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Brics members face obstacles on road to de-dollarisation

by Herbert Poenisch 25 August 2023

Common currency suggestions give way to second-best bilateral clearing

The 14th summit of Brics countries – Brazil, Russia, India, China and South Africa – has made clear that the possible creation of a common currency is still an illusion for now. A common currency would in theory enable Brics countries to move from bilateral to multilateral clearing in trade settlement and reduce their dependence on the dollar.

A declaration released at the gathering in Johannesburg on 24 August made no mention of a common currency and instead focused on bilateral clearing – the second-best option. It stressed the importance of ‘encouraging the use of local currencies in international trade and financial transactions between Brics as well as between their trading partners.’

It also encouraged the ‘strengthening of correspondent banking networks between the Brics countries and enabling settlements in local currencies.’ This ignores efforts by the Financial Stability Board to replace outdated correspondent banking with new forms of cross-border settlement, including central bank digital currencies.

There are some inherent problems in bilateral trade settlement. As long as trade is balanced between countries, such a model is no problem. However, when trade imbalances occur, two kinds of perennial problems arise. The first is the conversion into a commonly accepted currency, most likely the renminbi. Second, surplus funds from bilateral trades have to be held and invested in this local currency.

Conversion of local currency surpluses is the flipside of providing credit to those running deficits. There will have to be a paymaster who will provide a commonly accepted currency. China is the obvious candidate for this role but has not gone beyond a vague support for the internationalisation of the renminbi.

Recent examples have shown that this conversion will be the main problem for operating Brics trade settlement in local currencies…

Read the rest:

https://www.omfif.org/2023/08/brics-members-face-obstacles-on-road-to-de-dollarisation/

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