Commentary: Reform is the true battle

Gamal Wagdy
Tuesday 26 Sep 2023

Egypt should rationalise its expectations from membership of the BRICS group of countries, writes Gamal Wagdy


After the BRICS group of countries consisting of Brazil, Russia, India, China, and South Africa invited Egypt to join the group in August along with five other new countries, many people have been eagerly awaiting the potential economic benefits of this expansion.

Some hope Egypt’s membership of BRICS will increase trade, investment, and borrowing opportunities. Others have gone as far as to anticipate that it could end the dollar shortage the country has been facing. However, while the BRICS membership can indeed benefit Egypt’s economy through a proper selection of policies, many of these expectations are unfounded and represent wishful thinking.

The reason lies in the group’s structure and the mechanics of the settlement of foreign-currency transactions.

Unlike other economic organisations such as the Organisation for Economic Cooperation and Development (OECD), the North America Free Trade Agreement (NAFTA), and the European Union (EU), BRICS is not primarily an economic organisation, even if it does have a significant economic dimension to its activities.

Instead, the group mainly serves as a forum for cooperation and dialogue among its member countries. It is often called a “group” or “association” rather than a formal international organisation, and as an informal grouping of five major emerging economies it encompasses political, security, and cultural issues.

Economic cooperation and development have also been essential aspects of its agenda. The group engages in economic matters such as economic cooperation, trade, and investment opportunities among members.  

While BRICS facilitates discussion on economic cooperation and trade, each member nation retains its trade policies, and no formalised trade agreement binds them together as a trading bloc. Instead, BRICS meetings and summits are forums for dialogue and cooperation on various issues, including economics, politics, and global governance. The member countries engage in bilateral trade agreements and negotiations independently, but no integrated trade framework encompasses all BRICS members.

It is, therefore, an informal international organisation that facilitates cooperation, dialogue, and coordination among its member nations. Although it plays a significant role in shaping discussions and policies on key global challenges, it lacks the formal structure of many international organisations. In other words, it is a “loose organisation” because it lacks many of the legal and binding agreements typically associated with tightly integrated international organisations.

The expectation that conducting trade with other BRICS members in local currencies will yield significant benefits is not grounded in reality. Instead, this payment method would lead to the accumulation of Egyptian pounds in exporting countries, which they would then use to settle their imports from Egypt. Consequently, this practice would deprive Egypt of the convertible currencies (mainly US dollars) it otherwise would have earned through these transactions.

Furthermore, conducting trade in local currencies implies that other BRICS countries would import from Egypt using their respective national currencies. This would result in the accumulation of these non-convertible currencies within Egypt. While these non-convertible currencies are valid for transactions with the counterparty or other BRICS countries, they simultaneously limit Egypt’s import options. And it is worth emphasising that, in accordance with International Monetary Fund (IMF) guidelines, non-convertible foreign currencies do not contribute to a country’s international reserves.

Hence, it is not merely a question of the currency with which the country conducts its foreign trade; rather, it is the overall value of imports and exports that holds significance, irrespective of their denomination. A deficit in the balance of payments (BOP) retains its status as a deficit, regardless of the counterparties involved. It remains a deficit (or surplus) concerning the “rest of the world” irrespective of the currencies employed in the underlying transactions.  

Boosting the intra-trade (with other BRICS countries) is not achievable by mere membership of the group. While BRICS membership provides a platform and potential opportunities for increased trade among member countries, actual progress in boosting intra-trade depends on mutual arrangements and agreements among the member countries themselves.

Thus, membership of BRICS can facilitate dialogue, cooperation, and exploration of trade opportunities, but it does not guarantee an automatic increase in trade. Effective trade promotion requires sustained cooperation, policy coordination, and the removal of trade barriers to create an environment conducive to trade expansion.

The prospect of increased investment flows from BRICS countries follows a similar trajectory as the aspiration to boost trade. However, becoming a new member of the BRICS group provides an opportunity to enhance investment from other group members by leveraging the platform for diplomatic engagement and economic cooperation. This requires the concerned authorities to actively engage in diplomatic efforts to build strong and collaborative relationships with the current group members.

Regular high-level dialogue and bilateral meetings can foster trust and cooperation. It is also imperative to highlight investment opportunities, including sectors with growth potential, infrastructure projects, and strategic industries where foreign investment is welcome. Egypt could also seek bilateral investment treaties or investment-protection agreements with other BRICS members to provide legal protections and assurances for foreign investors.  

BRICS offers its members (and potentially other emerging economies) funding for infrastructure and sustainable development projects through the New Development Bank (NDB). The NDB’s lending terms may differ from those of other financial organisations, depending on the specific context and nature of the projects being funded.

While the NDB shares some similarities with established financial institutions like the World Bank (WB) and the IMF, it also has unique features and principles. It places a significant emphasis on funding infrastructure and sustainable development projects. This focus sets it apart from some other international financial organisations that have a broader range of funding priorities. The NDB also offers specific terms and conditions that vary depending on the project and the needs of the borrowing country.

The differences between the lending terms and conditions of NDB and other “Western” financial institutions, such as the WB or the International Development Association (IDA), can vary, but the differences may not always tilt in favour of BRICS institutions. It depends on the specific project, the borrowing country, and the prevailing economic conditions.

Whether the differences are considered significant or minor can be subjective and depend on the borrowing country’s perspective and the project’s objectives. The WB and the IDA offer both concessional and non-concessional lending. Concessional loans typically have lower interest rates and more extended repayment periods, making them favourable to countries with limited financial resources. The NDB, on the other hand, primarily offers non-concessional loans with competitive market-based interest rates.

All these institutions conduct creditworthiness assessments and risk evaluations for borrowing countries. The outcome of these assessments affects the lending terms offered. Countries with strong creditworthiness receive more favourable terms from all institutions, while those with higher perceived risk will receive less favourable terms or higher interest rates.

The NDB’s distinctive features and principles have sparked a range of expectations, some grounded in reality and others less so. Hopes have risen to create a framework that encourages shifting away from the US dollar and decreasing the dollar dominance and the strength that western institutions, such as the IMF, exercise on foreign affairs.

Critics of the current world financial order accuse its leading institutions, mainly the IMF and the WB, of doing little to encourage most-needed projects in the developing world and doing very little to build up domestic industry. The IMF, in particular, is under intense attack for its structural adjustment programmes, which impose trade liberalisation, privatisation, and austerity measures on lower-income countries as borrowing conditions.

Considering BRICS membership as a stride toward reducing dollar dominance or rebuilding the global financial order should be taken with a grain of salt. Assertions that it would automatically invigorate Egypt’s economy lack a solid foundation and contradict current economic realities. Engaging in dollar-free transactions through bilateral agreements with fellow BRICS members — in addition to not being as rosy as some believe — should not imply that Egypt must actively join forces to challenge dollar dominance.

This is supported by two key considerations.

Firstly, attributing Egypt’s economic challenges to the dominance of the US dollar is a simplistic interpretation. It is essential to recognise that economic policies and domestic factors play the most crucial role in shaping economic outcomes. A shortage of the US dollar does not inherently implicate the dollar as the primary culprit; rather, it underscores the need for comprehensive economic policy reforms.

Secondly, it is worth acknowledging that many developing countries operating within the framework of dollar dominance have achieved substantial economic progress and transformed into emerging economies. China’s ascent to global power and India’s emergence as a significant global player serve as compelling examples. Therefore, the quest to break from dollar dominance is not the most important battle for Egypt. Instead, its true battle is to breathe new life into its economy.

The writer is a banking consultant.

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