The two south American nations are exploring methods to increase bilateral commerce and wean themselves off the mighty US currency. Its announcement has been widely criticized since they are not a natural fit for a single currency. This is due to one country’s relative economic prosperity and the other’s economic upheaval. This experience between Brazil and Argentina is instructive and illustrative for African nations with comparable aspirations to develop a single currency.
- Brazil and Argentina announced early last month that they would create a joint currency to increase trade and political relations.
- Similarly Africa has expressed the same ambitions at different times. The advent of AfCFTA gives further impetus to the concept that Brazil and Argentina has reignited.
- Brazil and Argentina first came up with the idea of a joint currency in the 1980s but it never took off because economic fundamentals.
- The joint currency experiment by Brazil and Argentina which has been received with widespread criticism and ridicule in equal proportions has important lessons for Africa and the creation of a common market through AfCFTA.
- The creation of AfCFTA will create a common market by collapsing all borders and trade restrictions on the African continent.
- For a joint currency to be sustainable in Africa, the case of Brazil and Argentina has shown that all parties to a joint currency need to have stable macroeconomic fundamentals and indicators. This is not the case with Brazil and Argentina.
- Argentina like most African countries has weak macroeconomic fundamentals. A joint currency with Brazil will make it unsustainable in the longrun.
When Brazil and Argentina declared in January 2023 that they would establish a joint currency, it seemed certain that this would be met with jubilation. In actuality, the opposite is true. The action has been described as uncomfortable and peculiar. Analysts and the media have expressed broad ridicule at the proposed Sur money. Media outlets with a playful sense of humor devised trite headlines to mock the ruling. The BBC announced the news with the headline Are you Sur-ious?” Why was this ostensibly progressive policy move by two independent and sovereign nations to develop their own currency to advance their economic goals treated with such contempt? What should African nations earnestly exploring the creation of shared currency learn from Brazil and Argentina’s evident mistake? Why would the decision of two countries so distant from Africa to form their own currency affect the continent’s economic development?
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For openers, the Africa Continental Free Trade Area has advanced plans to create a single common market by essentially collapsing the continent’s trade and customs borders. It is reasonable for economic experts on the African continent to consider the possibility of a single currency for the settlement of commercial transactions. Should the AfCFTA become a reality and be successful, Africa’s economy would become the fourth largest in the world after Germany. The development of Africa’s economy would inevitably follow the effective execution of AfCFTA projects. Thus, the question must be posed: Was Muammar Gaddafi insane when he first proposed a single currency for Africa? Is it possible for two or more countries to successfully implement a shared currency?
The demand for regional currency blocs is increasing louder as anti-American sentiment increases. The geopolitical scenario in Europe, which has been marked by a year-long conflict between Russia and Ukraine, has aided proposals for regional currency blocs. Last year, the government began to make strong recommendations for the creation of a currency to be used for the settlement of trade transactions among the BRICS nations (Brazil, Russia, India, China, and South Africa). This is Russia’s purposeful effort to reduce its dependency on the U.S. dollar to settle its foreign commercial operations. The US government took at least fifty percent of the foreign exchange holdings of the countries seen as the originator of the war in Ukraine. Also, Russian banks were excluded from the SWIFT system.
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This practically precludes Russian banks from participating in and funding international commerce. A reader with a radical political viewpoint will consider this exclusion of Russian banks as weaponizing the usage of the United States dollar, upon which the majority of nations rely substantially for international commerce settlement. This perspective and perception have fueled anti-American sentiments. Brazil and Argentina stated comparable justifications for their plan to create the Sur, which they will use for bilateral commerce.
India has just started accepting Rupees as payment for foreign commerce transactions, excluding those involving oil and energy items. Some nations, such as Iran, have built their own version of the global SWIFT system, known as Hawala, which enables them to transfer payments internationally without the inspection and restrictions of SWIFT rules and norms.
Returning to the bromance between Argentina and Brazil, many economists believe their flirtation with a shared currency will not survive or is doomed to fail. In terms of their macroeconomic foundations, the two countries could not be more dissimilar. The Economist published an article titled “Argentina and Brazil propose a joint currency, what are they thinking?” in response to the development. How’s that for some skepticism? The article opened with a historical framework for the concept, demonstrating that the common currency had been proposed previously but never materialized.
The article in The Economist analyzed Argentina’s macroeconomic status. The article states, “Argentina is rapidly running out of vaults. When annual inflation approaches 100 percent and the central bank produces notes to meet the government’s budget deficit, local banks are making room for soaring peso stocks. The government has tightened capital controls. Imports have come to a halt. The government is going through the motions with the IMF to avert a sovereign default for the tenth time since gaining independence in 1816. Yet, on January 22nd, Luiz Inácio Lula da Silva, the president of Brazil, and Alberto Fernández, the president of Argentina, announced they would begin preparations for a common currency, possibly leading to a full currency union, which would couple South America’s largest economy with one of its weakest. Economically, Argentina is anything from normal. It is not difficult to understand why Argentina created the unified currency. The country in South America is perpetually short of US money to cover its loans and imports. According to The Economist, a common currency would provide alternative reserves and facilitate commerce with neighbors. Argentina’s major trading partner is Brazil.” This action is supported by political and economic incentives. Argentina receives a financial reprieve, while Brazil’s president da Silva is able to raise his political profile by promoting regional collaboration.
Central Banking.com concerns whether the joint currency is an attempt to establish a monetary union or merely a limited tool to facilitate commercial transactions. Former IMF chief economist Olivier Blanchard referred to the proposal as “crazy.” The former chief economist’s opinions were included in a Financial Times news piece on the subject. The two countries’ pursuit of a unified currency appears to be driven more by political than economic considerations. This has a lot to do with the current governments in both countries. According to the Financial Times, this is the first time in seven years that both countries have leftist governments in power.
In the case of Argentina, political support for the adoption of a unified currency stems from the desire of its citizens to revive their shattered economy. The country has been on the verge of insolvency for years, its central bank reserves are decreasing, tight exchange controls have fueled a thriving dollar illicit market, and peso confidence has crumbled. The Financial Times reports. According to experts on currency adoption, Argentina needs an external anchor to re-establish its credibility.
Over the past decade, trade between the two nations has decreased from $40 billion to $30 billion. This is mostly owing to the country’s persistent scarcity of United States dollars, which are required to purchase Brazilian commodities. A unified currency will promote trade without creating foreign exchange risks, according to both parties. Brazil will not grumble if its exports gain access to a new, larger market with fewer trade barriers. In conclusion, the concept of common currencies or currency blocs is not new. The most prominent example is the Euro. The currency celebrates its 23rd birthday this year and has so far managed to maintain its value since the majority, if not all, of the bloc’s member nations are decently and comparatively economically stable. This is a prerequisite for any endeavor to establish a common currency. Where this economic stability is lacking in one or more nations comprising the currency bloc, it undermines the currency that keeps them all together. African nations must keep this in mind when pondering and entertaining the idea that a common currency could be adopted to settle international economic transactions.
