Political and economic purposes require the use of local currencies. These nations’ reliance on foreign currencies will be lessened, and transaction costs will be reduced if they trade among themselves using their own currencies.
Due to changes in the global economy over the last few centuries, some currencies have gained value and are now more generally accepted for use in cross-border transactions. These consist of the British pound, the euro, the US dollar, and the Japanese yen. Because they originate from nations with robust economies and a long history of international trade, these currencies are valuable everywhere.
Due to their constant value and ease of use or exchange everywhere in the world, people or nations that trade using these currencies and eventually wind up collecting or retaining them view them as “safe.”
However, commerce is far more challenging for nations in the “Global South,” such as Ethiopia, whose currency, the birr, is not commonly acknowledged outside of their boundaries. These nations find it difficult to generate enough revenue from exports in the main currencies to pay off their debts, which are typically denominated in those currencies, and purchase necessities on global markets. In turn, difficulties that impede economic growth and development may arise from the requirement to trade in major currencies or from the incapacity to do so.
Consequently, growth and development will be aided by even a small amount of local currency exchange between BRICS+ members. Russia, an oil exporter, is a special case. The country is subject to severe financial penalties for its war of aggression against Ukraine, even though total foreign exchange restrictions are less severe. It might be simpler to evade these penalties if it uses a range of currencies in its international activities.
Politically, the main justification for utilising different currencies is the absence of sanctions. The Society for Worldwide Interbank Financial Telecommunication’s (SWIFT) international payments system is one of the instruments used to make sanctions effective. Established in 1973, SWIFT is a Belgian company. For international payments and transactions, it makes it possible for financial institutions to communicate securely and uniformly. And it is pretty much the only way to accomplish this.
Following its initial application in 2012 to impose financial penalties on Iran, it has now been applied to North Korea and Russia. When a nation disconnects from SWIFT, banks struggle to execute payments, disrupting international trade and financial activities. Economic isolation and difficulties entering international markets may result from this.
One of the things driving momentum toward a new payments system that also depends less on the currencies of the nations that oversee SWIFT, such as the US dollar, Japanese yen, British pound, and euro, is the possibility and actuality of being excluded from SWIFT’s payments system.
What obstacles are they likely to encounter?
The main issue is that most currencies are not in high demand elsewhere. Furthermore, it is difficult to replace the current main currencies’ global importance. For instance, India can primarily use Ethiopian birr solely in trade with Ethiopia if it acquires them. Or what will India do with the rupees if Russia permits it to purchase oil from them?
Countries looking for alternatives to relying on the dollar must think about which currencies to amass through trade as most of them export more than they import or are lower-income importers.
Alternatives are starting to appear, at least in terms of payment systems. BRICS+ is developing BRICS+ Clear of its own. Approximately 160 nations have agreed to use the system. In general, China’s Cross-border Interbank Payment System functions similarly to SWIFT.
However, there is a chance that these payment options will only serve to split the system, making it even more expensive and inefficient.
Has anyone else engaged in local currency trading?
Not all transactions use major Western currencies. For instance, the South African rand has a comparatively significant role in cross-border finance and trade within the Southern African Customs Union. The currencies of Thailand and Singapore vie for dominance in the subregion, much like throughout Southeast Asia.
The largest exporter and manufacturer of industrialised goods in the world, China, is also entering into bilateral currency exchange arrangements with other nations. The goal is to increase the global usage of the renminbi.
India and Russia have experimented with trading in the rupee as a way to get around sanctions. Since the conflict in Ukraine, Russia’s oil exports to and through India have increased significantly, with the rupee and rouble accounting for almost 90% of bilateral commerce. Russia now faces the challenge of deciding what to do with all the rupees it has amassed. Indian banks hold these deposits, subsequently investing them in regional stocks and other assets.
China’s “barter trade” approach is another example of attempts to avoid using major international currencies. For instance, the strategy involves China sending agricultural equipment to an African nation and receiving payment in that nation’s currency. China then imports those commodities back to China after using that money to purchase goods from the same country. After selling these commodities in China, the Chinese trader receives payment in renminbi.
One nation using this barter approach is Ghana. The digitisation of trade and payments, as well as the necessity for high levels of trust to build and preserve relationships between trading parties as individuals and as enterprises, are challenges facing the model. Although it lacks robust rules, regulations, and industry standards, it also necessitates a certain amount of centralisation and coordination. This suggests that platforms and businesses may not be compatible, which could slow and cost transactions.
Another instance is when Ethiopian Chinese investors benefit from birr. They purchase Ethiopian goods, such as coffee, with the birr and then export them to China. They get renminbi in China when they sell these things. Therefore, they increase Ethiopia’s exports to China to transfer their earnings from Ethiopia to China.
Although there are comparatively large coordination costs, anecdotal accounts indicate that this is possible on a small scale.
Other difficulties might arise. For instance, there may be fewer dollars available overall if Chinese consumers pay Ethiopian coffee growers in their local currency rather than US dollars. Certain international transactions still heavily rely on the dollar.
There is no straightforward or readily expandable way to get rid of SWIFT or the need for large foreign currencies. The requirement is for a quick, electronic payment system that would effectively calculate and balance currency demand. Additionally, it must be dependable, replace components of the current system, and not incur additional expenditures for nations that have not yet adopted it.
While certain BRICS+ countries, such as Russia, might be more interested in accelerating transformation, other BRICS+ members might not be as keen. For example, local financial institutions must support a move away from SWIFT, and those in African nations might not feel pressured to switch to a new, less well-known platform.
The drive among BRICS+ nations to adopt local currencies for trade represents a strategic response to long-standing economic and political challenges inherent in the global financial system.
By shifting away from dominant currencies such as the US dollar, euro, British pound, and yen, these countries aim to reduce their vulnerability to external financial pressures, avoid punitive measures like sanctions enforced through SWIFT, and ultimately reclaim greater monetary sovereignty. Local currency trade promises reduced transaction costs and improved economic cooperation among member nations, encouraging a more balanced and regionally integrated financial network.
However, many local currencies lack the international demand and liquidity necessary to replace established global currencies, and nations with trade imbalances may face difficulties in accumulating or managing these currencies. Past instances of localised currency trading in regions like Southern Africa or bilateral agreements between India and Russia depict both the potential benefits and inherent complexities of such systems.
Ultimately, the shift represents not only an economic recalibration but also a political realignment that seeks to create a more autonomous and resilient global financial architecture. As these developments unfold, continued collaboration and innovative policy-making will be paramount for the long term.