The use of national currencies among developing countries is acquiring increasing importance as the developing economies are building their own development banks and integration platforms against the backdrop of rising protectionist pressures in the developed world. Indeed, the creation of these new integration platforms may notably facilitate the increasing use of national currencies – one of the potential test cases is the emergence of BRICS+ – a platform that potentially could bring together the largest integration block of the developing world.
Within such a BRICS+ there may be a case for what may be termed as the ‘R5 initiative’ that targets the use of the respective national currencies of BRICS countries – Rouble (Russia), Rand (South Africa), Real (Brazil), Rupee (India) and Renminbi (China) – within the BRICS+ circle and more broadly in the world economy. The elements of such a strategy may include measures to boost trade and investment among BRICS+ (cooperation between the respective RTAs to create more scope for the use of national currencies), cooperation between development institutions in using national currencies to fund investments and long-term projects, cooperation in promoting BRICS+ currencies towards reserve currency status. Importantly, the R5 initiative (or alternatively the R5+ initiative to denote the national currencies of all BRICS+ members) needs to target greater use of all currencies in the BRICS+ circle, in order to render the R5+ network open and inclusive.
The launching of the R5+ initiative would allow the BRICS+ countries to ‘monetise’ the increasing intensity of mutual economic cooperation through the use of national currencies and a substantial reduction in transactions/ conversion costs associated with the use of other currencies such as the dollar or the euro in mutual transactions. Furthermore, the BRICS+ format appears to be particularly suitable for the implementation of the R5+ initiative. Firstly, the inclusion of the regional circle of partners facilitates the propagation of such an initiative and renders it more sustainable in time due to the relatively greater intensity of trade and investment across the respective regional integration arrangements. Also, the synergy from bringing together the cooperation between the regional development banks and the respective RFAs (regional financing arrangements) that form part of the BRICS+ framework creates additional instruments and possibilities to sustain the drive towards the use of national currencies in the regional as well as cross-regional domains.
The following five common platforms among BRICS could facilitate a more intensified use of BRICS national currencies:
- A platform for national and regional development banks of BRICS economies, with options of co-financing projects in national currencies. The group of regional development banks would comprise among others such institutions as the Eurasian Development Bank, FOCEM and SDF. The operation of such a platform would also benefit from the participation of Chinese development banks and funds. The regional development banks could be allocated additional capital denominated in national currencies in order to finance long-term development projects. The New Development Bank could play a coordinating role in the operation of such a platform of regional development banks.
- A common platform for sovereign wealth funds of BRICS economies – currently the only BRICS member without a sovereign wealth fund is South Africa (even though in terms of macroeconomic policy considerations such a Fund may be expedient given the significant dependency of the country’s economy on the commodity sector).
- A common platform for the national currency and stock exchanges – this would serve to facilitate greater liquidity and volume in trading the respective currency pairs as well as the development of hedging and other financial instruments.
- A common payment system platform, which would cover the BRICS economies as well as their regional partners through payment systems in national currencies. One of the recent initiatives in this area focuses on the creation of a common payment card system for BRICS and their regional partners. A common payment card system would complement (not replace) the existing national payment card systems of BRICS+ countries and create the conditions for increasing the national market shares in servicing financial transactions in the domestic markets (Preksin and Kazartsev, 2016).
- A platform for regional financing arrangements (RFAs), with options of financing stabilisation programmes and investment projects in national currencies. The corresponding RFAs with BRICS part icipation include the Eurasian Fund for Stabilisation and Development (EFSD), BRICS Contingency Reserve Arrangement (BRICS CRA), CMIM – Chiang Mai Initiative Multilateralisation. Among these RFAs a critical element in the BRICS cooperation in the sphere of financial and macroeconomic stability is the BRICS Contingent Reserve Arrangement that became operational in 2015. In line with Article 2 of the BRICS CRA Treaty the initial committed resources of the CRA stand at USD 100 billion, with individual commitments ranging from USD 41 bn for China to USD 5 bn for South Africa.
There may be several trajectories of BRICS+ cooperation in the financial sphere where the involvement of the relevant RFAs could prove instrumental. One such area is mutual policy coordination with respect to international financial organisations such as the IMF – in fact such coordination appears to be already taking place. In October 2016 a highlevel dialogue on the role of regional financing arrangements (RFAs) in the Global Financial Safety Net (GFSN) took place in Washington DC with the participation of the representatives of the IMF as well as representatives of AMRO (the ASEAN+3 Macroeconomic research office), the BRICS Contingent Reserve Arrangement (represented by the Reserve Bank of India), the Eurasian Fund for Stabilisation and Development, the Latin American Reserve Fund (FLAR), the European Stability Mechanism (ESM), as well as the Arab Monetary Fund.
The potential for increasing the use of national currencies in the BRICS and their regional partners is significant, given the high levels of dollarisation in many BRICS+ countries. In the Eurasian Economic Union, for example, the use of the Russian rouble in cross-country transactions has increased to 75% in 2016 compared to 56% in 2010 at the expense of the US dollar, whose share declined from 35% in 2010 to 19% in 2016.
Going forward, the BRICS countries will need to explore innovative approaches to addressing the issue of expanding the use of national currencies. Potential venues in this respect could include the creation of an SDR-type currency basket of BRICS+ countries (the R5+ currency basket), which would include the most liquid currencies in the BRICS+ universe. This basket of currencies could then be potentially used in the operations undertaken by the regional financing arrangements (RFAs) as well as the regional development banks, where BRICS+ countries are members.