BRICS BANK

15 July 2014
08:22
Reasons for setting up new Bank:
1. Fed up with the heavily dominated US & Western Influence over global financial
system and have been oppressive against developing countries, 5 emerging markets
come together to create "alternatives to existing world order"; failure of richest
countries led by US to create governance reforms may have been major trigger for this
move by countries accounting for 20% global output to push for a lender who is more
sympathetic to the causes of developing countries
2. BRICS bank as an alternative to WB & IMF which is BRICS countries have a "shared
desire for want of bigger voice in global economic policy"; each of them has had
painful experiences with US dominated global financial system in the past: Contending
with economic sanctions with Western powers, forced to make strict budget cuts or
accept other obligations for emergency IMF loans; It basically is a safety net if they fall
out with the west.
Facts:
1. BRICS bank (to be named as New Development Bank (NDB)) - All 5 countries to invest
equally now (initial funding) for this bank while other developing countries can join
later.
2. $100 billion fund to fight financial crises and create BRICS version of mini-IMF
3. China will have largest share of new reserve fund-called Contingency Reserve
Arrangement with $41 billion by China, $18 Billion By India, Brazil & Russia & $5 billion
by South Africa
Issues agreed upon so far:
1. Bank will be fully capitalized with $100 billion in long term; other developing countries
to be roped as shareholders
2. Terms of $100 billion Contingency Reserve Arrangement(CRA) have been decided
3. BRICS will hold a minimum stake of 55% at the lending stage
4. HQ to be in Shanghai, China (which is a huge business hub) with a regional center in
each of the founding member countries; First President to be from India and to be
shared by rotation thereafter every year.
Positives:
1. Provides extra measure of comfort with for emerging markets (including India) who
have experienced volatility in currency markets after capital outflows in recent times.
2. An alternative to WB which provides loans for infrastructure projects across
developing world.
3. It will work like swap arrangement between 5 countries; limits on how much funds can
be accessed based on several parameters.
4. Additional buffer ( analogous to India's arrangement with Japan) will perhaps obviate
the need to approach global institutions/markets in case of liquidity squeeze situations
=> quick recourse to short term liquidity management which can stave off pressure of
local currency and provide comfort to markets.
5. In short term window: can help do away with regressive moves like clamp down on
imports & exports during bouts of liquidity squeeze and volatility.
6. In Medium Term: potentially help global acceptance of these currencies as trade &
output grows.
7. $50 billion capital, sizeable fund to finance infra projects in developing countries.
8. Funding could be channeled towards even social sector programs and needs of
developing countries unlike that of WB.
9. This move to promote new bank may nudge the Washington based lenders towards
reforms especially on voting & shareholding rights which is crucial for India,
considering it had been a founding member of these institutions six decades back.
Negatives:
1. Should not turn out to be a replica of WB & IMF in its efforts to be an alternative to
them.
2. Rate of borrowings from this new bank in comparison with WB & IMF over longer
tenure still unknown; curious to see if they will offer competitive rates compared to
WB & IMF.
3. China has world's largest pile of forex reserves; Ideally china must not borrow from
this bank. If starts borrowing, then there will be less funds remaining for capital
starved nations.
4. Terms of lending to be key issue; Bretton Woods Institutions have AAA credit rating.
Hence, can tap into markets for to raise funds at very low rates. This may not be
possible with BRICS bank. This bank may not obtain such a rating and hence
borrowings would turn out to be costlier.
5. Terms of loan agreement will be a tricky issue. WB & IMF borrowings are related to
certain strict conditions. Negotiating such conditions would be challenging for BRICS
bank.
6. Threat of Chinese domination & influence due to its economic might over this bank
analogous to Washington's influence over WB & IMF. These leads competitive vying
for posts and influence between member countries themselves.
7. Striking differences in economies & politics of the member countries.
8. China could bring other smaller countries (from its sphere of influence) for loans to
project its soft power and increase their influence over these countries.