MercoPress. South Atlantic News Agency

BRICS agree on a 100bn ‘financial firewall’ in anticipation of ‘currency shocks’

The Federal Reserve is expected to take its first steps to reduce the extraordinary monetary stimulus

BRICS nations (Brazil, Russia, India, China and South Africa) have agreed to a 100 billion dollars currency reserve pool as a “financial firewall” in anticipation of liquidity strains and ‘currency shocks’ as the United States Federal Reserve moves to reduce monetary stimulus.

“A mutual reserve will be a financial firewall for the five-member bloc of emerging economies” said Zhang Monan, economist at China’s National Development and Reform Commission, the country’s planning body.

The idea was first considered during a BRICS summit in South Africa but finally materialized on the sidelines of last week’s G20 summit in St Petersburg.

China is contributing with the “lion's share”, 41 billion dollars, followed by 18bn each by Brazil, India and Russia and 5 billion by South Africa.

“The US tapering off its quantitative easing later this year will have a profound impact on the global financial markets, especially emerging economies,” Zhang said, pointing out that such an impact will involve capital outflow and depreciation of domestic currency and assets.

The US Federal Reserve is widely expected to take its first steps in coming weeks to reduce the extraordinary monetary stimulus, which was largely blamed for the turbulence being experienced by the Indian Rupee.

It was feared the move would bring turmoil and substantial spill-over effects to a global financial system where the US dollar accounts for 62% of reserve assets, state-run China Daily said.

South Africa's Rand has depreciated 17.7% cent against the dollar this year, the most among 24 emerging-market currencies followed by the Indian Rupee and the Brazilian Real.

Chinese currency however which is backed by 3.30 trillion in foreign currency reserves has strengthened by 1.8%.

“We see the temporary difficulties of some BRICS countries mainly as difficulties in terms of international balance of payments,” Chinese Vice-Minister of Finance Zhu Guangyao said.

Zhang suggested that BRICS countries should enhance financial ties by boosting investment exchanges, expanding currency swaps, encouraging trade settlement in local currencies and promoting convertibility among their currencies to prevent capital outflows.

The emerging economies are mostly net creditors to developed nations, as they accounted for 75% of the world's total currency reserves, among which China contributed one-third of the world's total. China itself holds about 1.20 trillion of US bonds.

“The gravity of the global economy has moved from the West to the East, but the power of wealth distribution is still in the hands of Western countries,” Zhang said.