Dubai: The anti-dollar alliance among the Brics [Brazil, Russia, India, China and South Africa] has resulted in the successful launch of the New Development Bank and the Contingent Reserve Arrangement (CRA), a stabilisation fund of $100 billion in reserves.

The CRA, along with the New Development Bank (previously called the Brics Development Bank) is launched as alternative to the International Monetary Fund (IMF), the World Bank and other regional development financial institutions as a pledge to help one another in times of financial crisis.

The birth of the new development bank is a reflection of the growing frustration among developing nations on the dollar denominated global financial system where the multilateral agencies are controlled by the rich nations.

The World Bank and the IMF have come under criticism from the rapidly developing Brics, who together account for 20 per cent of global gross domestic product (GDP) and 40 per cent of the world’s population. In their view, the two global institutions are dominated by the rich nations of the G7 and attach stringent conditions to their lending.

Recent efforts to reform the 70-year-old institutions appear to have stalled. “Though IMF exists to provide short-term balance of payments financing, such funding is often insufficient, and is often tied to inappropriate conditionality. There is, therefore, a clear gap for a broad-based Southern-led monetary fund, that can be led by the BRICS, and that builds on the experience of, and complements existing regional institutions,” wrote Stephany Griffith-Jones in a recent discussion paper from United Nations Conference on Trade and Development (Unctad).

Examples of the existing institutions include the original Chiang Mai Initiative — which has evolved into the 10+3 foreign-exchange reserves pool established by the Association of South-East Asian Nations (Asean) plus China, Japan and the Republic of Korea, with a size of $240 billion, called CMIM, or Chiang Mai Initiative Multilateralisation — and the smaller-scale Fondo Latinoamericano de Reserva (FLAR).

The CRA — a stabilisation fund is a coordinated central bank fund which is set up to provide mutual liquidity in the event of a crisis, probably without the involvement of the IMF.

China will contribute $41 billion to the total pool; South Africa will give $5 billion; and Russia, Brazil and India will contribute $18 billion each. Each country would hold the amount in their own reserves. In the event of a crisis, the pool would be used to buy up the local currency of country in trouble to check the outflow of capital. The five countries will be able to receive a third of their contributions on request.

But recent history of fund outflows from emerging markets show CRA has an important role to play. Many of the Brics countries were hit by a wave of instability following the US Federal Reserve’s announcement of tapering of monetary stimulus.

“The CRA is an easy win for a group that is increasingly accused of being a talk show. It provides a concrete course of action that the group can take without much difficulty,” said Christopher Wood from the South African Institute of International Affairs.

 

Funding crunch

 

The rationale for the BRICS development bank has been built focusing on the major needs in infrastructure and more sustainable development. Current annual spending on infrastructure in Brics is estimated to reach around $0.8—0.9 trillion, leaving an estimated gap of unmet needs of between $1.0—1.4 trillion. Overseas Development Aid and existing Multilateral Development Banks finance provide only an estimated $40—60 billion annually.

“The main, though not the only, reason for creating a Brics development bank is that it can contribute to bridge that crucial gap. The fact that the estimated financing gap is so large is an important reason for providing the Brics bank with a large capital endowment, said Griffith-Jones.

Another reason to create a Brics bank is to give emerging and developing countries greater voice in the development finance architecture, at a time when they clearly have the financial resources to do so.

From the perspective of the Brics themselves, as well as other potential contributors of capital to the new bank, there are clear advantages in putting a small part of their existing reserves into long-term investment in developing countries, as this offers them clear benefits of diversification, as well as improving facilities for infrastructure in countries with which they increasingly trade and invest in.

At first, the bank will start off with $50 billion in initial capital. The New Development bank is expected to make its first loans in 2016 and will focus on bi- or multilateral development projects involving companies from participant countries.

Politically, economically and geographically, the countries have little in common. The creation of the Brics bank will almost surely create competition for both the World Bank and other similar regional funds. Despite their political and economic differences, the one thing these countries do agree upon is that rich countries have too much power in institutions like the World Bank and the IMF.

 

Box:

 

In numbers

 

Brics on Tuesday signed the long-anticipated document to create the $100 billion Brics Development Bank and a reserve currency pool worth over another $100 billion.

Each Brics member is expected to put an equal share into establishing the start-up capital of $50 billion with a goal to reach $100 billion. The Brics bank will be headquartered in Shanghai, India will preside as president the first year, and Russia will be the chairman of the representatives.

The $100 billion crisis lending fund, called the Contingent Reserve Arrangement (CRA), was also established. China will contribute the lion’s share, about $41 billion, Russia, Brazil and India will chip in $18 billion, and South Africa, the newest member of the economic bloc, will contribute $5 billion.