Argentina and Brazil propose common currency for their bilateral commerce

Argentina and Brazil have announced that they intend to explore the creation of a common currency for trade between the two countries.

The project, which, if it goes ahead would have a medium to long-term timeframe, was revealed in a joint announcement on January 23 by Argentinian president Alberto Fernández and Brazilian president Luiz Inácio Lula da Silva.

The proposal, which is still to be assessed by the countries’ respective oversight bodies, aims to strengthen bilateral commerce between the two and protect their U.S. dollar reserves.

Serious situation in Argentina

Argentina has for some time been experiencing serious problems due to a shortage of U.S. dollar reserves at its Central Bank (BCRA).

This has led the BCRA to now restrict importers' access to the foreign exchange market, which is mostly used to pay for imports in U.S. dollars, to protect what remains of its reserves. This has dampened trade, though payments for imports, especially recent commercial transactions, continue to be made.

Brazil, together with China and the United States, is one of Argentina’s biggest export markets. Going the other way, Brazil accounted for 19.5% of Argentine imports in 2022. Yet despite the already relatively high degree of trade between the two, both governments believe they can increase these numbers further, which would also strengthen their bilateral relationships.

A trade currency, not a single currency

One point that both countries have been quick to make clear is that the proposed new trade currency is not intended to replace either country’s existing currency.

According to the respective finance ministers, Sergio Massa, of Argentina, and Fernando Haddad, of Brazil, any new currency would coexist alongside the Brazilian Real and Argentine Peso, and its use would be limited to commerce. Through this, the new currency, which could be called “Sur”, would enable importers and exporters in both countries to use an alternative to the U.S. dollar for trading goods and services.

Previous payment system offers hope and caution

It’s not the first time the two countries have attempted to act to improve their mutual trade relations. In 2008, they established the so-called “Local Currency Payment System” for international commercial transactions. This allowed for up to 360 days of financing and enabled Argentinian and Brazilian importers and exporters to make payments and collections in their local currencies.

The idea, as now, was to promote commerce between the countries. However, traders' distrust of the Peso and Real, due in part to the fluctuations between the two, meant it was never really implemented and limited the system’s impact. ?

The IA View

In our opinion, the creation and implementation of a common currency for commercial transactions between Brazil and Argentina could have a positive impact, not only by increasing trade between both countries, but also by increasing trade with other markets, such as between Argentina and China, or other regions.

Given the volume of Argentine imports from Brazil, introducing a common trade currency between the two could in turn enable the Argentine Central Bank to ease its foreign trade policies. Basically, the common Argentine-Brazilian trade currency would release U.S. dollars that importers could use to trade with other countries.

?Written by:? Claudia Espinoza

*This article is informative and is not to be used as legal, economic, or commercial advice.

?