Thursday, 18 September 2014

BRICS by Brick: Will the BRICS Development Bank lead to the establishment of more such institutions like a SAARC bank to bolster regional economics?




The BRICS bloc, formerly known as BRIC before South Africa joined it in 2010, is a consortium of five newly industrialized advanced economies which include Brazil, Russia, India, China and South Africa. These five nations have 40 percent of the world’s population, account for 20 percent of the global economic output and hold among them $4 trillion as foreign exchange reserves. 

Factors such as the decrease in the monetary policy by the U.S. during the last recession followed by the reduction in the World Bank’s funding forced the BRICS countries to think of an alternative banking system which could finance their development projects. In March 2013, it was decided in the 5th summit of BRICS that the bloc would form a ‘BRICS Development Bank’. In July 2014, at their 6th summit at Fortaleza, Brazil, the five countries signed the agreement to establish the new bank. 

Initially, every member country will contribute $10 billion to raise $50 billion – the starting capital of the bank – and will gradually increase their share to $100 billion. The primary focus of the bank will be on providing funds for infrastructure projects, such as roads, energy, education, health, etc. Lending is expected to start from 2016. 

The New Development Bank (NDB) is seen as a competitor to the World Bank, the Asian Development Bank and the IMF because its main objective is to provide funds to developing countries. On an interesting note, the NDB will not decide on the projects that come up for lending. It will only choose from among the projects that ask for its lending support. Moreover, unlike the World Bank and the IMF, the NDB will not frame its own conditions for loans. This will help countries to follow their own policies. 

Apart from providing World Bank-type lending, the bank also has the provision of lending IMF-type loans. This type of lending is called Contingent Reserve Arrangement. It is a self-managed system to avoid short-term balance of payment problems. It will start with a capital of $100 billion; China has the largest share of $41 billion and South Africa the smallest with $5 billion, while the rest of the countries will contribute $18 billion each. 

Unlike the World Bank and the IMF, where the U.S. dominates the policies by virtue of having the power of veto, in the NDB every country has equal number of votes. Although China, being the largest country in the group, can exercise more control, it wants to stay away from any kind of dominance in the group, making way for the other four countries to work in a democratic way instead of getting bogged down in political intrigues. 

Although currently only the BRICS members have access to the funds available with the NDB, they can allow other countries to join the NDB with or without having voting rights. However, BRICS’ capital share cannot fall below 55 percent. This implies that if India can ask other countries to join and get their voting shares in the NDB then whosoever has more countries on its side can manipulate the decisions of giving loans by having more votes.

Considering the financial uncertainties in the global markets it is hoped that the NDB will stabilise financial flows to the developing economies which were volatile during the recession. Stability in financial flows will eventually stabilise the economy of BRICS countries. This will, in turn, put these countries on the path of sustainable growth in the long run. 
It is a fact that the dictatorial strings attached to World Bank and IMF loans are so harsh that they don’t allow the recipient countries to formulate their own policies. Both institutions put certain conditions to release each instalment of loans. With the emergence of the NDB, the dependence of the world community on the WB and the IMF will decrease over time. 

With a higher sustainable growth, India’s status in the region, especially among the SAARC countries, is likely to increase. While it will be in a position to provide funds on its own, other SAARC countries can also benefit from the NDB by joining it, especially to solve their short-term balance of payment problems.

It is still unclear what currency will be used for the bank’s reserves – U.S. dollar or Chinese yuan. Apparently, two major countries, China and India, have a good amount of foreign exchange reserves in U.S. dollar. Nevertheless, India’s balance of payment is consistently negative, while China has been enjoying a current account surplus for many years now. If Yuan is selected as the reserve currency then the countries can easily borrow from China irrespective of the U.S.’ influence to release Chinese foreign exchange reserves held at the U.S. treasury. Moreover, India can boost trade with China and finance its infrastructure projects using Chinese technologies. 

Even if the reserve currency is U.S. dollar, for not making China more powerful in the BRICS, the hypothesis of sustainable financial flows irrespective of global recession becomes even stronger given the argument that China holds a good amount of reserves and can ensure cash flows if any country is in dire need. China is also the maximum contributor in the CRA fund. 

India will get several benefits by obtaining loans for infrastructural development. It could be energy-related projects, roads or educational development. These projects will not only boost India’s GDP growth but will also attract people from all over the world as well as from SAARC countries to India – although Pakistan may be an exception. Moreover, it will also raise the standard of living of the ordinary Indian. 

Accordingly, India will be in a good position to set up a SAARC development bank which is also on the wish list of Indian Prime Minister Narendra Modi. The country can act as an experienced member and take the driver’s seat if such a bank is set up. 

It is clear that India’s status will considerably increase in the region, especially among the SAARC countries, due to the NDB. Thus India needs to be extra careful in formulating its foreign as well as domestic and economic policies as they can affect the smaller countries in the region. And if it wants to further bolster its status in South Asia, what other way to do it than forming a SAARC bank!

Article appeared in the South Asia Magazine in September 2014
http://www.southasia.com.pk/region-india.html

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