By Daya Thussu
LONDON, Jul 1 2015 (IPS)

As the leaders of the BRICS five meet in the Russian city of Ufa for their annual summit Jul. 8–10, their agenda is likely to be dominated by economic and security concerns, triggered by the continuing economic crisis in the European Union and the security situation in the Middle East.

The seventh annual summit of the large emerging economies – Brazil, Russia, India, China and South Africa – also takes place with a background of escalating tensions between Russia and the West over Ukraine and the eastward expansion of the North Atlantic Treaty Organisation (NATO), as well as the growing economic power of Asia, in particular, China.

Daya Thussu

Nearly a decade and a half has passed since the BRIC acronym was coined in 2001 by Jim O’Neill, a Goldman Sachs executive, now a minister in David Cameron’s U.K. government, to refer to the four fast-growing emerging markets. South Africa was added in 2011, on China’s request, to expand BRIC to BRICS.

Although in operation as a formal group since 2006, and holding annual summits since 2009, the BRICS countries have escaped much comment in international media, partly because of the different political systems and socio-cultural norms, as well as stages of development, within this group of large and diverse nations.

The emergence of such groupings coincides with the relative economic decline of the West.

This has created the opportunity for emerging powers, such as China and India, to participate in global governance structures hitherto dominated by the United States and its Western allies.

That the centre of economic gravity is shifting away from the West is acknowledged in the view of the U.S. Administration of Barack Obama that the ‘pivot’ of U.S. foreign policy is moving to Asia.“The major countries of the global South have shown impressive economic growth in recent decades … [it is predicted that] by 2020 the combined economic output of China, India and Brazil will surpass the aggregated production of the United States, Britain, Canada, France, Germany and Italy”

And there is evidence of this shift. In the Fortune 500 ranking, the number of transnational corporations based in Brazil, Russia, India and China has grown from 27 in 2005 to more than 100 in 2015. China’s Huawei, a telecommunications equipment firm, is the world’s largest holder of international patents; Brazil’s Petrobras is the fourth largest oil company in the world, while the Tata group became the first Indian conglomerate to reach 100 billion dollars in revenues.

Since 2006, China has been the largest holder of foreign currency reserves, estimated in 2015 to be more than 3.8 trillion dollars. According to the International Monetary Fund (IMF), China’s gross domestic product (GDP) surpassed that of the United States in 2014, making it the world’s largest economy in purchasing-power parity terms.

More broadly, the major countries of the global South have shown impressive economic growth in recent decades, prompting the United Nations Development Programme to proclaim The Rise of the South (the title of its 2013 Human Development Report), which predicts that by 2020 the combined economic output of China, India and Brazil will surpass the aggregated production of the United States, Britain, Canada, France, Germany and Italy.

Though the individual relationships between BRICS countries and the United States differ markedly (Russia and China being generally anti-Washington while Brazil and South Africa relatively close to the United States and India moving from its traditional non-aligned position to a ‘multi-aligned’ one), the group was conceived as an alternative to American power and is the only major group of nations not to include the United States or any other G-7 nation.

Nevertheless, none of the five member nations are eager for confrontation with the United States – with the possible exception of Russia – the country with which they have their most important relationship. Indeed, China is one of the largest investors in the United States, while India, Brazil and South Africa demonstrate democratic affinities with the West: India’s IT industry is particularly dependent on its close ties with the United States and Europe.

Although the idea of BRIC was initiated in Russia, it is China that has emerged as the driving force behind this grouping. British author Martin Jacques has noted in his international bestseller When China Rules the World, that China operates “both within and outside the existing international system while at the same time, in effect, sponsoring a new China-centric international system which will exist alongside the present system and probably slowly begin to usurp it.”

One manifestation of this change is the establishment of a BRICS bank (the ‘New Development Bank’) to fund developmental projects, potentially to rival the Western-dominated Bretton Woods institutions, such as the World Bank and the IMF. Headquartered in Shanghai, China has made the largest contribution to setting it up and is likely that the bank will further enhance China’s domination of the BRICS group.

Beyond BRICS, Beijing has also established the Asian Infrastructure Investment Bank (AIIB), which already has 57 members, including Australia, Germany and Britain, and in which China will hold over 25 percent of voting rights. Two other BRICS nations – India and Russia – are the AIIB’s second and third largest shareholders.

Such changes have an impact on the media scene as well. As part of China’s ‘going out’ strategy, billions of dollars have been earmarked for external communication, including the expansion of Chinese broadcasting networks such as CCTV News and Xinhua’s English-language TV, CNC World.

Russia has also raised its international profile by entering the English-language news world in 2005 with the launch of the Russia Today (now called RT) network, which, apart from English, also broadcasts 24 hours a day, 7 days a week in Spanish and Arabic.

However, as a new book Mapping BRICS Media – which I co-edited with Kaarle Nordenstreng of the University of Tampere, Finland – shows, there is very little intra-BRICS media exchange and most of the BRICS nations continue to receive international news largely from Anglo-American media.

The growing economic cooperation between Moscow and Beijing – most notably in the 2014 multi-billion dollar gas deal – indicates a new Sino-Russian economic equation outside Western control.

Two key U.S.-led trade agreements being negotiated – the Transatlantic Trade and Investment Partnership (TTIP) and the Trans Pacific Partnership (TPP), and both excluding the BRICS nations – are partly a reaction to the perceived competition from nations such as China.

For its part, China appears to have used the BRICS grouping to allay fears that it is rising ‘with the rest’ and therefore less threatening to Western hegemony.

The BRICS summit takes place jointly with Shanghai Cooperation Organization (SCO) Heads of State Council meeting. The only other time that BRICS and the SCO combined their summits was also in Russia – in Ekaterinburg in 2009.

Apart from two BRICS members, China and Russia, the SCO includes Kazakhstan, Kyrgystan, Tajikistan and Uzbekistan. SCO has not expanded its membership since it was set up in 2001. India has an ‘observer’ status within SCO, though there is talk that it might be granted full membership at the Ufa summit.

Were that to happen, the ‘pivot’ would have moved a few notches further towards Asia.

Edited by Phil Harris    

The views expressed in this article are those of the author and do not necessarily represent the views of, and should not be attributed to, IPS – Inter Press Service. 

Excerpt:

Uzbekistan has introduced sweeping new banking and import regulations that appear designed to keep hard currency from leaving the country.

Observers say residents and entrepreneurs should expect a bumpy ride in the coming months, as the cumbersome new measures are expected to drive up prices for basic goods and encourage an expansion of the shadow economy.

At the beginning of February, new rules regulating foreign currency exchange basically made it impossible for Uzbeks to get their hands, legally, on hard currency. Under the new rules, residents can only trade Uzbek sums for virtual hard currency loaded onto plastic banking cards for use abroad or online, not cash.

At the same time, authorities began arresting the currency traders who operate in a thriving black market, where the U.S. dollar fetches approximately 40 percent more than banks offer in exchange for sums.

While the exchange regulations received widespread attention, on Jan. 30 customs authorities also quietly introduced new import rules requiring mountains of paperwork. According to the State Customs Committee, importers must now submit “preliminary” customs declarations for all imported goods 30 days in advance.

Along with the preliminary declaration, importers are also required to procure certificates showing goods’ compliance with Uzbekistan’s strict and oft-changing hygienic, conformity and veterinary standards. The new steps add more paperwork to an already burdensome process.

And in Uzbekistan – routinely classified as one of the most corrupt countries on the planet; Transparency International ranks it tied for 170th out of 174 countries surveyed in its most recent Corruption Perceptions Index – paperwork often gives authorities a chance to find errors, perceived or real, and solicit bribes.

Officially, the new customs regulations stated aim is to “further fundamentally improve the business environment and provide greater freedom to entrepreneurship” and to “liberalize” foreign trade. But with the regulations announced so suddenly, after no public discussion, few are taking authorities at their word.

Instead, some regional media outlets have suggested authorities are trying to keep hard currency from leaving the country; others speculate that authorities are protecting the business interests of a well-connected individual or family (not unheard of in Uzbekistan).

Either way, analysts say it is difficult to imagine Uzbekistan’s limited domestic manufacturing base offering substitutes of sufficient quantity and quality to offset the expected price fluctuations as goods disappear from store shelves.

Import restrictions in Uzbekistan are hardly news: In 2000, Tashkent banned individuals from importing goods for resale. In 2009, the maximum value of goods that could be imported duty-free for personal consumption was reduced to 10 dollars per person.

These rules turned travel abroad for the average Uzbek into a troublesome experience. Long lines are now routine at border crossings, as customs officers sift through bags to identify items subject to customs duties or seizure (or another chance to solicit a bribe).

Because high import tariffs already make consumer goods in Uzbekistan expensive, many Uzbeks have long preferred to shop in neighbouring countries such as Kazakhstan and Kyrgyzstan. This practice is growing increasingly difficult under the existing regulations.

Unsurprisingly, when it comes to facilitating cross-border trading, the World Bank recently ranked Uzbekistan as the worst performer out of 185 countries surveyed in its Doing Business report for 2013.

Coupled with the latest foreign currency restrictions, analysts believe the new import regulations aim to prevent Uzbekistan’s foreign exchange and gold reserves from dwindling. (By limiting imports, the idea is the authorities are limiting the outflow of precious foreign cash and gold. Most analysts consider current account statistics unreliable).

Tashkent does not publish data on its reserves, or what share of its export earnings are channeled into replenishing reserves. But given the government’s reluctance to borrow, the restrictions on the circulation of hard cash suggest Tashkent is having trouble balancing the books.

“Coming on the back of the recent changes to currency regulations, one reason for the import restrictions is likely to be that the government is seeking to protect the country’s foreign-exchange reserves,” Anna Walker, a Central Asia analyst at the London-based Control Risks consultancy, told EurasiaNet.org.

“It also probably reflects a long-standing policy of encouraging import-substituting industrialization, though this policy has failed to foster a dynamic, domestic industrial sector that produces goods capable of competing with imports.”

Walker doubts the Uzbek government can achieve its economic goals by administrative fiat alone.

“Given the prevalence of imported goods in most sectors, it is highly unlikely that domestically produced goods will be able to substitute for imports. The government’s attempts to attract foreign investment in sectors other than natural resources have been largely unsuccessful, and the domestic manufacturing sector does not have the capacity to fill the gap left by the new import restrictions,” Walker added.

The stifling import and currency regulations often force Uzbek entrepreneurs to operate in the shadows. Privately, many confess they can only survive by bribing tax and customs officials.

One entrepreneur, a jeweler, who agreed to talk to EurasiaNet.org on condition of anonymity, said he thought any new import restrictions were done for one reason only: “To prevent the outflow of foreign currency from the country.”

The new restrictions are likely to backfire, driving up prices and pushing more entrepreneurs into the shadow economy, Walker said: “The immediate result is likely to be an increase in prices, as the availability of goods diminishes, as well as growth in the shadow economy as consumers and retailers attempt to get round the restrictions.”

While there has not yet been a visible impact on the prices for essentials in the capital, Tashkent, the restrictions have started hurting supplies. One shopkeeper told EurasiaNet.org that he was having trouble sourcing chocolate and candy. While other items were still in stock, he explained, his local suppliers have stopped accepting and delivering orders.

Editor’s note: Murat Sadykov is the pseudonym for a journalist specialising in Central Asian affairs.

This story was originally published by EurasiaNet.org.

The International Monetary Fund (IMF)’s internal auditor has criticised the Fund’s recent policy on foreign currency reserves, and has offered an implicit warning that the United States’ outsized influence within the institution has resulted in policy that was insufficiently evidence-based.

The findings, which were publicised in an unusually narrow report on Wednesday but follow months of discussion, are seen as a victory for a bloc of “middle income” developing countries, particularly China, that have advocated hoarding larger stockpiles of foreign currency as insurance against the effects of the international financial crisis.

Starting in 2009, the IMF began advising governments around the world not to depend too greatly on such reserves, anxious over the potential impact on the global economy. The Washington-based Fund offers yearly inspections on – and in certain cases nearly oversees – economies around the world, and remains one of the most powerful forces in defining the functioning of the international financial system.

That system has been upended in the aftermath of the 2008-09 financial meltdown, however, and some key IMF tenets have increasingly been called into question, particularly by fast-rising economies such as Brazil, China, India and others. The IMF itself has realised that the Fund now needs to offer advice on finance rather than just macroeconomic policy, a new focus for which it is still strengthening its capacity.

Now, auditors with the Independent Evaluation Office (IEO) of the IMF have suggested that the Fund’s spotlight on reserves was “not helpful”, criticising its economists for focusing on symptoms rather than on underlying causes of financial instability.

Around the world, the analysts point out, foreign reserves amount to only around 10 trillion dollars – a large amount, thought not when compared to, for instance, the 105 trillion dollars in the banking system or the 117 trillion dollars in the fund management industry.

Plus, the governments and central banks that hold these reserves are relatively more interested in maintaining the stability of the international monetary system than are private-sector interests, seemingly further decreasing the potential for reserves to upset the global financial equilibrium.

Many officials, the report states, feel that IMF advice would have been better served by focusing instead on “other developments … that they considered to be of more pressing concern than reserves”.

U.S.-China factor

The IEO investigators hint that the IMF may have chosen to follow such a policy approach for less than apolitical reasons.

“The evaluation found a broadly held view that (the IMF management’s) emphasis on excessive reserve accumulation was a response to frustration among some member countries with the IMF’s inability to achieve exchange rate adjustments in Asian countries with persistently large current account surpluses,” the audit states.

This has struck many as a direct reference to longstanding frustrations voiced by the IMF’s single largest shareholder, the United States, about a chief economic rival, China.

“When the IMF talks about imbalances, that’s generally code for China and the United States,” Jo Marie Griesgraber, executive director of New Rules for Global Finance, a Washington-based international network, told IPS.

“While the United States is desperately trying to jumpstart its economy, policymakers are holding interest rates low, but this is trashing other countries’ attempts to hold down the appreciation of their own currencies. Brazil is perhaps the most prominent example in this regard.”

Brazil has been at the forefront in pushing up its foreign reserves, continuing to increase this cushion as the world economy has continued to roil.

While Griesgraber suggests that powerful countries such as China and Brazil will increasingly get away with flouting IMF diktat, she warns that smaller countries continue to get squeezed by overlapping responsibilities imposed by the World Trade Organisation and various bilateral treaties – responsibilities often, and still, demanded by Washington.

Meanwhile, with the largest trove of international reserves in the world, estimated at some three trillion dollars, China is given special attention in the IEO report. Washington has long accused Beijing of holding down the yuan’s exchange rate in order to keep exports cheaper. (Significant reserves can be one result of an artificially low exchange rate.)

The exchange-rate issue even became a central point during the recent presidential election here, with President Barack Obama’s Republican opponent, Mitt Romney, pledging that he would formally declare China a “currency manipulator” on his first day in office.

And while many analysts have suggested that Beijing’s currency manipulation isn’t really much of a factor anymore, the 2012 presidential election saw both candidates trying to take a harder line on the issue.

Costly self-insurance

IMF managers, meanwhile, have rejected several of the audit’s findings, warning that the IEO investigators have understated the potential disturbances caused by excessive reserves and have misconstrued the breadth of the Fund’s response in dealing with the global economic downturn.

While IMF staff did not respond specifically to any broader accusation of politicisation, others have urged caution in this regard.

“Reserves have multiple purposes,” Dev Kar, lead economist with Global Financial Integrity, a Washington-based watchdog, and a former senior economist at the IMF, told IPS in an e-mail. “While a large accumulation serves the insurance purpose … such an accumulation can impose a cost on other countries (for example, inhibiting corrective action on the exchange rate).”

He continued: “So research cannot be seen as kowtowing before any country’s economic or political agenda. The facts are what they are. The interpretation lies in the eyes of the beholder.”

On the other hand, Griesgraber emphasises that the fact that countries are feeling the urge to build up the cushion of significant reserves in the first place underscores a broader problem facing the IMF, which was originally created to offer just this type of insurance for economies facing uncertainty.

“If the IMF is not fulfilling the purpose for which it’s designed, it makes sense to have some form of self-insurance,” she says. “At the same time, we can’t forget that this has a high opportunity cost for many countries, which are forced to use their own money for interest payments rather than using it to build roads, strengthen health systems, and other social expenditures.”

Money changing hands will soon be a thing of the past as East Africa standardises an electronic payment system. Credit Miriam Gathigah/IPS

By Miriam Gathigah
NAIROBI, Jul 17 2012 (IPS)

For months now East Africans have been expectantly waiting for an economic revolution to begin as they anticipate the launch of a new standardised payment system that will integrate the electronic transfer of money in the region. But continued delays in the launch of the system have economists fearing that the weak financial infrastructure here is hindering its implementation.

The system, a replica of the Single Euro European Payments Area (SEPA), will make all electronic payments in the East African Community (EAC) domestic ones through harmonised laws, policies and regulations within the region.

Although people still make electronic payments across the region, it is often insecure. Currently, cross border transfers in East Africa also take a number of days to be processed.

But when finally launched, the system will be unprecedented in Africa. Not even the Southern African Custom Union, the world’s oldest union, has a common electronic payment system in place. Sources say that it will eventually lead to the creation of one central bank for Kenya, Uganda, Tanzania, Rwanda and Burundi, the countries involved in the formation of the system.

“This system is a step forward towards the establishment of one central bank in the region, as well as one common currency,” Dr. Danson Mwangangi, an economist and market researcher in East Africa, told IPS.

And it is also about integrating trade.

“This is about electronic transfers. A payment method that is increasingly becoming common as the East African Community continues to integrate trade,” explained an economist and policy analyst at the Central Bank of Kenya involved in the process, and who did not wish to be named.

But that future appears a long way off. Though the payment system was supposed to have been launched in April, it has yet to come into effect. And the Central Bank of Kenya, one of the architects of the project, has refused to divulge information about its progress or set a new launch date.

However, Dr. George Ntawagira, a Rwandese economist working in Kenya, told IPS that the delay could be because the region’s cash-based economy is characterised by weak financial infrastructure. At least 60 percent of all payments in EAC are made in cash, a system that is bulky, risky and often inefficient.

Ntawagira added that banking remained risky in the region as a significant number of banks in Kenya lose millions of shillings every year from illegal withdrawals by computer-savvy criminals.

“These kind of risks have to be minimised. Still, East Africans have great expectations for this system and there has been concern over the delay in the inception of it.

“But this is to be expected, the financial infrastructure is still too weak to support this system. One of the greatest challenges is the discrepancies in regulatory and supervisory frameworks.”

Meanwhile, Ntawagira said that most banks across East Africa still have different tax regimes that hinder financial integration.

He added that close supervision of all the banks in the region would be critical to the success of the system.

“Although it is rare to find supervisors across banks scrutinising each other, this is an important aspect of regional integration because weaknesses in one financial institution can be corrected to prevent it from putting the entire system at risk.”

Ntawagira was quick point out that even the highly successful M-PESA, a mobile phone system where a maximum of 500 dollars can be transferred from mobile phones to pay bills and accounts and even purchase airtime, faced numerous problems when first launched in 2007. This included issues of network connectivity and financial integration.

But, according to the World Bank, it has since become Africa’s success story and facilities payments totalling almost 320 million dollars a month in the region.

And economists still believe that the new electronic payment system will significantly change how money moves across the region’s borders. The system is expected to not only be more secure than the current banking structure, but also cheaper and more efficient.

“Currently, if you move to another country in East Africa, even temporarily, you will have to go through a number of complex procedures in order for you to open a new account in your new country.”

With the new electronic payment system, residents of East Africa will be able to continue using their existing bank accounts from their home countries while residing elsewhere in the region.

It is also hoped that the system will lead to increased investment.

“EAC has continued to struggle in their attempt to lure foreign direct investment (FDI). This has largely been due to poor infrastructure in all sectors, be it roads, financial and so on. This system might improve FDI,” economic analyst, Titus Mwakazi, told IPS by phone from Tanzania.

“An integrated financial market can enhance liberalisation of intra-trade, boost the development of viable projects, strengthen financial institutions, encourage innovation as well as the pooling together of scarce resources in the region,” he said.

Still, despite of the promise that an integrated financial system holds for the struggling EAC economy, it nonetheless still has with a number of challenges. This includes the issue of the uneven level of growth and sophistication in the banking sector in some countries like Rwanda and Burundi.

“Kenya has achieved a much higher level of growth compared to the other countries. A weak banking system in one country may compromise the success of the system by increasing the risk of cross border electronic transfer,” Mwangangi said.

As Malawi’s poor struggle to afford food and other staple items since the 48 percent devaluation of the local currency against the dollar, economic commentators are optimistic that the move will provide an opportunity to boost the country’s export market.

A group of farmers queuing to buy fertiliser outside a shop in Bvumbwe, southern Malawi after the local currency was devalued. / Credit:Claire Ngozo A group of farmers queuing to buy fertiliser outside a shop in Bvumbwe, southern Malawi after the local currency was devalued. Credit: Claire Ngozo

On May 7, Malawi’s President Joyce Banda made a decision to devalue the Kwacha from K168 to K250 to the dollar.

The lowering of the currency against the dollar has hit locals hard. Malawi is one of the poorest countries in the world: 74 percent of the population of this southern African nation lives on less than 1.25 dollars a day, and nearly one in 10 children die before their fifth birthday.

The devaluation of the Kwacha created panic among consumers who rushed to stock up on basic food items such as maize flour, cooking oil and rice as the price of products increased by an average of 50 percent.

Consumers suffered a further blow on May 11 as the prices of fuel and electricity also rose by 30 and 63 percent respectively.

“The devaluation has made us poorer than before. Our salaries remain the same, so how can we afford to pay twice as much on basic necessities such as maize flour?” asked Mada Mayuni, a civil servant who works as a copy typist in the capital, Lilongwe.

Consumers suffered a further blow on May 11 as the prices of fuel and electricity also rose by 30 and 63 percent respectively.

“The devaluation has made us poorer than before. Our salaries remain the same, so how can we afford to pay twice as much on basic necessities such as maize flour?” asked Mada Mayuni, a civil servant who works as a copy typist in the capital, Lilongwe.

Mayuni is a widow and looks after seven children aged between four and 16.

“I don’t know how we will survive because my salary is only enough for transportation to and from work. Maybe I should move to the village and try subsistence farming,” she told IPS.

Matthews Chikankheni, the president of the Malawi Confederation of Chambers of Commerce and Industry, a partnership of enterprises and associations representing all sectors of Malawi’s economy, told IPS that although the average person was suffering, the devaluation of the Kwacha was a necessary adjustment that should be welcomed as it would boost the country’s export trade.

“This is a chance for export traders to improve their earnings. The devaluation means that exports will be cheaper and imports more expensive, and as a country we need to take advantage of this situation and export more,” said Chikankheni.

By devaluing the Kwacha, Banda was responding to requests that the International Monetary Fund (IMF) and local economists had made to the country’s late President Bingu wa Mutharika. However Mutharika had repeatedly refused to take the step that economists believed would have saved the country’s failing economy.

Malawi’s donor relations suffered greatly following accusations that Mutharika’s government failed to respect the human rights of lesbian, gay, bisexual and transgender people and the right to freedom of the press.

Donors refused to release up to 400 million dollars and the United States suspended a 350-million- dollar grant. At the time, almost 40 percent of Malawi’s national budget was donor-dependent. Many donors have since pledged to help Banda restore the country’s economy.

The devaluation of the Kwacha and the liberalisation of the foreign exchange market are expected to contribute to the government’s attempts to reach an early agreement with the IMF in order to unlock donor funds.

Chikankheni said that the devaluation would boost demand for domestically-produced goods and discourage the current dependency on imported consumer goods, which have now automatically risen in price.

He added that the increase in exports would mean that foreign exchange would be easily available in the country and would result in an eventual improvement in the economy, which would trickle down to the people.

Currently Malawi’s annual imports, which are estimated to be two billion dollars worth of goods such as electronic items, groceries and furniture, exceed its exports. The country exports 1.2 billion dollars of agricultural products like tobacco, tea, sugar and groundnuts, according to the National Statistical Office.

Chikankheni is optimistic that the devaluation will aid the growth of the tobacco industry.

Tobacco is the country’s main revenue earner, accounting for up to 60 percent – or 950 million dollars – of foreign exchange. According to the Ministry of Agriculture and Food Security, Malawi’s tobacco accounts for five percent of the world’s total exports.

Dalitso Kubalasa, the executive director of the Malawi Economic Justice Network, a coalition of more than 100 civil society organisations that promotes economic governance, told IPS that the devaluation would make Malawi’s export products more competitive on the international market.

“On the export front, the devaluation will lead to increased demand for Malawi’s exports in the short run. In the long run, this is expected to stimulate production and thus lead to increased production of exportable goods … thereby generating foreign currency,” said Kubalasa.

He added that because the prices of imports had automatically risen and become unaffordable for some, the situation would motivate locals to substitute these goods with commodities that can be produced locally. It would provide an incentive to local industry, he said.

But he admitted that the devaluation would affect the country’s middle class and poor.

“We all have been through desperate times…perhaps we might have to even brace ourselves for more,” said Kubalasa. “But on the brighter side, we still need to understand that something needed to be done fast to put a stop to the downward trend of the economy before it got to a point of no return.”

He said he was hopeful that the devaluation was not the only solution to Malawi’s economic woes.

“For the devaluation to be effective, it needs to be done alongside strategic and well-focused supporting intervention measures,” said Kubalasa. (END)

China is looking to Latin America to experiment with the yuan, or renminbi, to replace the dollar, taking advantage of the growth in Chinese trade and investment in this region. But because the volume is still insignificant, it is not yet clear what impact the currency will have on economies in the region.

The 2008 outbreak of the financial crisis in the United States prompted China to push for the use of its currency in transactions with its leading partners, Brazilian economist Rodrigo Branco explained to IPS.

“This change was mainly due to the need to guarantee steady supplies of commodities, and also because of the instability of the industrialised economies,” which have been hit hardest by the crisis, added Branco, with the Foreign Trade Studies Centre Foundation (FUNCEX).

China, which joined the Inter-American Development Bank (IADB) in 2008, has seen a 16-fold increase in its trade with the countries of Latin America and the Caribbean over the last decade, to a total of 188 billion dollars a year in 2011.

Trade with Brazil alone climbed to 77 billion dollars last year, 37.5 percent up from 2010.

China is now Brazil’s largest investor and trading partner.

“The Asian giant is financing infrastructure in the region to expand its production and thus guarantee its sources of raw materials, while trying to cut the prices of imports,” the director of Brazil’s Foreign Trade Association (AEB), José Augusto de Castro, told IPS.

This influence is seen, for example, in loans to countries like Venezuela, with which it has a strategic relationship, in the words of Venezuelan President Hugo Chávez.

According to an article in the Wall Street Journal, China’s policy banks are seeking to expand their loans to Latin American countries that are suppliers of key food and mineral commodities using the yuan instead of the dollar, as part of a strategy to promote use of the Chinese currency in international trade.

The Export-Import Bank of China (China Exim Bank) is in negotiations with the IADB to set up a fund that would provide one billion dollars worth of yuan to finance infrastructure projects in Latin America and the Caribbean.

The two institutions signed an agreement in September under which the China Exim Bank committed itself to offer up to 200 million dollars to finance trade between China and Latin America. Part of that funding will be in yuan.

China’s decision to strengthen the IADB also shows its priority interest in beefing up infrastructure in Latin America, de Castro said.

Branco said “the most important aspect of this is the change in stance on the part of the Chinese government, which previously did not want to internationalise the yuan because its possible volatility would leave the country hostage to the external economic situation.”

Unknown effects

“The effect on Latin America’s economies of an internationalised yuan is not yet clear. We will have no way to gauge the impact until there is a market in place in which the currency is being freely traded,” the economist added.

Branco pointed out that China has shown interest in this region in three ways: through the direct purchase of minerals and crops from countries with comparative advantages, like Brazil, Argentina and Chile; through mergers or the creation of binational companies; and by means of loans and capital, with credit lines in yuan, to finance imports and infrastructure.

“The increase in trade in yuan has the aim of diversifying risk with respect to the dollar and the euro, given the volatility of the latter two,” Branco said.

“Furthermore, the increased international use of the Chinese currency is designed to complement the implementation of a new currency, which is already being traded in important markets like Hong Kong,” he added.

But de Castro does not believe the new loans in yuan will have an effect on the region’s trade or monetary policies in the short term, because political conditions would have to be different in China in order for the yuan to become an international currency.

“China has a closed system,” he said. “We all know the government adjusts the exchange rate according to its interests. It would have to build up international credibility in order for its currency to become convertible in practice and not just theory.”

Mauricio Claverí, an economist with the Argentine consultancy Abeceb, said that in order to analyse the eventual effects of the introduction of the yuan in regional trade, it is necessary to look at what happened in the Mercosur (Southern Common Market) trade bloc, made up of Argentina, Brazil, Paraguay and Uruguay.

“With respect to trade in local currencies between Argentina and Brazil, only a very small portion, between two and 2.5 percent of trade, is done in local currencies,” he said. “But large firms continue using the dollar.”

Argentina and Brazil were even considering bringing Uruguay and Chile – an associate member – into the initiative, but they refrained from doing so, and “the system never took off, because companies are very attached to the dollar,” the expert told IPS.

But the possible expansion of the yuan in Latin America raises other doubts. For example, what would the Chinese currency be used for?

Branco said the yuan would initially be used in future trade deals with China itself. “The currency could be used as a guarantee for contracts when the euro or the dollar are more volatile, as in recent times,” he said.

But the accumulation of reserves in yuan, he said, would only occur later, after the consolidation of a global financial market in that currency.

De Castro warned that “because the yuan is not a convertible currency, it would have difficulties being traded in the domestic market.”

In the case of Brazil, the Central Bank would have to absorb the yuan and later try to place them on the international market, which implies a financial risk, he said.

A report published this month by Inter-American Dialogue, a Washington-based centre for policy analysis, exchange, and communication on Western Hemisphere affairs, says China extended 37 billion dollars in credit to Latin America in 2010 – more than the loans from the World Bank, IDB, and United States Export-Import Bank combined.

More than 90 percent of that total went to Venezuela, Brazil, Argentina and Ecuador, especially to finance the purchase of commodities and towards Chinese companies that have investments in those countries.

Countries like Venezuela and Ecuador, which have a harder time obtaining multilateral loans, have particularly benefited from this assistance.

In the context of a 20-year strategic plan, China has loaned Venezuela more than 40 billion dollars since 2007, when a China-Venezuela fund was established, for four billion dollars. The fund, which has been renewed several times, finances investment in infrastructure and social programmes, for which precise figures are unavailable.

And in 2010, a 20 billion dollar credit line was negotiated, half of which is in dollars and half in yuan, mainly to buy goods and services from China.

The Chinese oil companies CNPC and CNOOC also made several billion dollars available to Venezuela’s state-run oil giant, PDVSA, for oil industry projects.

China’s investments in Venezuela have ranged from oil production to railways, infrastructure works, construction of housing, and car, motorcycle and mobile phone assembly plants.

* With reporting by Marcela Valente in Buenos Aires and Humberto Márquez in Caracas. (END)