BRICS Financial Systems and Their Impact on Developing Nations

Terence The acronym BRIC, which stands for the four once rapidly growing countries, was coined by British economist James O’Neill. These were formerly regarded to be a threat to the global economic clout of the industrialized G7 economies. 

Among the four are Brazil, Russia, India, and China. Global economies include Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States.

The Group of Seven (G7) is a political forum with the European Union (EU) as a “non-enumerated member”. It is founded on shared values including pluralism, liberal democracy, and representative government.

Inclusion of South Africa into the preceding BRIC in 2010

After obtaining an official invitation from the group, South Africa officially joined the (Bric) on December 24, 2010. South Africa’s acceptance of the invitation meant that the group’s formal name would eventually change to BRICs, with (S) standing for South Africa.

Renu Modi, an expert on Indo-Africa ties, views this choice as a Christmas gift from South Africa to itself in an interview with an Indian online journal. However, critics pointed out at the time that South Africa’s admission in BRICS was owing to the China factor. South Africa was deemed unfit by some analysts, including Goldman Sachs economist Jim O’Neill.

‘It’s not totally clear to me why the BRICs agreed to invite South Africa to join,’ says O’Neill. He also inquired in the interview because South Africa was deemed a large economy. However, they were also experiencing economic difficulties.

South Africa is the BRICS country with the smallest economy and population. Its GDP is less than a quarter of that of Russia, making it the smallest of the four BRICs (Brazil, Russia, India, and China). Furthermore, South Africa’s population of 50 million is significantly less than Russia’s population of 140 million and Brazil’s population of 190 million. South Africa is a route for the BRICs to join Africa’s one billion consumer market because it accounts for one-third of the Sub-Saharan African economy. Inviting South Africa back into the BRICs was a signal from the world’s most powerful rising economies that South Africa is a major regional power and a gateway to Africa capable of safeguarding the interests of the entire continent.

Despite having a much smaller population and economy than Nigeria, South Africa has benefited from other factors such as vast natural resources such as gold, diamonds, and platinum, excellent infrastructure, established corporate footprints, a culture of innovation, easy access to finance for business, a stable macro and micro financial climate, an advanced banking system, and functioning regulatory frameworks, as many analysts have noted.

South Africa will host the 15th BRICS summit in Johannesburg in 2023. This is an international meeting attended by the heads of state or government of the five member countries. President Cyril Ramaphosa of South Africa has also invited leaders from 67 nations to the conference. While we’re at it, some countries have already shown interest in joining the BRICS organization.

At the meeting, South African President Cyril Ramaphosa revealed that Argentina, Egypt, Ethiopia, Iran, Saudi Arabia, and the United Arab Emirates had been asked to join the group. On January 1, 2024, full membership will take effect.

The establishment of a new development bank

At the fourth BRICS meeting in Delhi in 2012, India proposed the establishment of the bank. The meeting’s major focus was the establishment of a new development bank. At the 5th BRICS summit in Durban, South Africa, on March 27, 2013, BRICS leaders agreed to establish a development bank.

On July 15, 2014, the BRICS governments signed the New Development Bank Agreement, establishing the bank’s legal foundation, on the first day of the 6th BRICS summit in Fortaleza, Brazil. In a separate agreement, the BRICS countries established a $100 billion reserve currency pool.

On May 11, 2015, K. V. Kamath was appointed president of the bank. The existing institutions primarily benefit non-BRICS corporations, and the political significance is significant because it allows BRICS member countries “to promote their interests abroad… and can highlight the strengthening positions of countries whose opinion is frequently ignored by their developed American and European colleagues.”

A different financial system

The BRICS aims are self-evident. They seek to end the West’s long-standing hegemony over Africa. If this is successful, we will have a more inclusive and egalitarian financial system that benefits developing countries. Creating an alternative financial system displays serious desire and the potential to challenge the global financial institutional architecture, according to Sanusha Naidu, a senior research fellow at the Institute for Global Dialogue specializing on China and Africa.

BRICS nations have also been working on “BRICS pay,” a BRICS payment system that does not involve the conversion of local currencies into dollars.

Despite this, the NDB is still largely reliant on dollars and has struggled to get them due to sanctions imposed on Russia, a founding member. The US dollar represents 60% of global central banks’ foreign exchange reserves.

Though South Africa has declared that it will not be discussed at this summit, speculation about a BRICS currency has recently gathered pace. According to Gustavo de Carvalho, a senior researcher on Russia-Africa ties at the Johannesburg-based South African Institute of International Affairs, the BRICS’ de-dollarisation activities are not intended to replace the dollar, but rather to provide alternatives to facilitate trade. The principle is simple, as is the pledge to others who desire to join or partner with the BRICS.

Aside from the possibility of US sanctions, reliance on the US dollar for trade or debt repayment is costly when the dollar’s value rises – as it almost invariably does during global crises like the one the globe has been experiencing since 2020 bilateral trading in local currencies.

Contingent Reserve Arrangement (CRA)

The BRICS Contingent Reserve Arrangement (CRA) is a framework for using liquidity and precautionary mechanisms to respond to existing or projected short-term balance of payments pressures. The BRICS nations of Brazil, Russia, India, China, and South Africa established it in 2015. The legal underpinning is the Treaty for the Establishment of a BRICS Contingent Reserve Arrangement, which was signed on July 15, 2014, in Fortaleza, Brazil. As stated at the 7th BRICS summit in July 2015, it became effective following ratification by all BRICS countries.

This reserve’s purpose is to protect against global liquidity constraints. Currency concerns arise when global financial factors exert pressure on members’ national currencies.

As an example of rising South-South collaboration, the CRA is commonly considered as a challenger to the International Monetary Fund (IMF) and the New Development Bank.

The capital of $100 billion is distributed as follows: According to the Arrangement, states can request half (China) to twice the amount of money given.[In retrospect, from March to June 2022, the BRICS Business Council successfully held a series of cross-border matching events for “BRICS +” firms in a hybrid format. Special sessions were planned for Brazil, South Africa, Argentina, Peru, Chile, and Vietnam, as well as industries such as anti-pandemic supplies, leading SMEs specializing in specialty sectors, digital ecosystems, wine tasting, and cross-border e-commerce.

Over 1,300 businesses from over 20 emerging markets and developing nations in Asia, South America, Africa, and Europe participated in the activities. Over 500 preliminary collaboration intentions were achieved, totaling more than CNY 4.3 billion. Such initiatives will increase economic cooperation and trade links, which will assist emerging economies by improving market access.

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