Decade-old Brics ambition to push local currency remains a pipe dream

By Martha Beck and Mirette Magdy

 

Brics countries once again failed to make significant strides in the cross-border payments system for trade and investment they’ve been discussing for a decade.  

In a statement released as they kicked off their meeting in Brazil Sunday, leaders committed to additional talks on the potential for greater trade integration of the 10-nation bloc.

 

“We task our ministers of finance and central bank governors, as appropriate, to continue the discussion on the Brics Cross-Border Payments Initiative,” the statement reads. A survey prepared by the Brazilian central bank will be presented at the two-day Rio de Janeiro summit. 

 

Despite the group’s aspirations, progress has been slow — and the tide of global trade is shifting so quickly that it may be impossible to catch up.  

 

It’s a missed opportunity for Brics as the dollar comes under continued pressure from President Donald Trump’s erratic policies. The greenback had the worst start to a year since 1973 as Trump’s trade war and attacks on the Federal Reserve’s hesitancy to lower interest rates roiled markets, calling into question the longstanding outperformance of US assets and sending investors fleeing in search of alternatives. It’s created a boon for emerging markets that traders expect to extend further. 

 

While all members are supportive of the idea of cross-border payments, first cited in the statement of the bloc’s 2015 summit, the technical aspects of integration are complicated. Central bank systems in some countries are not yet ready, three people familiar with the discussions said. It will take time to adapt those, they said, adding that it’s unlikely to happen anytime soon. 

Roadblocks

Discussions involve payment mechanisms, types of currencies used, how to implement infrastructure and how to share costs. There are security concerns about the integrated systems, two people said, adding that the Brics bloc’s recent expansion has also caused delays.

 

The fact that several of the bloc’s currencies are non convertible, and existing sanctions on member states Iran and Russia further complicate discussions, one person said. Some countries may argue that the cost involved in setting up and maintaining a unified system would not be justified given what they already have in terms of bilateral trade, another added. All asked not to be identified sharing details of private conversations. 

China, for one, has taken advantage of the US disarray and launched a sweeping campaign to promote the yuan’s global role. In a speech last month, Chinese central bank governor Pan Gongsheng outlined a vision in which the country’s financial markets are more open and the yuan plays a central role in the world’s capital flows.  

 

Beijing is exploring the launch of the country’s first domestic currency futures, which could compete with similar hedging tools in offshore markets like Singapore and Chicago, and is expanding its own payment system, known as CIPS, to cover more foreign banks.

Trump pushback

Brics leaders also reaffirmed their commitment to expand local currency financing, diversify funding sources and strengthen cooperation in trade to promote inclusive growth and sustainable development. 

 

A document obtained by Bloomberg that outlines the latest thinking by the bloc shows that discussions around a new investment platform dubbed NIP are similarly stalled. 

 

The platform is seen as potentially filling a gap in development finance, providing more flexibility and reducing the dependency on hard currency financing. But “given the variety of approaches and proposals raised, and the complex nature of the issues involved, further technical dialogue will be essential to advance a common understanding of the Platform’s potential added value and operational framework,” it reads.  

 

Trump has threatened to slap 100 per cent levies on Brics if they ditch the dollar in bilateral trade. The pushback, in turn, has spurred interest in developing local payment systems and other instruments that can facilitate commerce and investment between the nations. 

 

The idea of abandoning the dollar and setting up a common currency for the bloc isn’t under discussion, several officials have said. The US leader’s response has not delayed Brics conversations for the integrated systems, three people said.   

 

“One of the ways to bring countries closer together is to reduce financing costs for trade operations. And one of the ways is to use more local currencies,” Tatiana Rosito, secretary for international relations at Brazil’s Finance Ministry, said in an interview. “Banks say that, depending on the period in which you carry out the operation, they may need to use the rate converting renminbi to dollars. But the goal in the end is you one day don’t have it.” 

 

If there’s a liquid market, “you will have a direct exchange rate real-renminbi, real-rupee, real-rand,” she said. “But this will depend on whether you have a critical mass and a volume of trade investments.”

High rates

The Brics statement also references the added challenge presented by “fluctuations in financial and monetary policies in some advanced economies” for countries already grappling with high debt levels. “High interest rates and tighter financing conditions worsen debt vulnerabilities in many countries,” it reads. 

 

The bloc is also in discussions to establish a multilateral guarantees initiative which would focus on improving “creditworthiness in the Brics and the Global South.” The initiative, dubbed BMG, will be incubated within the NDB and start without additional capital contributions, according to the statement.