BRICS Development Bank

The aftermath of the global financial crisis was dominated by growth being picked up by emerging and developing economies. The ripple effect of the global financial crisis failed to have any major impact on them. It was at Russia in 2009, an informal association of four developing countries-Federative Republic of Brazil, Russian Federation, Republic of India and People Republic of China, together known as BRIC nations took birth. The first summit which was hosted by Russia was hailed as the ‘epicentre’ of world politics by the Russian leader.  After South Africa’s entry to this amalgamation in 2010, this powerful group of states came to be known as BRICS. There exist stark differences in the political spheres of each member countries, cultural diversity within each nation, and a huge geographical divide. Despite these constraints, BRICS has managed to emerge as a major political association without influence of any Western powers.

bricsThe BRICS summit held at Durban, South Africa in 2013 concluded with a decision to establish a New Development Bank also known as the BRICS Bank. The design of the bank is similar to that of US dominated World Bank or the International Monetary Fund. Like all other international institutions, the focus of NDB will be on funding of infrastructural projects in developing economies. Having gained marginal independence in the political arena, the creation of this bank will give developing countries a new outlet through which they can raise finances and proceed with their development endeavors. Developing countries have majorly relied on west dominated institutions for the same. It is anticipated that the conclusion of BRICS Summit 2015, which is due for commencement at Ufa, Russia in July, will give a clearer picture of what this organization is likely to be like and foundation for the $100 million bank will be set.  Creation of a $100 million Contingency Reserve Arrangement is also on the cards and will hopefully take shape by the time the Summit closes. Deputy Governor of People’s Bank of China, Yi Gang was reported saying to Chinese press that BRICS countries were close to consensus on establishment of the Contingency Reserve Arrangement. He specified that consensus had been reached between BRICS nations on ratio contributions, operation mechanisms, governance structure and loan to value ratio.

The BRICS Development Bank will be based at Shanghai, China. K.V Kamath, a veteran in the banking industry has been appointed as the first president of the bank. The provisions of Agreement of New Development Bank provides for  voting powers equivalent to the number of subscribed shares in the capital stock of bank. Also, the member countries will not be allowed to increase their capital share in the bank without the consent of member countries. The membership will be initially restricted to the member countries. However, the institution also envisages at bringing other low-income or middle-income countries under its ambit in near future. While that has been allowed, BRICS has also maintained that the share of capital of new members will be limited to only 45% of total capital. Article 24 of the New Development Bank hints at possibility of financing being done in local currency where operations are initiated which would mean that currency swap will have to be enabled between the central banks of member countries. The negotiations regarding a non-dollar financial architecture are still proceeding.

The launching of the bank has come at a time when developing countries are facing devaluation of their currencies against dollars, and risk of capital outflow with the ‘tapering’ of quantity easing of Federal Reserve looms over them. Though developing countries can raise funds from existing institutions such as the IMF, they are often subject to unfair conditions imposed to serve the interests of developed western powers.  In the wake of all these events, it was imperative that a south dominated financial institution such as NDB was set up so that a more secure economic environment is created.

It is a well known fact that lack of social infrastructure is a barrier to growth. No access to quality education or healthcare services serves as an origin to unproductive population which is capable of impairing growth of the country in the long run. Developing economies such as India lack this social infrastructure and hence there is dire need for raising loans that are specifically channelized in this direction.  A shortfall of investment of approximately $1 trillion has been identified for the unmet infrastructure needs. For countries to ensure inclusive growth, budget allocation to social infrastructure must be increased. Keeping this in mind, BRICS has decided that loans will be extended to developing countries (after careful analysis of their credit worthiness so as to maintain minimal defaults) which are looking for funds to boosting the state of infrastructure in their respective nations.

Developing economies are also known to have accumulated huge foreign exchange reserves which are preserved in sovereign wealth funds.  Yaroslav Lissovolik, Chief Economist, Deutsche Bank in Russia said- ‘’There are so many savings in the emerging markets and none of the existing institution there can allow these savings to productivity work to boost growth rates and development. This is the niche and ultimate demand for this new institution’’ Hence the savings of the economies will be channelized into productive infrastructural projects which will also lead to creation of an income stream in future.

In light of recent economic developments in the US, countries are also at risk and vulnerable to an economic shock. The creation of Contingent Reserve Arrangement will allow such countries to tackle the short term liquidity crises as an when they arise.  BRICS can also create a pool of experts within the New Development Bank who can give advice to member countries or other borrowers on matters related to planning of a project and drafting of a blueprint for major infrastructural investments.

BRICS is one of the most influential political platforms independent of the West. Once the curtains are drawn at the BRICS Summit that will be hosted in Ufa, Russia, there will  be greater clarity about the objectives and functioning of this organization and when its operations are due for commencement. If the operations are carried out effectively, then there lies huge potential for the New Development Bank to trigger a significant positive change in the economies of the member nations. It will not only trigger growth but will also enable a growth environment which is sustainable.

Mansa Saxena

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