BRICS Development Bank and non-BRICS Nations.
BRICS
Development Bank and non-BRICS Nations.
Dr Ram P. Mainali*
Sixth summit of BRICS states; Brazil, Russia, India, China and South Africa, held in Fortaleza, Brazil has agreed to create a new development bank, formally known as BRICS development bank, with an authorized capital of $100 billion. According to the treaty signed-up in Fortaleza, the bank will be headquartered in Shanghai and the management, at the beginning, will be headed by the chief executive officer (CEO) from India. China alone has agreed to contribute $ 41 billion while Brazil, Russia and India will be investing $18 billion each. The least investor among BRICS states, South Africa, will contribute $5 billion onto proposed authorised capital. The bank is scheduled to start lending and opening of its shares for non-BRICS countries from the beginning of 2016.
The main objective of the bank is set to provide funding for the development of infrastructure in member countries and also to create a contingency reserve worth of $10 billion in order to tackle potential adverse financial shocks would be associated with it's member countries. Furthermore, the bank intends to provide assistance to other non-member nations suffering from economic volatilities. Therefore, the scope of the bank is not limited to the economic development of BRICS nations alone. In fact, the bank seems to complement existing multilateral financial institutions such as the World Bank (WB), Asian Development Bank (ADB) and International Monetary Fund (IMF). It has thus propped up an optimism for receiving fund by non-BRICS countries for long term investment in infrastructure development and thereby to achieve more sustainable economic development in the years to come.
The bank is originated on the ground-reality of the deficiency of funding for the infrastructure development particularly in BRICS states and other developing economies. Bhattachrya and Romani, who were the most influential personalities for its establishment have estimated a deficit of US$ 1 trillion a year for the sustainable infrastructure development in this region. They highlight that the rural-urban migration taking place in emerging economies has put significant upward pressure on the need of investment in urban infrastructure in the absence of which poor are facing lack of access to basic services such as electricity and clean drinking water. Therefore, there is a significant funding gap in the development of infrastructure in this region which takes into account the pre-condition of the modality of modern development such as the need of growth, structural change, inclusion as well as flexibility.
An additional motivating factor for the establishment of this bank is to protect emerging and developing economies from short-term liquidity problems. IMF provides assistance to its member countries in order to resolve such problems by providing short-term financial assistance. However, IMF's provision for short-term financing in one hand is realised to be insufficient. In the other hand, such financing are often tied to indecent conditionality even at the time of crises. Southern-led monetary fund, which will be led by BRICS, can fill these gaps. Additionally, an important features of this bank is proclaimed as to arrange funding for project preparation which is not taken into account by existing banks despite the fact that they are significantly investing in the infrastructure development. It is likely to play an important role in running development projects in emerging and developing economies smoothly since studies have shown that the cost of preparation of a project alone stands at 5-10 percent of the total cost.
Developing and underdeveloped economies including Nepal are in immense need of funding to invest in infrastructure development which can be financed either from national budget, private sector and international financial market. However, the first source of finance is constrained by macroeconomic consideration while the second, the private finance, is problematic because of its pro-cyclical nature. Therefore, entire south economies are heavily dependent on the third source financing for their infrastructure development. Particularly in Nepal, foreign aid, multilateral and bilateral assistance, constitutes almost thirty percent of the total budget and share of which increases to twofold if it is compared only with the development budget. Nepal is also known as over-aided country with minimal achievement of single objective of poverty reduction (PF). There are many reasons such as, unnecessary conditions imposed by donors, uncoordinated interventions by donor communities, country's incapability for aid management and lack of good governance etc. which led Nepal to the failure of achieving her single development agenda of reducing PF at desired level. The former two factors can be attributed to the prevailing monopolies in the international financial market while the latter two are country-specific problems. Therefore, developing countries including Nepal are likely to take advantage from the establishment of BRICS bank by enjoying a relatively lower level of former two factors provided country-specific problems are resolved.
Accomplishment of these expectation, however, depends on the lending capacity of forthcoming bank and also on its governance structure. From the viewpoint of authorised capital pronounced by BRICS states, the bank will form a capital endowment of US$ 20 billion for lending at the beginning. It is expected to reach at US$ 350 billion after 20 years which allows bank to make an annual investment of US$ 34 billion. These figures are estimated by Stephany Griffith-Jones assuming that the bank will enjoy a leverage ratio similar to the development bank of Latin America- CAF. Additionally, co-financing by private and public lenders as well as receiving fund from international financial markets can significantly increase bank's investment capacity since BRICS states are highly rated by credit rating agencies. Therefore, new establishment is expected to provide a significant amount of capital for the unmet development needs faced by BRICS and other developing economies at present.
Non-BRICS nation's expectation from proposed bank can also be influenced by conditionality they might face in future while receiving funds which can partially be attributed to the bank's governance structure. It can clearly be envisaged that China will retain main control over the bank with a significant influence by India. Similarly, policy-influences by other BRICS states can't be ruled out. These imply that the representation in governance by other non-BRICS states will be minimal even if certain share is distributed to them. This indicates that the establishment of bank may offer no significant difference for non-BRICS countries including Nepal from the view point of availability of funds free of unnecessary conditionality. Nevertheless, it can be anticipated that entire emerging and developing economies can be benefited from its establishment for two reasons. Firstly, it is likely to strengthen the voice of emerging economies since it was initiated because of the realisation of insufficient lending and imposition of unnecessary conditions while providing financial assistance by existing financial institutions. The second is the supply side effect. In other words, a new establishment of multinational financial institution is also likely to weaken the power of existing institutions in shaping world financial market which in turn lowers the magnitude of superfluous conditions being faced by fund receiving countries at present.
This analysis
shows that BRICS bank will significantly widen the scope of receiving financial
assistance not only for BIRICS states but also for other emerging and developing economies. Such assistances
are also likely to tied with less conditionality relative to those being
imposed by existing financial institutions. However, the magnitude of benefit,
particularly for non-BRICS nations,
ultimately depends on the capacity of identifying their unmet
development needs and the utilisation of available fund properly.
Comments
Post a Comment