How BRICS Is Coming Together to Challenge the U.S. Dollar?
Meanwhile the downfall for us dollar remains work in progress. The US dollar is continuously facing backlash. Now Russia thinks that BRICS should do more. It has floated the idea of common currency. The first indication came in January when Russian foreign minister has issued the statement in which he says “Serious, self-respecting countries are well aware of what is at stake, and want to create their own mechanisms to ensure sustainable development. It is in this direction that have been voiced recently about the need to think about creating our own currencies within the framework of BRICS.” This idea is now gathering steam. Reports say that they are working on a proposal which is likely to be presented at August that’s when BRICS summit will be held in South Africa.
BRICS is an acronym that stands for an association of five major emerging national economies: Brazil, Russia, India, China, and South Africa. The term BRIC was initially coined in 2001 by Jim O’Neill, an economist at Goldman Sachs, to refer to the four countries of Brazil, Russia, India, and China, which were expected to become dominant suppliers of manufactured goods, services, and raw materials by the mid-21st century. In 2010, South Africa was included in the group, and the acronym was changed to BRICS. The five countries are all members of the G-20, and together, they represent about 42% of the world’s population, 23% of global GDP, and 17% of world trade. The BRICS countries cooperate in various areas, such as trade, investment, finance, and technology, and they hold summits annually to discuss issues of mutual interest. The BRICS countries have been exploring ways to challenge the dominance of the US dollar in international trade and finance. One of the ways they are doing this is by increasing the use of their own currencies in trade with each other. In 2014, the BRICS countries established the New Development Bank (NDB), which is aimed at providing an alternative source of funding for infrastructure projects in developing countries. The bank is capitalized with $100 billion, with each of the five member countries contributing an equal share of $20 billion. In addition, the BRICS countries have been pushing for reforms to the International Monetary Fund (IMF) and the World Bank to give emerging economies greater representation and voting power. They have also been calling for the creation of a new international reserve currency that would be less dependent on the US dollar.
Why the need to create a new currency?
Russia has been pushing the idea to create common currency among BRICS members since last year. Russian president backs the idea. Last year he said” The matter of creating the international reserve currency based on the basket of currencies of our countries is under review. Russia has its own reasons to push for this. It is under western sanctions, its access to global banking system has been limited, it also cannot use the Us dollars freely so it is pushing for a new global reserve currency and the other members of the BRICS also seem opened to the idea as they too wanted to challenge the dollars hegemony. A Russian lawmaker Alexander Babakov, the deputy chairman of Russia’s state Duma which is the lower house of Russian parliament shared the way forward. Babakov in his statement highlighted the fact that India and Russia currently one of largest emerging economies in the world would both benefit from the creation of a common currency that could be used for payments, calling it the “most viable” route to take at this time. “New Delhi, Moscow should establish a new economic alliance with a new shared currency, which could be a digital ruble or Indian rupee,” Babakov said. He further noted that China will also play a key role in the development of the common currency as it adds 1.4 billion more participants to the system.
The Russian lawmaker further stated that the transition to settlements in national currencies is the first step. The next one is to provide circulation of digital or any other form of fundamentally new currency in the nearest future. Some of this is already happening. For example, the settlement of trade in National currency. India has an agreement with Russia. It’s called the Rupee-Rubble mechanism where India pays for Russian goods in rupees and Russia earns in Rubbles. They do this with the help of special Vostro accounts and this has led to a boost in bilateral trade. According to statistics, in 2022 India’s trade with Russia touched the record which was valued at $30 billion dollars. This is belief to be an all-time high. Ofcourse the surge was fueled by oil purchases but the Russia has more expectations from India. It is banking on India for more support. Why the support? Infact Russian president Vladmir Putin has unveiled his view in foreign policy. The published new guidelines in Moscow a handbook for Russian diplomats says, Russia will continue to build up a particularly privileged strategic partnership with the Republic of India with a view to enhance and expand cooperation in all areas of mutually beneficial basis.
Russia has still a hope from China. The plan that the BRICS currency cannot materialize without help from India and China. Russia needs support from both of them and it’s not going to be an easy. Even former Goldman Sachs chief economist Jim O’Neill, who coined the acronym BRIC, has called for the BRICS bloc to expand and challenge the dominance of the US dollar as a way to combat the destabilizing effects that dollar dominance has on their monetary policy. He wrote in an article published in the journal Global Policy. “The US dollar plays too dominant a role in global finance. Whenever the Federal Reserve Board has embarked on a period of tightening or, conversely, easing, the consequences for the value of the dollar and the knock-on effects have been dramatic. O’Neill sees dollar dominance as a burden for countries with dollar-denominated debt, as their monetary policy is destabilized by exchange rate fluctuations.
The strength of the Russian ruble following harsh sanctions by the US and other European countries shows that there is a high level of opposition to the hegemony of the USD, and the BRICS countries see this as an opportunity to capitalize on the growing level of discontent toward the U.S.
Pakistan is a developing country with a population of over 230 million people, and despite efforts to boost its economy, it still faces high levels of inflation. According to the State Bank of Pakistan, inflation reached a 50-year high of 35.4% in March 2023. Inflationary pressures are impacting the purchasing power of ordinary citizens, particularly those in low-income brackets. However, despite these challenges, Pakistan has a thriving shadow economy that plays a significant role in the lives of millions of people. According to estimates by global economics reports, the shadow economy in Pakistan accounted for over 35.6% of the country’s GDP in 2022.
The shadow economy, also known as the informal economy or black economy, refers to economic activities that are not taxed or regulated by the government. In Pakistan, the shadow economy includes everything from street vendors and small-scale traders to large-scale smuggling operations and unregistered businesses. According to a report by the World Bank, the shadow economy in Pakistan was valued at $457 billion in 2022, accounting for 35.6% of the country’s GDP-PPP level. Some reports by an economist at PIDE states that the ratio is more than 90%.
There are various reasons why the shadow economy exists in Pakistan. One reason is the high tax burden on formal businesses, which can make it difficult for them to operate profitably. Another reason is the lack of access to formal credit for small businesses, which pushes them towards informal lending and borrowing. Additionally, corruption and bureaucratic hurdles make it challenging for businesses to operate within the formal economy.
The shadow economy plays a significant role in Pakistan’s economy. It provides employment opportunities for millions of people, particularly those who are less educated or lack formal job skills. It also provides goods and services at lower prices, making them more accessible to low-income households. However, the shadow economy also has negative impacts on the economy, such as the loss of tax revenue for the government, the undermining of formal businesses, and the lack of regulation and oversight.
Pakistan has been facing high inflation rates in recent years, which has had a significant impact on the economy and people’s livelihoods. According to the State Bank of Pakistan, inflation reached a 50-year high of 35.4% in March 2023, up from 12.7% in March 2022. The highest inflation rates were seen in food items, with an increase of 69.98% in the prices of wheat, 82.41% in the price of rice, and 53.51% in the price of cooking oil in 2021.
The impact of high inflation on Pakistan’s economy due to the Covid-19 pandemic has been further exacerbated by the recent political unrest in the country and the floods. Pakistan is still failing to meet IMF conditions for loan schemes which would further unstable the economy.
Despite the negative impacts of high inflation, the shadow economy in Pakistan has been playing a critical role in helping people to survive. It provides access to goods and services at lower prices than the formal economy, making them more accessible to low-income households. For example, street vendors and small-scale traders often offer essential goods, such as food and clothing, at lower prices than formal retailers.
The shadow economy also creates employment opportunities for millions of people. According to a report by International Labor Organization (ILO), the shadow economy in Pakistan employed over 75% of the total workforce. This is particularly important given that the formal economy is unable to absorb the country’s growing workforce.
The lack of taxes and regulations on informal businesses means that they can offer lower prices for goods and services, which can help people to stretch their budgets further. Informal businesses are often more flexible and able to adjust their prices in response to changes in market conditions. This can help to mitigate the impact of inflation on people’s standard of living.
While the shadow economy has positive impacts on the lives of many people in Pakistan, it also has negative impacts on the economy. One of the most significant negative impacts is the loss of tax revenue for the government. According to the World Bank, Pakistan’s tax-to-GDP ratio is one of the lowest in the world, i.e. 5.6% in 2022. The shadow economy contributes to this problem by operating outside of formal tax systems.
The shadow economy also undermines formal businesses by creating unfair competition. Informal businesses are often able to offer lower prices due to their lack of taxes and regulations, which makes it difficult for formal businesses to compete. This can lead to a decline in formal business activity and a reduction in economic growth. Additionally, the lack of regulation and oversight in the shadow economy can lead to a range of negative outcomes, such as poor quality goods and services, exploitation of workers, and environmental degradation. These issues can harm the economy and society as a whole.
To strike a balance, policymakers need to implement measures that encourage informal businesses to enter the formal economy, such as tax incentives and simplified registration processes. This can help to increase tax revenues and reduce the unfair competition between formal and informal businesses. By striking a balance between the benefits and risks of the shadow economy, Pakistan can ensure that it continues to provide essential goods and services, create employment opportunities, and help people to cope with economic shocks while also promoting sustainable and equitable economic growth in the long run.
On March 22nd, 2023, Bangladesh and Bhutan signed a transit agreement. Under the agreement, Bhutan can use Bangladesh’s land, air, and waterways to move goods to and from a third country in exchange for transit fees. As Bhutan is landlocked, it generally relies on its neighboring states for transit. In this context, the transit agreement will bring benefits to Bhutan in several aspects. On the other hand, providing a transit facility to Bhutan will also financially and politically benefit Bangladesh. Bhutan is the second country after India to avail of transit facilities from Bangladesh. Against this backdrop, it is worth assessing the potential implications of this transit agreement for both Bangladesh and Bhutan.
The agreement was signed on March 22nd at Bhutan’s Capital, Thimpu. Bangladesh’s Commerce Minister Tipu Munshi represented Bangladesh while Minister for Industry, Commerce and Employment Lyonpo Karma Dorji represented Bhutan. Under the agreement, Bhutan will avail Bangladesh’s land, air, and water routes for moving goods to and from a third country. In return, it will pay Bangladesh required fees and taxes.
According to the newspaper report, Bhutan will mainly use Mongla Sea Port and land and waterways from there. The agreement is also important for bilateral relations as Bangladesh and Bhutan signed a Preferential Trade Agreement in 2021.
Potential Implications for Bhutan
As Bhutan is a landlocked South Asian state, it requires cooperation from bordering and neighboring states to meet its export and import. In this aspect, the transit agreement will increase its cooperation with Bangladesh. Bhutan mainly relied on India to move its goods for a long time. Signing a transit agreement with Bangladesh will diversify its trade route. Moreover, Bhutan will greatly benefit by reducing its transit dependence on India. Due to the Sino-Indian rivalry over Bhutan, reducing transit dependence on India will also benefit Bhutan politically by easing geopolitical tension. The transit agreement will also increase trade relations between Bangladesh and Bhutan as Bhutanese traders will maintain close contact with their Bangladeshi counterparts for logistical support.
Potential Implications for Bangladesh
The agreement will increase commercial activities at Mongla Port. As a result, the agreement will help Bangladesh to utilize Mongla Port properly. Apart from Mongla Port, the agreement will also likely to increase commercial activities at the river ports. Moreover, moving Bhutanese goods will also increase the Bangladesh government’s revenue through collecting taxes and transit fees.
Besides revenue, fees, and taxes, it will also contribute to the local economy. Moving Bhutanese goods will increase business for the transport sector of the country. New ventures of facilitating transit will also open new jobs at the local level. The ‘roadside’ economy also has the scope to find extra profit. It is worth mentioning that the agreement opens up the scope, but the benefits Bangladesh and Bhutan would receive depends on the volume of goods Bhutan moves through Bangladesh.
In terms of bilateral relations, the agreement will enhance relations between Bangladesh and Bhutan. This is the second agreement in two years for the countries. In 2021, Bhutan and Bangladesh signed Preferential Trade Agreement (PTA) among them. Both countries are also discussing currently the possibilities of increasing agricultural trade among them.
Apart from bilateral and financial gains, the agreement will also diversify Bangladesh’s transit obtainer list. Before Bhutan, Bangladesh only had one transit obtainer, India. A diverse transit list will allow other states such as Nepal to initiate negotiations.
The agreement will also serve as an influence on regional connectivity. For a while now, Bangladesh and other Asian states are promoting trans-Asian connectivity through a network of road connections, transit facilities, and transshipment facilities. Bangladesh’s opening its trade routes to other South Asian states would serve as an example and inspiration for future regional connectivity also.
The agreement will not only benefit the signatory countries but also the region, South Asia. In South Asian politics, there is an effort to promote connectivity and regional trade. In larger ‘Asian Politics’, there is also an effort to promote connectivity and regionalism. So, the transit agreement will inspire future efforts and serve as a reference for future negotiations. The agreement will also become a milestone for Bangladesh-Bhutan bilateral relations, especially after the PTA agreement of 2021. Therefore, it is a praiseworthy agreement.
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