New Development Bank : The new BRICS financial institutions

Business Line Editorial

The announcement by the BRICS countries — Brazil, Russia, India, China and South Africa — to establish a New Development Bank (NDB) with an initial subscribed capital of $50 billion, alongside a $100 billion Contingency Reserve Arrangement (CRA) fund for members to use during balance of payments crises, is an initiative with significant global economic implications. The NDB would essentially do what the World Bank presently does: extend loans, payable over 15-20 years, to fund infrastructure and other development programmes.

The CRA’s envisaged role is, likewise, similar to the International Monetary Fund’s (IMF): providing emergency assistance to members facing currency collapse or flight of capital. But the IMF and World Bank are largely western-controlled. The combined voting power of the five BRICS nations in the World Bank, at 13.09 per cent, is lower than the US’ 15.01 per cent. Nor do they have a real say in the IMF, whose loans are often conditional upon the borrowers undertaking extreme austerity measures.

The proposed NDB is expected to be a more democratic institution, with all the five BRICS countries having equal shareholding. While the bank would be headquartered in Shanghai, its first president will be from India. The CRA can similarly help members tide over payments problems through currency swaps involving potentially less onerous conditions. Thus, this fund could provide liquidity in dollars (or even yuan) in exchange for the currency of the borrowing member and the latter, in turn, buying back its currency at a future date at the prevailing exchange rates. But the NDB/CRA initiatives, above all, reflect the increasing role that emerging economies — the BRICS countries together make up 28 per cent of the world’s GDP by purchasing power parity and 42 per cent of its population — see for themselves in global decision-making. If nothing, it may force reforms in the existing Bretton Woods institutions; the industrialised powers that call the shots in these need to reconcile themselves to the new reality.

For all the lofty goals underlying the launch of NDB/CRA, one shouldn’t, however, ignore the influence that China will have in their effective running. With its $4 trillion-plus forex reserves — over three-fourths of the total for all BRICS economies — only China has the resources to make the new institutions count. It will obviously view this as an opportunity to make the yuan a reserve currency to rival the dollar — which it is already doing through currency swap deals with Brazil, Argentina, Indonesia and many other countries. Also, the NDB can be a channel for Chinese credit to be extended without inviting suspicion of underlying political motives associated with direct financing. Yet, for all the obvious Chinese interest in pushing for a ‘fairer’ global financial order under the auspices of BRICS, the project is worth it if the new financial institutions can offer competition to the IMF and World Bank.