BRICS Bank

The New Development Bank (NBD) also popularly known as the BRICS Bank is just an additional multilateral development bank. In itself, it is simply an ordinary multilateral development bank. A study conducted by the Association of Development Financing Institutions[1] in Asia and the Pacific estimated that there are at present 550 development banks in the world out of which 32 are multilateral, regional, or sub-regional development banks, the rest are national banks. The leaders of Brazil, Russia, India, China and South Africa, popularly known as the BRICS, a world coined by Jim O’Neill[2], came together in Florenza to establish the New Development Bank. Therefore, the news of yet another development bank should not lead to much excitement.

Yet, the NBD has created much enthusiasm, for mostly invalid reasons as will be discussed below. In order to critique the bank, first, it is important to understand the dynamics of the bank. Officially established on 15 July 2014, the bank has an authorised capital of $100 billion and a $50 billion initial subscribed capital. The five countries have an equal share paid-up capital in the form of actual equity or hard money of $10 billion and $40 billion as guarantees. According to the Bank’s Charter founding members will remain dominant ad infinitum, as their combined share can never fall under 55%. Apart from having an equal paid-up capital, the Bank also seeks to be equal in other aspects. While China got to host the Bank’s headquarters, India got to be the chair of a rotating presidentship. South Africa would host the first regional office; a Russian would be the first chair of the board of governors whereas the first chair of the board of directors will be from Brazil.

So far so good, however, it is also important to understand the reason why the Bank was born. The Bank as it is argued was created out of frustration.[3] As the Financial Times analysis suggests, the ineffectiveness, or rather neglect of the IMF has stimulated the growth of the NBD. The Asian countries, or rather the developing world in particular dislikes the IMF.  Throughout its history, it has insisted on ruinous austerity packages, which have resulted in more damage rather than improving the situation. However, after the 2008 financial crises, it happily engaged in fiscal and monetary laxity for the west. In addition, its quota system, which determines the vote of each country, does not reflect the true economic power balance in the world.

The BRICS nation, in total account for a meagre 10.3 percent, whereas their total output or exports of the nation’s accounts for more than a fifth of the global exports. In contrast, European countries have 27.5 percent votes, however, they contribute only to 18 percent of output. Therefore, as seen from the BRICS’ perspective, the global financial system is stacked against them, which is why many commentators welcome the BRICS Bank. They field various reasons for it. Firstly, the BRICS Bank will add to the role of the countries in the global economic power struggle, which has been monopolized by the West. The World Bank operates on the principle of votes according to capital share, which works as a disadvantage to the developing countries. Their weight will increase if they themselves had a development bank reducing their reliance on the World Bank or IMF. Well, the above analysis is not just false, but serves as a disadvantage at best. There are various reasons why the NDB may not live up to the excitement it generated after its announcement. I will seek to prove the statement by giving three reasons as to why the Bank has more disadvantages than advantages.

First, the BRICS Bank is not equal in all aspects. At the Fortaleza meet in July, the BRICS countries also decided on the Contingent Reserve Arrangement (CRA). The CRA would be committed with $100 billion. It has been defined as, “a framework for the provision of support through liquidity and precautionary instruments in response to actual or potential short-term balance of payment pressures.”[4] For the CRA, neither the paid-up capital is equal nor is the policy of ‘one vote one country’. The $100 billion sum is contributed by $41 billion from China, $18 billion from Russia, Brazil and India and $5 billion from South Africa. Therefore, their respective votes become 39.95% for China, 18.10% equally for Russia, Brazil and India and 5.75% for South Africa.[5] Many have critiqued this provision as being a mere replica of IMF[6], the organization that its founding members seek to stay away from. The CRA also serves for Chinese hegemony. As was considered for the IMF and the World Bank, which seek to put forth American interests, the BRICS Bank seems to put forth Chinese interests. When seen from the present perspective, the Chinese Banks have been lending to various African nations and also many developed nations. In addition, China is trying its best to have the BRICS Bank denominate in the Chinese Yuan. Therefore, the Bank is nothing but a mere replica of the IMF in this regard. The latter served the American hegemony, whereas the former is to serve the Chinese interests.

Second, the NDB not only allows UN members to be a part of the Bank, but also provides for a category of non-borrowing members, which can as a group acquire, with the consent of the board, shares that gives them voting power of up to 20% of the total. This can be preposterous when seen from a purely monetary perspective. In addition, it also gives developed countries a wild card entry into the bank’s decision-making process, the same developed nations that the founding members feel neglected by. If this was not enough, the Bank also comes with the declared possibility that the international financial institutions would be granted the status of observers in the meetings of the board of governors whose presence and voice would be acknowledged. Therefore, it is very likely that these financial institutions or developed nations could exploit their presence in the Bank and their differences in the degrees of developed countries dependence on the BRICS nations and thus would effectively reduce the possibility of the NDB as being an “alternative” institution, something the founding members based the idea of the Bank on.[7]

The third critique stems from Article 5 of the treaty establishing the CRA.[8] The said article specifies what the maximum borrowing limits, and the terms of borrowing are, very closely following the model of the Austerity Package by the IMF. The article stipulates that the maximum borrowing limit of a member, which is to be determined as a multiple of the financial commitment made by each of the members. Therefore, since China is the largest contributor to the CRA, it will have the largest borrowing limit as a member. However, even of the said borrowing limit, a member cannot borrow the entire amount. This maximum limit is divided into two parts, a delinked portion, and another IMF portion. Only an access to 30% (the delinked portion) of this maximum is available to a member based on the agreement. The remaining 70% (the IMF-linked portion) can be accessed in part or full only after obtaining permission from the IMF. If the Requesting Party seeks to borrow more than 30%, them it has to provide evidence of an on-track arrangement with the IMF. The IMF would then impose conditionality on the borrower, like the Austerity Packages, and on compliance with the terms and conditions of the arrangement with the IMF and the Requesting Party, it would be able to borrow in excess of 30% of its maximum borrowing limit.

This apart from reducing the credibility of CRA and the Bank also reduces the chances of the Bank becoming an alternative to the IMF in offering balance of payments support to a distressed economy, a reason for its existence. The CRA, if put in proper context, it can be said as being subordinate to the IMF, which is more like an appellate authority.

As noted, there are various reasons that suggest that the NDB and the CRA are mirror images of the IMF. Therefore, the formation of the Bank in itself seems to be more of a political stunt and a display of resentment of the Bretton-Woods institutions. It may also reflect the inherent desire of individual countries to seek leverage from this show of strength and ask for more say in IMF or World Bank. The desire to redress the obvious inequities in the global financial system seems far less important and therefore, the purpose of the Bank’s very existence is its demise and its purpose negligent.

List of References

1. Article 5, Treaty for the Establishment of a BRICS Contingent Reserve Arrangement, available at: http://brics.itamaraty.gov.br/media2/press-releases/220-treaty-for-the-establishment-of-a-brics-contingent-reserve-arrangement-fortaleza-july-15, (Last visited: 14 October 2021)
2. Chandrasekhar, C, Banking with a Difference, Economic and Political Weekly, vol. XLIX no. 32
3. Dosani, Sameer, BRICS Bank: New Bottle, How’s the Wine, Bretton Woods Project, February 2014.
4. Patnaik, Prabhat, The BRICS Bank, People’s Democracy, Vol. XXXVIII No. 30, July 27, 2014.
5. Pena, Alberto, Principles of Development Banking, available at: http://www.adfiap.org/docs/PRINCIPLES_OF_DEVELOPMENT_BANKING.pdf, (Last visited: 14 October 2021)
6. Pilling, David, The BRICS bank is a glimpse of the future, Financial Times, August 4, 2014.
7. Scaffardi, Lucia, The BRICS In The Spotlight: A Research Agenda, 1 BRICS L.J. 112 2014

[1] Alberto D. Pena, Principles of Development Banking, available at: http://www.adfiap.org/docs/PRINCIPLES_OF_DEVELOPMENT_BANKING.pdf, (Last visited: 14 October 2021)

[2] Sameer Dosani, BRICS Bank: New Bottle, How’s the Wine, Bretton Woods Project, February 2014.

[3] David Pilling, The BRICS bank is a glimpse of the future, Financial Times, August 4, 2014.

[4] C P Chandrasekhar, Banking with a Difference, Economic and Political Weekly, vol. XLIX no. 32

[5] Lucia Scaffardi, The BRICS In The Spotlight: A Research Agenda, 1 BRICS L.J. 112 2014

[6] Prabhat Patnaik, The BRICS Bank, People’s Democracy, Vol. XXXVIII No. 30, July 27, 2014.

[7] ibid. supra n 4.

[8] Article 5, Treaty for the Establishment of a BRICS Contingent Reserve Arrangement, available at: http://brics.itamaraty.gov.br/media2/press-releases/220-treaty-for-the-establishment-of-a-brics-contingent-reserve-arrangement-fortaleza-july-15, (Last visited: 14 October 2021)