BRICS announce NDB and CRA for $100 billion each

The BRICS emerging market bloc have set up two new financial initiatives: a bank for funding infrastructure projects in developing countries, and a currency reserve pool to be drawn upon in times of liquidity pressures.

by Kanaga Raja

GENEVA: The BRICS group of countries, at their Sixth Summit held in Fortaleza, Brazil, on 15 July, announced the establishment of a New Development Bank (NDB) that will be armed with a sizeable initial authorized capital of $100 billion.

Also announced was the signing of a treaty for a Contingent Reserve Arrangement (CRA) of $100 billion (in currency swaps) as a precautionary measure to help face short-term liquidity crunch, effectively bypassing the US dollar as the trading currency.

The headquarters of the NDB will be located in Shanghai, while the first President of the Bank shall be from India.

In their Fortaleza Declaration, the leaders of the BRICS countries – Brazil, Russia, India, China and South Africa –said that the purpose of the NDB will be to mobilize resources for infrastructure and sustainable development projects in the BRICS and other emerging and developing economies.

They cited the fact that the BRICS, as well as other emerging market economies and developing countries (EMDCs), continue to face significant financing constraints to address infrastructure gaps and sustainable development needs.

“Based on sound banking principles, the NDB will strengthen the cooperation among our countries and will supplement the efforts of multilateral and regional financial institutions for global development, thus contributing to our collective commitments for achieving the goal of strong, sustainable and balanced growth,” they said in their Declaration.

According to the document, the Bank shall have an initial authorized capital of $100 billion, and the initial subscribed capital shall be $50 billion, equally shared among the founding members.

The first chair of the Board of Governors is to be from Russia, while the first chair of the Board of Directors shall be from Brazil.

The BRICS leaders also announced the signing of the treaty for the establishment of the CRA with an initial size of $100 billion. “This arrangement will have a positive precautionary effect, help countries forestall short-term liquidity pressures, promote further BRICS cooperation, strengthen the global financial safety net and complement existing international arrangements,” they said.

The agreement is a framework for the provision of liquidity through currency swaps in response to actual or potential short-term balance-of-payments pressures, they underscored.

IMF reform process

The BRICS leaders also drew attention to the International Monetary Fund (IMF), saying that they “remain disappointed and seriously concerned with the current non-implementation of the 2010 International Monetary Fund (IMF) reforms, which negatively impacts on the IMF’s legitimacy, credibility and effectiveness”.

(Those reforms were agreed to at the G20 Seoul Summit, but the US Congress has failed to act on them.)

The IMF reform process is based on high-level commitments, which already strengthened the Fund’s resources and must also lead to the modernization of its governance structure so as to better reflect the increasing weight of EMDCs in the world economy. The Fund must remain a quota-based institution, the BRICS leaders declared.

The BRICS leaders called on the membership of the IMF to find ways to implement the 14th General Review of Quotas without further delay.

“We reiterate our call on the IMF to develop options to move ahead with its reform process, with a view to ensuring increased voice and representation of EMDCs, in case the 2010 reforms are not entered into force by the end of the year. We also call on the membership of the IMF to reach a final agreement on a new quota formula together with the 15th General Review of Quotas so as not to further jeopardize the postponed deadline of January 2015.”

They further called for an international financial architecture that is more conducive to overcoming development challenges.

“We have been very active in improving the international financial architecture through our multilateral coordination and through our financial cooperation initiatives, which will, in a complementary manner, increase the diversity and availability of resources for promoting development and ensuring stability in the global economy.”

Crucial juncture

According to the Fortaleza Declaration, the Sixth Summit took place at a crucial juncture, as the international community assesses how to address the challenges of strong economic recovery from the global financial crises, sustainable development, including climate change, while also formulating the post-2015 development agenda.

“At the same time, we are confronted with persistent political instability and conflict in various global hotspots and non-conventional emerging threats.”

On the other hand, said the BRICS, international governance structures designed within a different power configuration show increasingly evident signs of losing legitimacy and effectiveness, as transitional and ad hoc arrangements become increasingly prevalent, often at the expense of multilateralism.

The BRICS leaders said that the world economy has strengthened, with signs of improvement in some advanced economies. They, however, cautioned that significant downside risks to this recovery remain.

“Unemployment and debt levels are worryingly high and growth remains weak in many advanced economies. Emerging market economies and developing countries (EMDCs) continue to contribute significantly to global growth and will do so in the years to come.”

Even as the global economy strengthens, monetary policy settings in some advanced economies may bring renewed stress and volatility to financial markets and changes in monetary stance need to be carefully calibrated and clearly communicated in order to minimize negative spillovers, they added.

Strong macroeconomic frameworks, well-regulated financial markets and robust levels of reserves have allowed EMDCs in general, and the BRICS in particular, to better deal with the risks and spillovers presented by the challenging economic conditions in the last few years, the Declaration noted.

“Nevertheless, further macroeconomic coordination amongst all major economies, in particular in the G20, remains a critical factor for strengthening the prospects for a vigorous and sustainable recovery worldwide.”

On the Doha Round of trade negotiations at the WTO, the BRICS said: “In reaffirming our support for an open, inclusive, non-discriminatory, transparent and rule-based multilateral trading system, we will continue our efforts towards the successful conclusion of the Doha Round of the World Trade Organization (WTO), following the positive results of the Ninth Ministerial Conference (MC9), held in Bali, Indonesia, in December 2013.”

In this context, they reaffirmed their commitment to establishing by the end of this year a post-Bali work programme for concluding the Doha Round, based on the progress already made and in keeping with the mandate established in the Doha Development Agenda.

“We affirm that this work programme should prioritize the issues where legally binding outcomes could not be achieved at MC9, including Public Stock-Holding for Food Security Purposes. We look forward to the implementation of the Agreement on Trade Facilitation. We call upon international partners to provide support to the poorest, most vulnerable WTO members to enable them to implement this Agreement, which should support their development objectives.”

The BRICS leaders also reaffirmed the United Nations Conference on Trade and Development’s (UNCTAD) mandate as the focal point in the UN system dedicated to considering the interrelated issues of trade, investment, finance and technology from a development perspective.

UNCTAD’s mandate and work are unique and necessary to deal with the challenges of development and growth in the increasingly interdependent global economy, they said.

“In congratulating UNCTAD for the 50th anniversary of its foundation in 2014, which is also the anniversary of the establishment of the Group of 77, we further reaffirm the importance of strengthening UNCTAD’s capacity to deliver on its programmes of consensus building, policy dialogue, research, technical cooperation and capacity building so that it is better equipped to deliver on its development mandate.”

Trade ministers’ meeting

Meanwhile, the ministers responsible for trade of the BRICS countries held their fourth meeting in Fortaleza on 14 July.

In a joint communique, the BRICS trade ministers noted the successful outcome of the WTO Ministerial Conference held in Bali in December 2013. They undertook to pursue vigorously the achievement of the objectives and timelines set out in the Bali Ministerial decisions.

They reaffirmed the importance of an open and rules-based multilateral trading system and underlined the central role of the WTO in setting rules for global trade.

The ministers emphasized that the conclusion of the Doha Round on the basis of its development mandate remains central to the objective of promoting the full integration of developing countries into the global trading system.

The ministers affirmed their commitment to coordinating efforts with a view to ensuring that the efforts to establish a work programme in the WTO will lead to a balanced, transparent, inclusive and development-oriented outcome in all pillars.

The ministers also reaffirmed that the work programme should reflect the centrality of agriculture and of the development dimension and the commitment to prioritizing the issues where legally binding outcomes could not be achieved at the Bali Ministerial Conference.

The ministers also noted the importance of non-agricultural market access (NAMA) and services and the need to work on the existing Doha texts. (SUNS7846)

Third World Economics, Issue No. 574, 1-16 Aug 2014, pp10-12