Introduction

Last week, we explored the BRICS economy—an alliance of emerging market economies comprising Brazil, Russia, India, China, and South Africa. Now, we shift our focus to examine BRICS’ potential impact on the global financial system. As global economic and political dynamics change, we’ll explore what this means for developing countries like Zambia and how these countries can strategically position themselves amidst these shifts for growth and development.

Join us as we uncover BRICS’ influence on global finance and how developing nations can seize strategic opportunities for a more equitable and interconnected world.

Understanding the Global Financial System

The global financial system is a vast mechanism involving legally binding agreements, institutions, and economic actors that facilitate the flow of international financial capital for trade and investment financing. Key players in this system include institutions like the International Monetary Fund (IMF), World Bank, central banks, and major private international banks. For a long time, the IMF and World Bank have provided financial assistance to developing countries during crises and disasters, as well as navigating sovereign debt crises.

BRICS’ Challenge to the Current Global Financial System

Although BRICS represents 26 percent of the world’s geography and approximately 42 percent of the global population, it remains underrepresented in the global financial system. The combined nations hold less than 15 percent of the voting rights in IMF and World Bank.

In 2014, BRICS launched the New Development Bank (NDB) to mirror the World Bank and IMF. The NDB’s primary purpose is to offer financial assistance to developing countries for infrastructure projects. Moreover, BRICS established the Contingent Reserve Arrangement (CRA), a liquidity reserve mechanism, to provide support to members facing payment challenges.

Apart from providing financial alternatives, BRICS aims to develop a new currency to challenge the dominance of the United States Dollar (USD) in cross-border trading among its member countries. The introduction of this new currency could lead to the development of regional currencies and mitigate risks associated with global volatility resulting from dollar dependency.

Uncertainties Surrounding the BRICS Reserve Currency and Interest in BRICS Expansion

Despite BRICS’ efforts to introduce a new reserve currency, the US dollar remains the primary choice for cross-border trade and forex market benchmarks. The potential impact of BRICS’ new currency on the US dollar’s standing remains uncertain.

Several countries, such as Argentina, United Arab Emirates, Mexico, Algeria, and Saudi Arabia, have expressed interest in joining the BRICS initiative. Emerging economies, especially those with negative experiences of IMF’s structural adjustment programs and austerity measures, find BRICS attractive due to its potential benefits of financial support without conditionalities.

Strategic Positioning for Developing Countries like Zambia

For developing countries like Zambia, aligning with BRICS could present a trade-off. Joining BRICS may mean reduced attachment to institutions like the IMF and World Bank, which offer support like the IMF’s Extended Credit Facility (ECF) program. However, associating with BRICS could lead to significant benefits, including Foreign Direct Investment (FDI), mining, clean energy, financial services, information technology, job creation and a stronger voice in international issues.

The emergence of BRICS as a collective force in shaping the global financial landscape has sparked both skepticism and hope regarding its implications for developing economies like Zambia. While BRICS’ challenge to the current global financial system presents opportunities for greater financial inclusion and a shift away from dollar dependency, uncertainties surround the success of its reserve currency ambitions. As countries like Zambia weigh the potential trade-offs of aligning with BRICS, they must carefully consider the benefits of reduced conditionalities and increased investment opportunities against the potential loss of support from traditional institutions like the IMF and World Bank.

Conclusion

It is important for developing nations like Zambia to adopt a strategic approach in positioning themselves amidst these shifts. Staying vigilant and well-informed about global political economy developments will be crucial in adapting to the changing dynamics. By actively engaging with BRICS, these countries can tap into the potential benefits of enhanced financial support, diversified investments, and a more prominent role in international affairs.

BRICS’ influence on the global financial system is undeniably reshaping the dynamics of international finance. Whether it becomes a transformative force for the betterment of developing economies or merely an extension of member countries’ geopolitical ambitions remains a topic of debate. For countries like Zambia, embracing this evolving landscape with cautious optimism and adaptability will be key to securing their future growth and development in global relations.

About the Author
Matrina M. Mumba is a Public Finance Management Researcher at the Centre for Trade Policy and Development (CTPD). She holds a Master of art degree in Economics from the University of Zambia and a Bachelor of Arts degree in Economics from the University of Zambia.