Exploring the Potential and Challenges of BRICS Currency Swap in Rivaling the Dollar

BRICS Currency Swap: A Solution or Another Problem?

The BRICS nations – Brazil, Russia, India, China and South Africa – have long been striving to reduce their reliance on the US dollar. Their latest strategy involves implementing a currency swap agreement. However, the effectiveness of this approach is questionable.

A currency swap agreement is a financial pact between two countries that allows them to exchange set amounts of their respective currencies at a predetermined rate. The objective is to facilitate smoother bilateral transactions and lessen dependency on global reserve currencies like the US dollar.

A BRICS currency swap agreement is the new solution for BRICS countries to de-dollarize, but it is too small and too complex to have any meaningful impact on the dollar or to be expanded to future BRICS members.

However, there are several challenges impeding this process. One major issue is that many of these nations possess relatively weak, non-convertible currencies which are not accepted for most international trade. Moreover, most of these currencies have consistently lost value against the dollar over the past five years.

This makes it difficult to price international trade in these currencies due to fluctuations in their value. For instance, despite maintaining their value against the dollar because they are pegged and backed by dollars, Saudi Arabia and UAE’s currencies cannot displace the US dollar as global trade currency since they derive their value from it.

The only international currency in the grouping is the Chinese yuan which is also partially pegged to the dollar and suffers from the same problems of non-convertibility and weak exchange rate to the USD.

Another issue is that none of the central banks of BRICS countries are willing to hold large amounts of BRICS currencies as reserves, making them largely useless for international trade with other countries.

Recent news reports have claimed that BRICS was establishing currency swaps with 29 Countries Worth $550 Billion. However, this amount is minuscule compared to the total trade of these 29 countries and the estimated $6 trillion in trade they conduct.

In a currency swap agreement, the exchange rate is typically locked in for its duration. Therefore, if China and India agree to a $20 million swap, they each deposit $20 million worth of their respective currencies in each other’s central banks. The settlement is made using these deposits when they trade. Yet, goods would still likely be priced in dollars for stability and consistency, necessitating conversion back to the dollar value for final pricing and settlement.

If BRICS wants to get rid of the dollar altogether, they would need to conduct currency swaps worth trillions of dollars.

This strategy also raises issues around foreign debt. BRICS members issue their foreign debt in dollars and must service it in dollars. Normally, they obtain dollars through trade to pay these debts and for commodity imports. But with these swaps, they will not be receiving dollars for trade; instead, they will have local currencies that cannot be used to pay off dollar-denominated debts or pay for commodities and imports from countries outside the BRICS swap agreement.

So, even in the best de-dollarization scheme that BRICS came up with, currency swaps, three of the currencies are still pegged to the dollar, and the value of each of their currencies is expressed in dollars. The price of their swaps is set in dollars and is dependent on the value of each currency against the dollar, and the trades are priced in dollars.

In conclusion, while a currency swap agreement may seem like a plausible solution for de-dollarization on paper, it presents numerous challenges when applied practically. The effectiveness of this strategy remains to be seen.

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