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BRICS agree to use local currencies for mutual credit

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April 14, 2011

Member countries of the BRICS forum have agreed to establish mutual credit lines in their own currencies, skipping the existing exchange medium of the dollar.

Development banks of Brazil, Russia, India, China and South Africa today signed a framework agreement to establish mutual credit lines denominated in their own currencies.

Heads of Brazil's BNDES, Russia's Vnesheconom Bank, Export-Import Bank of India, China Development Bank and the Development Bank of South Africa signed the framework agreement on the sidelines of the BRICS summit on the southern Chinese island of Sanya.

Local currency credit will help boost trade among member countries of BRICS, head of Russia's state development bank Vnesheconom Bank said.

"The agreement is aimed at strengthening financial cooperation between partner banks and support financial institutions and companies seeking to enter BRICS markets," the bank said in a statement.

While local currency credit lines may have limited role and are more symbolic in nature, BRICS said the long-term prospect of the dollar as the dominant currency for international trade is a cause of worry.

They also called for a more broad-based international reserve currency system so as to reflect the current realities of the situation.

Although export-import firms continue to trade in dollars, which is the dominant currency in global commerce, America's large trade and budget deficits belie the privileges that come with being the leading reserve currency, they point out.

In this context, BRICS leaders reviewed the role of the IMF reserve currency, the Special Drawing Right, which some experts believe could be a substitute for the dollar.

They, however, did not elaborate on which currencies should be used to make the SDR more representative.

While the Chinese yuan has long been touted as a likely currency, the group was not sure it would qualify since it is not freely convertible like the US dollar or the British pound.

The SDR is currently priced on the values of the dollar, the euro, the Japanese yen and the British pound.