|Get real about the dollar|
|Monday, 18 April 2011 00:00|
With intra-BRICS trade ($230 bn) accounting for well under 1% of total global trade ($30 tn), it is obvious there will be a limited impact of the Sanya declaration that intra-BRICS trade will take place in local currencies. Certainly it will have no impact on the dollar’s standing as the world’s reserve currency even though there has been considerable disquiet over this for some time now—the World Bank once hinted at taking another look at the gold standard. What’s important, however, is the symbolism of the declaration and the fact that, with the growth in the BRICS, it is obvious BRICS currencies must have more play in the international currency architecture.
That said, at the end of the day, however, the question is a simple one: Why would any country hold a currency? Since the US and the EU are the dominant trading partners, an exporter holding renminbi (RMB) or real or rand instead of dollars needs to find a way to use the surplus currencies. Given that the currency that is looking to increase its global role is the RMB, the question is about what those holding the RMB will do with it? Will China open up its financial markets to foreign investors? Not likely. While the rhetoric is good, it is unlikely India would like to hold part of its forex reserves in RMB or the real if the non-BRICS world sees little value in them.
The other issue relating to use of such currency directs us back to the problem of the euro. The euro has run into problems as some of the members have turned out to be rogue countries, which have fudged their economic numbers. Do we have inherent trust in each other’s economies? The answer is no. China is a global power, but the numbers are opaque. Russia has a different form of governance and is still highly dependent on oil. Brazil gets extravagant at times, and South Africa is a mixed bag. To come back to basics, such a theory would work
provided these five nations assiduously follow a common economic goal in terms of, say, fiscal deficits, inflation targeting, interest rate harmony and so on, which were agreed on by the euro nations. If this agenda is not in place, there would be a fundamental flaw in the model and it will not work. There are lessons to be learnt from having the
dollar as the anchor currency and the cracks in the euro. By creating a system analogous to the euro of accepting domestic currency for trade, we may be creating a problem—while the BRICS have a common political-based economic agenda, the economies are at different levels and do not justify such a move. Let us hold on to the dollar until something better can evolve.