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How does the BRICS Currency Transform the World Economy?

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By  Yaroslav Lissovolik

The creation of a BRICS currency has become throughout the past year one of the headline themes related not only to BRICS, but also the global financial markets. Along with the skepticism coming from most of the pundits from the developed world there is also an enormous number of misconceptions and unsubstantiated claims of the speedy “demise of the dollar” and the crumbling of the global financial system due to the creation of a common BRICS currency. In reality the actual scenario and the modalities of the introduction of such a currency are yet to be determined and it could well be that in the first stages of the launching of the BRICS currency it could take the form of an accounting unit rather than a full-fledged international transactions currency. But even in the guise of a unit of account for the economies of the Global South the R5 (taking its name from the first letters of BRICS respective currencies) could have a significant effect on the international financial system and deliver important benefits to the economies of the developing world.

The first forays into the R5 common currency project and the use of BRICS as a platform for de-dollarization, were undertaken by Y. Lissovolik back in 2017-2018 in a series of publications for the Valdai club1 as well as the South African Joburg Post and “The Thinker”2. The subsequent discussions around R5 while mostly revolving around the creation of a full-fledged euro-like currency for international transactions also featured such alternative paths as a reserve currency, or an accounting unit. The latter would in fact be the easiest and perhaps the most realistic scenario for the first stages of the R5 project. According to the leading experts in the field, the creation of an accounting unit for BRICS could be realistically undertaken with minimal resources and could be implemented in a relatively short period of time3.

Rather than rushing to create a physical unit to service international transactions, a staged approach that involves the creation of an accounting unit allows for tracking the volatility and stabilizing expectations around the operation of the future BRICS currency. The launching of the new BRICS currency in the form of a physical medium of exchange may well be greeted with speculative attacks and attempts to test the resilience of the new currency to the full force of global capital markets. Accordingly, in terms of the sequencing of the BRICS currency it may make sense to prioritize the creation of an accounting unit first and to accompany this effort with the development of market infrastructure in the main financial centers of the Global South that can support this project.

Apart from the simplicity of its introduction this mode of R5 is also in line with international best practice – in particular with such instruments as the Euro and the SDR. Furthermore, the “accounting unit” route has the advantage of being flexible, with one or several BRICS countries having the capability to launch such a currency format on their own, without the need for participation from all BRICS members. The resulting balance of pros and cons suggests that the creation of R5 as an accounting unit would minimize the risks, while retaining a lot of the benefits associated with a common currency, i.e. the easiest way to create the BRICS global currency – via the introduction of an accounting unit – is also the most optimal in the near term.

As for the R5 impact, perhaps the most important aspect in which the BRICS currency changes the world economy is the change in the mindset and the mentality of economic agents and businesses that is currently centered very much on the greenback. This “mental dependency” on the dollar arises from the fact that it is central in pricing, accounting and statistics across the globe – whether in advanced or the developing economies. The introduction of a BRICS accounting unit that replaces the dollar in the major economies of the developing world would provide a different reference point for emerging markets and a different lens through which businesses track the BRICS+ economies. Expectations of economic agents would be increasingly geared towards the new BRICS currency with greater attention accorded by global markets to the monetary policy decisions in BRICS countries rather than being overly fixated on the minutest of signals from the Fed.

Another reason why the issue of a BRICS currency is seen as being so critical is the credibility and stature that it delivers to BRICS as a block with a global reach. Thus far, the main achievements of BRICS have largely been associated with the creation of the New Development Bank – something that falls short of sizeable transformation in global governance or the international financial system. It is the creation of a new global currency by the BRICS bloc that would represent a veritable innovation and a transformation of the global economy with a qualitatively different stature attained by the grouping on the international arena.

In qualitative terms the introduction of a BRICS currency could impact the direction and the quality of macroeconomic policy pursued by BRICS members. My sense is that the emergence of R5 would somewhat reduce the tolerance of BRICS monetary authorities to sizeable swings in the exchange rate of their respective national currencies. There may also be greater coordination of macroeconomic policies of BRICS and BRICS+ economies to ensure a smoother trajectory towards implementing the subsequent stages of the introduction of R5. The overall quality of macroeconomic policies is also likely to improve to ensure a secure macroeconomic foundation for the operation of the future common currency. In fact, recent developments may be suggestive of such trends in the monetary policy sphere as some of the emerging markets acted earlier and more decisively in warding off inflationary pressures compared to the Fed and other Central Banks from developed economies.

And then there is of course the reaction from global financial markets to the introduction of the BRICS currency. The very introduction of R5 as an accounting unit could feed expectations of greater future demand for BRICS currencies as the R5 project advances to the stage of reserve currency and/or physical unit of exchange. The creation of R5 could also fuel the use of national currencies (including those of BRICS) in international trade. At the same time, the dollar may start to lose ground due to expectations of lower shares in global FX and commodity trade transactions. Accordingly, on balance the emergence of R5 would likely favor EM currencies, most notably the yuan, with some negative effect for the US dollar – the scale of these effects will depend on the exact modalities of the BRICS currency. The impact on the greenback is unlikely to be sizeable in the short-term as uncertainty concerning the future of the BRICS currency will remain significant. The effect on the yuan will be relatively more pronounced compared to other EM currencies due to the higher weight that the Chinese currency may have in the R5 basket and the relative importance for China of the resulting change in the geo-economics of the global financial system.

There could also be risks associated with the introduction of a common BRICS currency such as the scenario of the excessive zeal in introducing “advanced modifications” of the R5 in the form of a physical unit of exchange. There is a somewhat disconcerting predilection on the part of many market participants to advocate the creation of such a BRICS currency in digital form with lots of supplements such as oil or gold to be used to back this currency. This may be due in part to the abundance of speculative appetites around the creation of the new currency that favor a price boost to bitcoin, gold or other dollar competitors. But the end purpose of the BRICS common currency is greater wealth creation for the households and businesses of the Global South rather than servicing the interests of market speculators. In this regard, it may be preferable to make things transparent and simple during the early stages of the R5 project for the sake of its credibility. Another risk is the volatility issue of the R5 basket and its underlying national currencies – this calls for preparatory work to be done with respect to the depth and quality of supporting market infrastructure.

Overall, there may be important dividends for BRICS even with a minimalist approach of opting at first for the path of an accounting unit for R5. The impact of the creation of such a currency for the global economy, business operations and the international economic policy debate could also be significant in the near term. Going forward, it is crucial that the creation of the new BRICS currency is not centered solely on the creation of an alternative to the dollar – rather at an early stage the key priorities of the R5 project need to be focused on building greater trust in the financial systems and currency instruments in the Global South, to facilitating greater South-South trade and investment as well as the development of deeper capital markets. The BRICS currency will also need to serve as a credible anchor for those developing economies that will be increasingly re-orienting their trade and investment flows to the Global South. In the longer term as it advances to the stage of a reserve currency the R5 will contribute to a more balanced global monetary system and will compete for greater prominence alongside the US dollar and other leading reserve currencies. After all, as Western economic thought has it (compliments of Vilfredo Pareto), fair competition is one of the cornerstones of efficient and wealth-enhancing markets.

Author’s note: first published in BRICS+ Analytics

1 Y. Lissovolik. Monetizing BRICS+: introducing the R5 initiative. Valdai club. August 30, 2017. https://valdaiclub.com/a/highlights/monetizing-brics-r5/

2 https://eng.globalaffairs.ru/articles/boosting-the-use-of-national-currencies-among-brics/

3 https://tass.ru/interviews/17281219

Courtesy: Modern Diplomacy


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BUSINESS & ECONOMY

Inquiry on General Babangida’s Involvement in Conventional Banking despite Introduction of Islamic Finance in Nigeria

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Dear Editor,

I hope this letter finds you well. I am writing to express my curiosity and seek clarification on a matter that has caught my attention, specifically pertaining to General Babangida’s involvement in the conventional banking industry despite his role in introducing Islamic finance during the financial reforms of his military government in Nigeria. Vide your special article commemorating his 81st Birthday published in your esteemed news website: https://focus.afrief.org/trending/a-salutary-tribute-to-general-ibrahim-badamasi-babangida-architect-of-islamic-finance-in-nigeria/

It is indeed noteworthy that General Ibrahim Babangida played a pivotal role in shaping the economic landscape of Nigeria by introducing Islamic finance principles. It is fascinating to witness the implementation of Islamic finance in Nigeria, as it promotes principles that align with religious and ethical values. General Babangida’s efforts to introduce this form of finance were undoubtedly commendable, reflecting his commitment to establishing an alternative financial system that adheres to Islamic principles.

However, recent observations suggest his active participation in the conventional banking sector in Nigeria. Certainly, it is intriguing to see General Babangida’s continued involvement in the conventional banking industry, which operates under different principles. While some may argue that his involvement in both sectors is simply a matter of personal choice, it raises questions about the compatibility of his actions with the ideals and principles of Islamic finance. While the former is interest driven, the latter prohibits interest related transactions completely.

I wonder if General Babangida has ever publicly addressed this matter or explained his reasoning behind being active in both sectors. It would be enlightening to hear his perspective on how he reconciles his involvement in conventional banking with his efforts towards promoting Islamic finance. This has raised questions in my mind and perhaps in the minds of others as well.

I am keen to understand the rationale behind General Babangida’s dual engagement in both Islamic finance and conventional banking. Does this reflect a strategic approach to diversify Nigeria’s financial sector, or are there specific reasons behind his involvement in conventional banking despite advocating for Islamic finance principles?

Additionally, it would be interesting to explore the potential impact of his dual involvement on the perception and growth of Islamic finance in Nigeria. Does his presence in the conventional banking industry hinder the progress of Islamic finance, or does it have the potential to bridge the gap between the two sectors?

I believe that delving into these questions could provide valuable insights and generate constructive discussions within the Islamic finance community in Nigeria. By shedding light on General Babangida’s dual involvement and the potential implications, we can further enhance our understanding of the challenges and opportunities faced by the Islamic economy in our country.

Thank you for considering my questions, and I look forward to reading more about this topic in your esteemed Focus on Islamic Economy.

Sincerely,

 

Abba Musa Mamman Lagos

Kaduna


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10 Megatrends Shaping the World in 2024

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The report, “Navigating Megatrends Shaping Our Future in 2024”, was launched during the first day of the World Governments Summit (WGS) 2024, being held under the theme “Shaping Future Governments” from 12th-14th February in Dubai. The report examines the indicators that shape these megatrends, supported by evidence from today as well as future expectations. These trends inform decision-makers and foresight experts about various sectors and the potential opportunities in each.

Khalfan Belhoul, CEO of Dubai Future Foundation, said, “This report has been launched in line with DFF’s efforts to identify and communicate those trends with the most potential to shape opportunities and strengthen local and international partnerships to overcome current and future challenges.”

“The challenges that face us on our journey to the future require that we are agile enough to be able to adapt to rapid change. It is vital we pay attention to the signals we detect – only then can we be prepared to overcome challenges and seize opportunities. The World Governments Summit provides a platform for discussing these challenges and exploring the opportunities.”

Materials revolution

New types of materials will create a shift in the industry, with solutions based on artificial intelligence (AI) such as biopolymers, biorefineries, and chemical recycling paving the way. These solutions will facilitate the development of new biological and novel materials that could rival plastics.

Boundless Multidimensional Data

Enabled by developments such as 5G and 6G in addition to advanced connectivity, the availability of raw data will vastly increase. The Internet of Things (IoT) will continue being deployed in healthcare, agriculture, and smart cities, especially in the Middle East.

Technological Vulnerabilities

The cybersecurity sector will boom amid a sharp rise in smart home devices and wearable tech. According to a report by Allianz, the annual cost of ransomware is projected to reach around $265 billion by 2031. Meanwhile, the debate on the future of decentralised finance will continue.

Energy Boundaries

Advances in tech and the growing demand for energy will drive the pursuit of alternative sources of energy. Novel materials and machine intelligence will enhance current sources of energy, including their distribution around the world – and in space.

Saving Ecosystems

Approaches to conservation will be more interdisciplinary and future-focused, taking into account both societal and environmental factors. Driven by resource scarcity, climate change, and shifts in social values, environmental impact management will become increasingly holistic.

Borderless World – Fluid Economies

The world is witnessing a rise in unmediated transactions in finance, health, education, trade, services, and even space, which are blurring boundaries and creating more cross-border communities. Advances in communications, computing, and advanced machine intelligence will accelerate the creation of a borderless world that will change the way we work, live, and connect.

Digital Realities

The spread of 5G and 6G networks will enhance the applications of autonomous technologies and IoT. As quantum technologies become scalable and reliable, immersive experiences will become even more realistic.

Living with Autonomous Robots and Automation

Robotics and automation will increasingly be deployed across industries beyond automotive, manufacturing and supply chain logistics. This will provide opportunities for efficiency and innovation, although there will also be ethical challenges to address.

Future Humanity

New workplace norms will emerge, with people needing to adapt to non-traditional skill sets in areas such as digital literacy, communications, culture and sustainability.

Advanced Health and Nutrition

Accelerated progress in advanced machine intelligence, nano- and biotechnology, additive manufacturing, and IoT will transform health and nutrition, improving health and wellbeing for people of all ages. Technology will reduce, if not eradicate, some communicable and non-communicable diseases and enhance the sustainable use of and access to water and food.


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BUSINESS & ECONOMY

Africa’s New Online Foreign Exchange System will Enable Cross-border Payments in Local Currencies – what you need to know

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The high cost of making cross border payments on the African continent has driven governments on the continent to seek options of settling trade and other transactions in local currencies. This has given birth to the Pan-African Payment and Settlement System which was formally launched in Accra, Ghana, in January 2022.  Development economist Christopher Adam, who has studied the exchange rate policies of African countries, answers some key questions.

Why are African countries exposed in the international currency market?

Three main reasons. First, African economies are small and as such are highly dependent on trade with the rest of the world. Their exports are dominated by primary commodities including oil and gas, minerals and cash crop agriculture. On the import side, they purchase a whole range of goods – from essential commodities not produced at home such as fooddrugs and medicines, to capital goods and energy. A large proportion of these are sourced from China and other major economies of the global north. But because African countries are small relative to their trading partners they rarely have the power to determine the prices of imports and exports. They are “price takers” in world markets. And with world prices being set in the major reserve currencies of the world (the US dollar, euro, yen and renminbi), African countries are exposed to movements in these world prices. Second, “intra-African” trade is still a relatively small proportion of the total trade of African countries.

Finally, since African countries’ currencies mostly can’t be directly exchanged in international transactions, the dollar remains the most widely used currency in trade, even between African countries.

What’s required for the system to get off the ground?

The basic idea of the system is to be able to settle trade between African countries without having to use the US dollar.  There are two major challenges with that. First, intra-African trade accounts for less than 15% of Africa’s exports at present (although supporters of the African Continental Free Trade Area expect this to grow significantly over the coming decades). The African payment system therefore does not eliminate the role of the dollar (or other foreign currencies) in trade settlement entirely.

The second issue is that trade is not balanced between African countries. For example, Kenya exports goods of higher total value to Ethiopia than it imports from Ethiopia. If Ethiopia paid in its own currency, Kenya would end up with Ethiopian currency that it didn’t need. Some form of settlement currency that is acceptable to all is required – most likely the US dollar.

What are the challenges and potential risks?

Since trade rarely occurs instantaneously, some institution in the trade financing chain carries the exchange rate risk. Because of the gap between placing an order for imports and receiving them to sell in the local economy, there is a risk that the value of local currency will change relative to the currency in which the import is denominated.

In the “old” system, this risk is borne by the trader because everything is priced in dollars. The local currency value of the income from exports or the local currency cost of imports will change with movements between the local currency and the dollar, but the banks and those counterparts pricing in the dollar are protected.

Under the new system the same allocation of risk will remain in “external trade”. This currency risk is also present for intra-African trade.

An important question for the new African payment system is: who bears the exchange risk if one African currency depreciates relative to another? Should the importer carry the risk, or the exporter? Can and should the African payment system bear this risk of exchange rate movements itself? Where both currencies are volatile, traders might still prefer the relative stability of settlement through the US dollar.

The success of this system also depends on scale. The more trade settlement is routed through it, the easier it will be to settle in local currencies. Large currency imbalances will be less common. But until the system achieves this scale, the African payment system will need a strong balance sheet so that traders and participants can have confidence that settlement will be swift and risk free. It is unclear at the moment how this is to be achieved.

What is the best case scenario?

If the system can address the trade imbalance problem, provide clarity on risk management and reach scale, it could be very successful. But this is all going to be driven by underlying economic performance. Improved settlement will help but what is really driving this is the structure of trade. The more the economies of Africa can develop intra-African trade and the less dependent they are on extra-African trade, the less will be dollar dependence in trade. This growth in trade depends to some degree on trade settlement and trade financing but much more on production, consumption, trade policy and fiscal policy.

Christopher Adam is a Professor of Development Economics, University of Oxford


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