Story Of The Week

BRICS BANK (New Development Bank)

Following two years of intense negotiations, the BRICS leaders agreed on 15 July 2014 in Fortaleza (Brazil) to launch the New Development Bank (NDB). Leaders of the BRICS emerging market nations launched a $100 billion development bank and a currency reserve pool in their first concrete step toward reshaping the Western-dominated international financial system. The bank named as  aims at funding infrastructure projects in developing nations.

Key features of New Development Bank:-

  • NDB was formed on 15th July 2014.
  • It is a proposed multilateral development bank operated by BRICS states.
  • The bank will be based in Shanghai.
  • India will preside over its operations for the first six years, followed by Brazil and then Russia, leaders of the five-country group announced at a summit.
  • They also set up a $100 billion currency reserves pool to help countries forestall short-term liquidity pressures.
  • The inaugural Chairman of the Board of directors will come from Braziland the inaugural chairman of the Board of Governors will be Russian.

Structures and Objectives

Development Capital

  • The bank’s primary focus of lending will be infrastructure projects with authorized lending of up to $34 billion annually.
  • The bank will have starting capital of $50 billion, with capital increased to $100 billion over time.
  • Brazil, Russia, India, China and South Africa will initially contribute $10 billion each to bring the total to $50 billion.
  • Each member cannot increase its share of capital without all other 4 members agreeing, this was a primary requirement of India.
  • The bank will allow new members to join but the BRICS capital share cannot fall below 55%.

Contingent Reserve Arrangement (CRA)

  • The objective of this reserve is to provide protection against global liquidity pressures.
  • This includes currency issues where members’ national currencies are being adversely affected by global financial pressures.
  • The Bank would also provide assistance to other countries suffering from the economic volatility in the wake of the United States‘ exit from its expansionary monetary policy
  • This fund will consist of $10 billion of “paid-in capital” ($2 billion from each member to be provided over seven years) and an additional $40 billion to be “paid upon request”.
  • Out of the total initial capital of $100 billion, China will contribute $41 billion, Brazil, Russia and India would give $18 billion each, and South Africa would contribute $5 billion.
  • It is scheduled to start lending in 2016.
  • Open to membership by other countries, but the capital share of the BRICS cannot drop below 55 percent.

 

Why a new Bank when there’s no shortage of multilateral finance institutions 

  • Geopolitical shifts, the locus of decision making is moving from the G-7 to the G-20. Financially, the 2008 crisis has left old-power governments and their banks mired in debt and toxic assets.
  • Legitimacy, credibility and effectiveness of international financial institutions like IMF and World Bank.
  • Shortfalls in financing for infrastructure, the annual infrastructure spending gap in developing countries exceeds $1 trillion, and this rises by 15% when climate change adaptation and mitigation costs are factored in.
  • National priorities of the BRICS countries.

 

 

 

 

Uniqueness of NDB

  • Unlike the development banks like ADB, IDB and EBRD which have a predominantly regional focus, the NDB’s founder countries are from four different continents and its potential reach is thus truly global.
  • Furthermore, this will be the first time since the Bretton Woods conference in 1944 (which created the IMF and the World Bank) that the US has no influence in the governance structures of an international development bank (it is important to remember that the US is a founder-member of the IDB, the ADB and the EBRD).
  • This is thefirst time in modern history that China is actively involved in the creation of a multilateral institution.

A historic power shift from the West to the Rest

NDB is thus far the phenomenon’s most symbolic institutional representation. In order to manage the transition smoothly it would be wise for Europe not to be seen as constantly siding with the US in trying to obstruct any attempt to reform the international monetary and financial system. This will only increase tensions and foster the likelihood of a power game between competing blocs in which the US and Europe are on one side and the BRICS on the other. Europe will remain the US’s junior partner, but this should not preclude it from becoming a useful power broker between the US and the BRICS.

 

 

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7 replies »

    • The question is a lot deeper than that. Can a bank with a capitalization of $500 billion really compete with the Bretton Woods institutions? How will India, Brazil, South Africa, which are running huge current account deficits contribute to the Bank? whatever money they give would essentially be borrowed money because of their respective CAD! Too, who will control the Bank’s management? A simple rotating arrangement may not be enough.

      This topic needs more discussion among us. Maybe some of you could make a presentation to the rest of us.
      Cheers,

      • Yes Sir, these are indeed big questions for the new establishment. Think tanks of BRICS nations need to find a lot of answers for the bank to be really effective.