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The New BRICS Bank

The New BRICS BankWill It Reshape Global Financial System?

On July 21, the five BRICS countries — Brazil, Russia, India, China and South Africa — formally launched the New Development Bank (NDB) at its new Shanghai headquarters. The NDB is the second development bank, after the 57-member Asian Infrastructure Development Bank, backed by Beijing that seeks to create alternatives to the existing US-dominated World Bank and International Monetary Fund —  the Bretton Woods institutions. The NDB promises to provide not only a new source of funding for infrastructure projects in BRICS countries but to also represent a new way of providing such funding. In this Shanghai-based bank, unlike the World Bank which assigns votes based on capital share, each participant country will be assigned one vote, and none of the countries will have veto power.

Why was NDB Created?

A former Goldman Sachs Chief Economist and the incumbent Commercial Secretary to the Treasury of the United Kingdom, Mr Jim O’Neill coined the term BRIC in 2001 in a paper entitled ‘The World Needs Better Economic BRICs’ written for Goldman Sachs’s “Global Economic Paper” series. Jim did not initially count South Africa among the major emerging economies.

Excluding South Africa, in 2014, the four original BRIC countries comprised more than 3 billion people or 41.4 percent of the world’s population, covered more than a quarter of the world’s land area over three continents, and accounted for more than 25 percent of global GDP. The BRICS countries have always had quite different economies but a common feature has often been a high rate of savings. Thus, London School of Economics Professor Nicholas Stern and former World Bank chief economist Joseph Stiglitz came up with the idea of a new development bank at Davos in 2011 as a way for emerging markets with large trade surpluses to recycle those savings into productive investments in their own countries, such as infrastructure.

Another reason behind the establishment of the NDB lies in the BRICS countries’ frustration in the World Bank’s and the IMF’s delay in reforming their procedures so that voting weight and influence are more commensurate with economic size and contributions to such bodies. For example, the BRICS nations account for more than 25 percent of global economic output, but have 10.3 percent of quota in the IMF. European countries, on the other hand, have 27.5 percent of the voting weight, but make up 18 percent of global economic output. Compounding this inequality are archaic rules that require a European to always head the IMF and an American the World Bank. Against this context, the NDB represents, together with the Beijing-based AIIB, a financing alternative to the Bretton Woods institutions of the IMF and the World Bank that have underpinned the global economic order since their founding in 1944.

Establishment

At the fourth BRICS summit that was held in New Delhi, India in 2012, the idea for setting up the bank was officially proposed. In fact, the creation of a new development bank was the main theme on the agenda for the summit. So, BRICS leaders agreed in principle to set up a development bank during the 5th BRICS summit in Durban, South Africa on 27 March 2013. However, Articles of Agreement were signed during the sixth BRICS summit in Fortalezza, Brazil, on 15 July 2014 and these entered into force in June 2015 following submission by each BRICS country of documents of acceptance, ratification or approval.

At the Fortalezza Summit, Chinese capital Shanghai was selected as the headquarters after competition with New Delhi and Johannesburg. Moreover it was decided that an African regional center will also be set up in Johannesburg, South Africa. As far as the appointments of Bank officials is concerned, the BRICS countries decided to choose the first president from India, the inaugural Chairman of the Board of Directors from Brazil, and the inaugural chairman of the Board of Governors from Russia. So accordingly on 11 May 2015, K. V. Kamath was appointed as President of the Bank.

Initial Capital and Governance

The New BRICS Bank The NDB’s initial authorized capital equals US$100 billion. The BRICS countries have agreed that the Bank’s subscribed capital would amount to $50 billion, of which only $10 billion would actually be paid in (each of the BRICS member countries would contribute $2 billion within a seven-year period according to an established schedule).

The NDB has a Board of Governors, a Board of Directors, a President and Vice-Presidents. The President of the Bank will be elected from one of the founding members on a rotational basis, and there will be at least one Vice-President from each of the other founding members. India’s K.V. Kamath, the non-executive chairman of ICICI Bank and a former chairman of Indian IT major, Infosysis, has begun his term as the Bank’s inaugural President. He will be followed in the office by a Brazilian and then a Russian. A Chinese national will not lead the Bank until 2021.

The five BRICS nations will have equal voting rights and will give a total of $50 billion to fund the Bank. The members will also establish a reserve currency pool, worth more than $100 billion, to be known as the Contingent Reserve Arrangement that has been designed to allow the BRICS countries to draw funds during a crisis. In particular, if problems arise in providing dollar liquidity to national financial systems, BRICS central banks will support the partner by transferring a sum in US dollars on agreed serviceability and repayment terms. China has pledged to contribute $41 billion, Brazil, India and Russia will each contribute $18 billion, while South Africa will contribute $5 billion. The Bank is expected to make its first loans by April next year.

Mandate

The Bank has a mandate to finance infrastructure and sustainability projects in member countries — and eventually other developing nations — through loans, guarantees, credit and equity investments. It will also provide finance to BRICS and other emerging and developing countries “to complement the existing efforts of multilateral and regional financial institutions for global growth and development.” The NDB’s mandate clearly indicates that it should be involved in projects where private capital is not capable or unwilling, as the case may be, to make major investments due to potential low profitability and long payback periods.

Focus and Approach

The NDB’s priorities will be in line with national development banks of member countries, including the removal of infrastructural constraints for growth. There are signs that energy will be a key focus of activity for the Bank, as well as infrastructure projects that fall within China’s ‘One Belt, One Road’ initiative for improving connectivity in Eurasia.

The NDB will be guided by four defining principles: It will be professional, efficient, transparent and green.

“Professional” to reassure the international community that the NDB will be properly run as a global rules-based institution, even with a focus on “next practice, not best practice.”

“Efficient” echoes the AIIB’s desire to be “lean” — both institutions will have a leaner management structure than the World Bank and aim at faster decisions.

What is meant by “transparency” remains unclear, as do related issues concerning the appropriate level of disclosure to the public of decisions and the processes that lead to such decisions.

“Green” reflects a desire to uphold environmental standards and place renewable energy and clean technologies at the core of the NDB’s business model. In that vein, India’s Premier Narendra Modi has stated that he wants the first project of the NDB to be a renewable energy project.

NDB vs. AIIB

Comparisons between the NDB and the recently established Asian Infrastructure Investment Bank are inevitable. The broader AIIB membership will pressure that institution to uphold international rules and norms relating to bribery and corruption, such as the OECD Anti-Bribery Convention (1997) – based on the US Foreign Corrupt Practices Act of 1977 – and the IFC Anti-Corruption Guidelines. That pressure will be missing for the NDB and it remains to be seen what rules (if any) the Bank will adopt in respect of bribery and corruption, though it has committed in general terms to transparency.

NDB vs Global Financial System

There are a few other regional development banks, like Japan-led Asian Development Bank, operating for almost the same purpose around the world, but the BRICS’ New Development Bank (NDB) will be a global bank in the real sense. The world’s emerging economies will no longer depend on the US-controlled World Bank for concessionary loan. The NDB will open up another window for fund for the emerging economies.

It is expected that the proposed Contingency Reserve Arrangement (CRA) will function to an extent like the IMF and will include Chinese and other important currencies in its reserve account. So, with the operation of NDB, there will be no shortage of concessionary loans for the emerging economies.

To sum up the whole discussion, it is apt to say that the creation of NDB is indeed a good omen for the developing countries as it has all the potential to free them from the claws of IMF and World Bank. This will see great changes and transformation in the global financial system.

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