Current Affairs
New Development Bank
The New Development Bank (NDB), formerly referred to as the BRICS Development Bank, is a multilateral development bank operated by the BRICS states (Brazil, Russia, India, China and South Africa) as an alternative to the existing US-dominated World Bank and International Monetary Fund.
The bank is set up to foster greater financial and development cooperation among the five emerging markets. Together, the four original BRIC countries comprise in 2014 more than 3 billion people or 41.4 percent of the world’s population, cover more than a quarter of the world’s land area over three continents, and account for more than 25 percent of global GDP. The bank will be headquartered in Shanghai, China. Unlike the World Bank, which assigns votes based on capital share, in the New Development Bank each participant country will be assigned one vote, and none of the countries will have veto power.
The New Development Bank was agreed to by BRICS leaders at the 5th BRICS summit held in Durban, South Africa on 27 March 2013.
On 15 July 2014, the first day of the 6th BRICS summit held in Fortaleza, Brazil, the group of emerging economies signed the long-anticipated document to create the $100 billion BRICS Development Bank and a reserve currency pool worth over another $100 billion. Both will counter the influence of Western-based lending institutions and the dollar. Documents on cooperation between BRICS export credit agencies and an agreement of cooperation on innovation were also signed.
Shanghai was selected as the headquarters after competition from New Delhi and Johannesburg. An African regional center will be set up in Johannesburg.
The first president will be from India, the inaugural Chairman of the Board of directors will come from Brazil and the inaugural chairman of the Board of Governors will be Russian.
Structure and objectives
Development capital
The bank's primary focus of lending will be infrastructure projects with authorized lending of up to $34 billion annually. South Africa will be the African Headquarters of the Bank named the "New Development Bank Africa Regional Centre". The bank will have starting capital of $50 billion, with capital increased to $100 billion over time. Brazil, Russia, India, China and South Africa will initially contribute $10 billion each to bring the total to $50 billion. Each member cannot increase its share of capital without all other 4 members agreeing. This was a primary requirement of India. The bank will allow new members to join but the BRICS capital share cannot fall below 55%.
Contingent Reserve Arrangement (CRA)
The CRA is a framework for the provision of support through liquidity and precautionary instruments in response to actual or potential short-term balance of payments pressures.
The objective of this reserve is to provide protection against global liquidity pressures. This includes currency issues where members' national currencies are being adversely affected by global financial pressures.
The Bank would also provide assistance to other countries suffering from the economic volatility in the wake of the United States' exit from its expansionary monetary policy.
This fund will consist of $10 billion of "paid-in capital" ($2 billion from each member to be provided over seven years) and an additional $40 billion to be "paid upon request". Out of the total initial capital of $100 billion, China will contribute $41 billion, Brazil, Russia and India would give $18 billion each, and South Africa would contribute $5 billion. It is scheduled to start lending in 2016
The Agreement will enter into force and the Bank will begin operations only after all member countries deposit their instruments of ratification with Brazil. It will also provide the force of law to the commitments made by India in the inter-governmental agreement of the NDB including privileges and immunities that are to be extended to the Bank and its employees as specified in the Articles of Agreement.
Central Banks of the member countries will also have to finalize an Inter-Central Bank Agreement containing the operational details of swap transactions and the Standing Committee`s Operational Procedures (SCOP) before the arrangement can be operational.
Signing of the Agreement for the establishment of the New Development Bank is expected to allow India to raise and obtain more resources for the much needed infrastructure development, the lack of which is coming in the way of inclusiveness and growth as of now. Besides, the governance structure and decision making in the Bank will be equitable unlike the existing multilateral development banks.
So far infrastructure financing in India has been done from two public sources: Government and existing multilateral development banks. These have been supplemented by private sector contributions through Public-Private Partnership projects. However, in the context of fiscal consolidation, declining resources of existing MDBs and risk-averse private sector, the New Development Bank to be established by BRICS countries will make available additional resources thereby recycling the savings accumulated in emerging countries which are presently being locked up in Treasury bonds having much lower returns.
Signing of the Agreement is the first step towards economic cooperation of BRICS countries for pursuance of common goals. BRICS CRA will ensure equity and inclusiveness by providing a backup safety net arrangement in place that will allow the Government of India to go ahead with its necessary and bold policy decisions without being concerned about the international economic development that may lead to domestic imbalances and worsen BOP position.
The BRICS CRA is expected to serve the needs of our emerging economy in boosting access to additional foreign exchange reserves, should such situation arise. So far IMF support is the primary safety net that is available to India in case any BOP crisis situation arises. Pending the IMF governance reforms, India does not have much say in the IMF decisions. The proposed CRA will provide an alternative approach. This will also provide yet another window for our economy to engage with the BRICS in a more fruitful manner.