,” he stated
What Nigerian forex traders think
Also, the president of the Association of Bureau De Change Operators of Nigeria (ABCON), Alhaji Aminu Gwadabe, emphasized the need to diversify Nigeria’s reserves and reduce dependence on the dollar, adding that the naira should become a convertible currency in the West African economy.
- “So, it is not surprising to see the emergence of other blocks agitating for an overhaul of the world payments systems. One of the positive implications of this development to our economy is the opportunity to diversify our reserves and reduce our dependence on the dollar. Our higher volatility to the payments terms of trade always puts us on unbalanced terms of payments with less revenue and higher debt burden,” Gwadebe said.
He stated that the current situation, where the naira is tradable in countries such as Sudan, Central Africa, Saudi Arabia, Ghana, and the Benin Republic, should be leveraged to ensure acceptance of Nigeria’s e-naira product launched by the CBN.
- “Right now, the naira is tradable in faraway Sudan, Central Africa, Saudi Arabia, Ghana and the Benin Republic.
- “We should leverage the platform of ACFTA to ensure acceptance of our e-naira product launched by the CBN,” he added.