The BRICS Bank- Is it the solution?

The term BRIC(S), was coined by Jim O’Neill to mark the emerging economies of Brazil, India, Russia, China and South Africa. These economies are expected to be the dominant force of world trade and economic supremacy in the coming two decades and together presently control more than 20% of the world GDP. This share is expected to more than double by the year 2050. The recently concluded 6th BRICS summit in Fortaleza, Brazil marked several key agreements among the participating members. The most notable of which was the establishment of the BRICS Bank, the first major breakthrough to challenge the likes of World Bank and IMF.
The headquarters of this newly established bank will be located in Shanghai whereas it will be chaired by India for the first six years, followed by Russia, Brazil and China. In addition to this, the President will be supported by a board and four vice-presidents, one each from the other founding members. While both China and Russia wanted to head the bank in its initial years, it was India that managed to pull off the coup. Here, it must be remembered that the idea to start such a financial institution was initiated by India at the Delhi summit two years ago.

The bank will have an initial equity capital of 50 billion USD, contributed equally by the five nations and ensuring an equal say in its proper functioning and operate under the principle of ‘one member, one vote’. China, the world’s second largest economy, had earlier expressed desire to have a larger share of the bank which was opposed by both India and Russia, in particular. In addition to this, the bank will also have a 100 billion USD contingency reserve in case of an economic crisis. The use of this reserve pool will be determined by voting which will be in proportion to the contribution made by the members towards it. This pool will prove extremely beneficial for a country like India which has seen a massive depreciation in its currency largely due to global economic factors. In addition, the bank can be a cheap source of funding infrastructure projects in India including the proposed 100 smart cities.
The presence of China in this financial institution is quite interesting. It presently holds the largest forex reserves in the world exceeding 3 trillion USD along with being the largest investor in US debt. Hence it is unlikely to be a borrower with this bank. Its economy is larger than the combined economies of Brazil, India, Russia and South Africa. In short, China could have created a 100 billion dollar bank itself. Then why did it agree to wait for the next 17 years to head the BRICS bank? The answer lies in Chinese far-sightedness. While analysts in India hailed it as a diplomatic victory for India in shaping the Bank’s future, China was looking at the year 2031 when it will have the leadership to head the bank and will be closer to pushing its currency Renminbi as the world’s reserve currency. Moreover, as China’s economic interests are spread across Africa, the bank will provide it the cheap source of capital to fund activities for safeguarding its interests in the region. China will also look to involve its African & Latin American allies in this bank in order to give itself a much greater say towards its functioning in future. For the moment, China was keen to have it headquartered in Shanghai and has achieved what it desired.
The formation of this Bank should, however, be greeted with optimism as the western economies have been reluctant to grant emerging countries a greater role in the functioning of global institutions like World Bank and IMF. For instance, India’s share in IMF is expected to increase to 2.75% from the current 2.44%, however it has been held off due to lack of US Support. In the words of Indian Prime Minister, Mr. Narendra Modi, “A flexible international trading system is very important for the economic growth, economically. Many MoUs have already been signed amid BRICS countries that’ll enable efficient trade activities and promote intra- BRICS development.”  The formation of this bank will go a long way in redefining the Asian dream in the coming decades. The bank is unlikely to have a very high credit rating like its counterparts IMF and World Bank, however, if India can steer a clear path for the bank in its initial years, this will mark a tremendous breakthrough for developing economies. The presence of China can provide the bank the additional financial cushion needed in its formative years. Furthermore, it will open up doors of expansion of BRICS with ASEAN & LATAM countries making it a vibrant power in the global financial system. It can also work as the stepping stone in ensuring political and economic unity among the member states and the adoption of a common currency in future. Let us hope politics does not derail this new-born institution from achieving its destiny and restoring the global economic balance.

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The BRICS Bank- Is it the solution?

by Abhirup Bhattacharya time to read: 4 min

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