By Kevin Gandhi
Edited by Liz Maria Kuriakose, Associate Editor, The Indian Economist
The New Development Bank or simply the BRICS Bank is a Multilateral Development Bank (MDB) conceptualised and created by the BRICS nations as an alternative to the World Bank and the International Monetary Fund. The BRICS leaders agreed upon this idea in March 2013, and in July this year the leaders signed the long-anticipated document to create the $100 billion bank with a reserve currency pool worth over another $100 billion.
Theoretically, this bank is in essence, a competition to the World Bank and the IMF. Ironically, it is also a combination of sorts of the same. Like the World Bank, its initial capital will finance infrastructure and sustainable development projects and like the IMF, it will provide assistance to members in financial difficulty.
The major reasons with regard to the formation of this bank are discussed below:
- The first official reason is to provide liquidity to member countries during balance of payment crises.
- The second official reason is to grant aid to finance development in low and middle-income countries.
- Seemingly, this bank has been formed by the member nations to reduce global dependency on the US Dollar and strengthen international law, according to Russian President, Vladimir Putin.
- There are very large unmet needs in the emerging and developing countries, most clearly in the field of infrastructure and more environmentally sustainable forms of development where a deficit of investment of up to around US $1 trillion annually has been identified beyond what is currently likely to be financed.
The People’s Republic of China has been instrumental in pushing forward the formation of this bank. It is also the largest donor to the $100 billion Contingency Reserve Arrangement (A CRA is an amount of money established from retained earnings to allow for unforeseen losses in business). There have been various allegations and theories relating to China’s ulterior motive in providing about 41% finance to the bank. China, having the largest FOREX reserves in the world (about $4 trillion as of the first quarter of 2014) clearly does not require liquidity protection.
Now it seems as though China is simply being a Good Samaritan interested in financial stability, economic growth and infrastructural growth of the BRICS nations. But if China simply wanted to promote regional growth, it could just increase its bilateral contribution to existing multilateral institutions. Either way, only a fool could deny China’s contribution towards this Bank.
Let us now discuss the leitmotif of the working and composition of the bank, which is to start its business functions from 2016. The hierarchal composition is made up of the follows:
- Its first President is to be appointed from India.
- The Board of Directors is to be nominated from Brazil.
- The Chairman of the Board comes in from Russia.
Next, the BRICS nations along with Iran and Venezuela are to launch a new currency, called the Bricso. In its initial stages, it will be a virtual currency similar to what the Euro was in its initial years of existence. The foundation of the Bricso lies in the basket of finances provided by the BRICS nations as also Iran and Venezuela. The individual country currencies will be weighed according to their respective economic strength – similar to the Special Drawing Rights – SDR – of the IMF.
The Bricso has essentially been formed to challenge the US Dollar and it just may end up thwarting US plans of a new world order. A lot may change with the advent of this New Development Bank and the Bricso, but as of now it is too early to say whether or not this whole new system of the BRICS nations will be able to challenge the existing American system and the US Dollar. However, it is only a matter of time to conclude whether or not the economic structure of the BRICS nations, if not the world economy, will go through a drastic change if this Bank delivers results.
Kevin is a second year, undergraduate business student at NMIMS University, Mumbai. His hobbies include listening to bands such as Coldplay and Oasis, writing, going on nightly runs and occasionally playing the guitar. He has also participated in various Model UNs across the country. He loves to travel and is an enthusiastic supporter of the Kolkata Knight Riders.