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‘BRICS bank’ throws weight behind use of local currencies for trade and financing

‘BRICS bank’ throws weight behind use of local currencies for trade and financing
The Sandton Convention Centre as final preparations are under way for the 15th BRICS Summit in Johannesburg, starting on 22 August 2023. (Photo: EPA-EFE / Kim Ludbrook)

Although the New Development Bank has always stated its intention to increase its local currency fundraising and lending, it has rarely provided details on the mechanisms of doing so. It is targeting bond issuances in local currencies of India, the United Arab Emirates and Brazil.

The New Development Bank (NDB), the Shanghai-based lender better known as the “BRICS bank”, has thrown its weight behind the plan by its founding member countries to push for the use of local currencies to facilitate trade and transactions.

The use of local currencies for trade and finance to rely less on the US dollar is not new on the agenda of the BRICS bloc an acronym for a group of countries consisting of Brazil, Russia, India, China and South Africa.

But at the 15th BRICS Summit in Johannesburg, which begins on Tuesday, 22 August, South Africa is expected to come up with mechanisms to unseat the dollar as the world’s de facto global currency.

The NDB has also embraced the plan to deepen the use of local currencies of its founding BRICS members when it executes funding transactions on infrastructure and sustainable development projects.

Vladimir Kazbekov, the vice president and chief operating officer of NDB, said the bank plans to develop local/national currency transactions between BRICS member countries. This would allow one BRICS member to use its currency to finance projects with a fellow member in its country.

“For example, a project in South Africa can be financed in the renminbi [another name for China’s currency], not with US dollars. This would be done especially with projects that require the importing of parts, which would be cheaper to use local BRICS currencies than using US dollars,” Kazbekov said during a press briefing on Monday that unveiled the NDB’s funding of the second phase of the Lesotho Highlands Water Project. 

He hastened to add that the NDB does not plan to immediately phase out the use of the US dollar, underscoring that the currency remains dominant even though the BRICS bloc wants to amass global influence through the use of their currencies.

The BRICS members argued that the US dollar is volatile, as seen in its wild swings every time the US central bank makes interest rate decisions, or whenever there are signs that the US economy is slowing down. The volatility of the currency creates a financial headache for the BRICS members, which have dollar-denominated debt that becomes expensive to service. Affordability and amassing global influence are the main rationale for using local currencies.

How to build local currency trades 

Although the ‘BRICS bank’ has always stated its intention to increase its local currency fundraising and lending, it has rarely provided details on the mechanisms of doing so. How the NDB’s funding and lending works is that it borrows money on the Chinese market, funding projects from the proceeds of its bond issuances that are traditionally denominated in the renminbi/yuan.

To deepen the use of local BRICS currencies, the NDB closed the auction for its first rand-denominated bonds on 15 August, increasing its presence on the local capital markets. The first South African bond auction, recently concluded by the NDB, raised R1.5-billion — a R1-billion five-year note and a R500-million three-year note. These proceeds will be used to fund infrastructure and sustainable development projects in South Africa. 

There will be a similar capital raising in India in October, with the NDB denominating the bond issuance in the country’s currency of rupees, Kazbekov said. 

Then we can consider other members, including Brazil and Russia. Now we have new members [of the NDB] like the United Arab Emirates, maybe in the future we can see issuance in dirham.”

For now, the NDB’s lending exposure will remain mainly in South Africa, where its loan disbursements in the country make up more than 18% of its total approved loans worth $33-billion.  

In South Africa, the NDB plans to fund state-owned enterprises and private companies. On the former, for example, the NDB said it planned to provide the state-owned transport group Transnet with a loan facility of $1-billion before the end of 2023.

Kazbekov said the loan would be used “for the modernisation of Transnet and its locomotives”. But the NDB will not be giving Transnet a blank cheque — it will require the South African government to guarantee the entire loan amount. In other words, the NDB will need confirmation from the government that it will be on the hook to repay the loan if Transnet fails to do so. After all, Transnet is facing enormous financial problems and the chances of it defaulting on debt repayments are increasing.

Read more in Daily Maverick: Transnet’s crumbling rail network and debt problems overshadow its profits 

Within days, the NDB plans to sign a loan agreement with the Development Bank of Southern Africa to allocate $75-million for the development of Telkom’s telecommunications infrastructure and network, Kazbekov said. 

The NDB is also going big with infrastructure investments in Lesotho, a country that is not an adopted member of the bank. The NDB and South Africa’s state-owned Trans-Caledon Tunnel Authority (TCTA) have signed a R3.2-billion loan agreement for the implementation of Phase Two of the Lesotho Highlands Water Project. The South African government has provided guarantees for this project.

TCTA will use the funds to build the Polihali dam and reservoir, a 38km-long water transfer tunnel, including roads, bridges, as well as telecommunications infrastructure. On completion, the tunnel will deliver 71 million litres of water per annum to South Africa, from current volumes of 24 million litres. DM

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  • Johann Olivier says:

    It will go nowhere. Why? Look at the assortment of countries wanting to establish the alternate currency/currencies. The US, with its many faults, remains a bastion of creditworthiness. I wouldn’t accept trading in any currency from the BRICS shower if I were doing international business. Way too ‘iffy’.

  • David Pennington says:

    We’re going to swap one Amercan financial baas for one Chinese financial baas, thank you baasie

  • Desmond Bob says:

    I don’t think the efforts of the BRICS are directed at “unseating” or “challenging” the dominant dollar; the issue is about the downward pressure the dominant dollar tends to have on the currencies of BRICS countries, the high costs of dollar denominated debt and the West’s tendency to use the dollar’s dominance as an instrument of coercion in the execution of its foreign policy objectives. BRICS countries are diversifying their financial risks by diversifying the number of currencies they use to trade in or take on debt; which makes perfect sense to someone not wearing one dimensional Western blinkers. The choice between multilateralism and unilateralism (i.e. a democratic world order as opposed to a US dominated world order) should, under normal circumstances be a no brainer – however, more than 500 years of Western colonialism and neocolonialism makes it seem complicated. This complication is what pits the beneficiaries of Western neocolonialism against its victims in the countries of the South – it is also the basis of the divisions we see in our country (South Africa) on this subject.

  • Deon Botha-Richards says:

    Accuracy much???

    The Lesotho program currently sends 780 million m3. That’s 780 billion litres. Not 24 million

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