Francisco A. Laguna & Annapurna Nandyal
In July, Brazil hosted two important events, each significant in its own way: the FIFA World Cup; and the Sixth Annual Summit Meeting of Emerging Economies of Brazil, Russia, India, China and South Africa (BRICS). The members of BRICS meet annually to discuss the world economy, global development and the further strengthening of the BRICS group. Since its inception in 2009, BRICS have called for a greater role in international financial institutions like the World Bank and International Monetary Fund (IMF), as well as transparency in electing the leaders of these institutions. Despite robust economies, BRICS members continue to play a relatively minor role in global finance decisions. In a first step to provide an alternative to “Western-dominated” international financial institutions, the BRICS members announced a proposal to open the New Development Bank (NDB) during their 4th annual summit, held in Delhi, 2012.
The idea of establishing the bank was first proposed by India, and it took two years for members to cumulate the details. On 15 July 2014, BRICS members signed a document to create the NDB, formerly referred to as BRICS Development Bank. The bank headquarters will be based in Shanghai, China and will have a president (an Indian for the first six years), a Board of Governors Chair (a Russian) and a Board of Directors Chair (a Brazilian). Similarly, an African regional center bank called the “New Development Bank Africa Regional Centre” will be based in Johannesburg, South Africa. The NDB is set up with initial capital of $ 50 billion with contributions of $ 10 billion from each of the five country members. No member can increase its share of capital without the agreement of the remaining four. Unlike, the World Bank and IMF, all five NDB members will have equal voting power, and no country will have veto powers.
A potentially important economic element is the NDB’s Contingent Reserve Arrangement (CRA): a currency pool of over $ 100 billion meant to protect bank members during times of global liquidity pressures. For example, some national currencies are directly affected by the volatility of US dollar, which, in turn, affects the country’s domestic economy. In such situations, the CRA will lend monies to ease balance of payment problems. Unlike the members’ initial contribution to capital, CRA is being funded 41% by China, 18% by each of Brazil, India and Russia, and 5 percent by South Africa.
Many view the NDB as a direct competition to the World Bank and IMF, and specifically Western-dictated policies. Voting power in the WB and IMF is based on the member’s overall economy. The top five countries (US, Japan, Germany, UK and France) hold more voting power than rest of the world. Rising powers like China and India have expressed concern over their minor role in these institutions. BRICS members contend that the NDB will work on the sidelines with the World Bank and IMF and focus on financing new infrastructure projects and promoting regional trade.
The NDB will also allow new members, such as emerging and developing countries, to join. This will broaden the membership of the bank and improve overall governance. Geographical coverage lending will be expanded to benefit low- and middle-income countries from different regions. The implications of setting up of the NDB are numerous. If executed properly, the establishment of the NDB could result in surprising opportunities and consequences.
TransLegal has correspondent offices in each of the BRICS. Contact us with your questions concerning doing business in Brazil, Russia, India, China and / or South Africa.