- In a bold move to take on the US-dominated World Bank, the BRICS New Development Bank will now issue loans in local currencies.
- The BRICS, representing around one-fifth of the world’s economy, has emerged as a powerful new voice alternative to Western domination.
- The sanctions against Russia have exposed the danger of over-dependence on the US dollar in international trade.
The United States’ global economic dominance is experiencing disruption. Unsurprisingly, the BRICS New Development Bank (NDB) is at the center of the shift. NDB, formerly the BRICS Development Bank, is a multilateral bank established by Brazil, Russia, India, China, and South Africa. The Bank has launched a BRICS potential union of up-and-coming discontents. On the scale of GDP, the union now collectively outweighs the reigning economic hegemon, the United States. It also goes beyond the scope of the entire G-7 economic weight class.
As per the Agreement on the BRICS NDB, the five nations created the Bank to support multilateral economic development. Moreover, the NDB shall liaise with other financial entities and international organizations to provide technical support for projects within the BRICS nations. The new financial institution is part of the comprehensive monetary transition away from the US dollar in international trade.
On March 24, 2023, the China-based financial institution appointed Dilma Rousseff, former Brazilian President, as the head. Rousseff will preside over the NDB until July 2025, when Brazil’s term as the chair of the NDB will expire. As Brazil’s President, Rousseff helped establish the NDB in 2014, challenging Western financial hegemony over international developmental institutions.
READ MORE: BRICS Influence: Africa’s position in shifting global economic outlook
NDB championing financial independence
In a bold move to take on the US-dominated World Bank, the BRICS New Development Bank will now issue loans in local currencies. President Dilma Rousseff of the NDB has confirmed that the Bank intends to offer 30 per cent of its loans in the local currencies of its member nations, effectively abandoning the use of the dollar in international trade. The NDB’s local currency loans will assist the BRICS nations in avoiding foreign exchange risks and liquidity issues that could hinder long-term investments. Rousseff holds the view that using native currencies is necessary to lessen reliance on the US dollar.
Rousseff cites Brazil and China as prominent examples of nations that have already adopted trading in their respective national currencies, the Yuan and the Real. The head of the Shanghai-based entity has highlighted the significance of this new direction in local currency financing in assisting BRICS nations to avoid exchange rate risks and financing shortages now prevalent in economies globally.
Challenging the US dollar’s dominance in international trade
The BRICS, representing around one-fifth of the world’s economy, has emerged as a powerful new voice alternative to Western domination. The five members of BRICS contribute 16 per cent to global trade and around 24 per cent to global GDP.
Several other countries have expressed interest, with Argentina, Iran, and Algeria formally applying to join the extended BRICS+ economic bloc. According to Russia’s Foreign Minister Sergey Lavrov, Egypt, Turkey, Saudi Arabia, the UAE, Indonesia, Argentina, Mexico, and several African countries have also shown interest in joining the growing network.
The NDB’s decision to hinge on local currencies points to the growing global interest in challenging the US dollar’s hegemony. Brazil’s incumbent President Luiz Inacio Lula da Silva, in a recent diplomatic visit to China, emphasized the need to create a world with less inequality, less poverty, and more effort towards sustainability.
Moreover, NDB’s President Rousseff has stressed the importance of a counter-cyclical anti-crisis mechanism that supports stabilization, particularly given the threat of high inflation and restrictive monetary policies in developed countries.
South African International Relations Minister Naledi Pandor has also highlighted the BRICS nations’ efforts to develop a fairer monetary exchange system to weaken the US dollar’s dominance. Naledi notes that the current systems lean towards wealthy nations. The bias creates challenges for countries like South Africa with no option but to make payments in dollars at a higher cost.
The NDB’s drive for local currency financing marks a significant shift in the global financial landscape. The move challenges the supremacy of the US dollar in international trade. It also paves the way for increased economic independence for the BRICS countries and beyond.
A potential BRICS currency’s threat to the US dollar’s dominance
In recent months, the discourse about de-dollarisation has gained momentum. The sanctions against Russia have exposed the danger of over-dependence on the US dollar in international trade. The recent foreign exchange challenges have also recharged the growing efforts to bolster other currencies.
De-dollarisation could soon become a reality. A BRICS substitute to the dollar could enjoy high prospects for success, a former White House adviser, Joseph Sullivan, has noted. Sullivan served as a staff economist at the White House Council of Economic Advisers during the Trump administration. According to him, a potential BRICS currency poses a unique threat to the US dollar’s dominance in international trade.
Moreover, the President of Brazil recently reminded the international community of plans for a BRICS currency. The currency will be built around a basket of BRICS member currencies. Furthermore, Sullivan has pointed out that the conceived BRICS currency would have significant advantages over current options. For instance, bilateral agreements still result in the storage of revenues in dollar assets with limited use with other countries.
An independent currency union
The BRICS would also accomplish a level of trade independence that has eluded the world’s other currency unions. A BRICS currency union would not be comprised of countries with shared territorial borders. Thus, members would likely be able to produce a greater variety of products than any extant monetary union.
Interestingly, the impending changes would incentivize non-member nations to use a BRICS currency. Every member’s economy has a good standing in their respective regions, making them desirable business partners.
Besides eroding the dollar’s dominance in international trade, a BRICS currency could undermine the dollar’s reserve currency status. Governments of the BRICS nations could successfully coerce and subsidize the market into existence. They could successfully compel their households and businesses to invest their savings in the new currency.
