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A long wait for the BRICS bank

Russia drags its feet, China aims to lead, and Pravin Gordhan lows-balls expectations

WASHINGTON: While other participants at the G20/IMF meeting in Washington last week were abuzz with enthusiasm about the proposed BRICS development bank, BRICS ministers tamped down expectations.

 

World Bank president Jim Kim said the institution being set up by Brazil, China, India, Russia, and South Africa doesn’t represent competition. “For us,” he told reporters, “the BRICS bank is quite a natural extension of the need for more investment in infrastructure, and so we would welcome it.”

 

Kim continued, “every one of the BRICS countries has an enormous infrastructure deficit that simply can’t be met by one institution, certainly not the World Bank.” The World Bank is the largest multi-lateral lender, having approved $53 billion of loans, grants and investments in 2012.

 

But BRICS finance ministers were sobered by the failure of their leaders at last month’s summit in Durban to unveil the outlines of the new bank.

South African Finance Minister Pravin Gordhan told Moneyweb he had been misquoted when he reportedly said in Durban, ‘it’s done…the leaders will announce the details.’

 

Speaking at Washington’s Brookings Institution, Gordhan low-balled expectations, saying the project is at a very early stage.   “It’s going to be an interesting project,” he said, “if we can pull it off.”  Gordhan said technical issues including the bank’s capital stock, leadership and headquarters will be addressed over the next six months.

 

Indian Finance Minister Palaniappan Chidambaran was equally circumspect. He told an audience at the Peterson Institute on April 19 that the agenda is ambitious. He said, “We hope we can complete our work in 12 months,” so that leaders can announce the bank’s creation at their summit in March 2014 in Brazil. 

Analysts characterize the much-heralded BRICS bank as a test of the cohesiveness of the five emerging market economies. While representing 20% of global gross domestic product and 40% of population, the disparate countries are united principally by their desire to boost their political clout, particularly in the IMF.

Inside the BRICS, China is the most enthusiastic and Russia the least.  With $4 trillion of hard currency reserves, Beijing is keen to put money to work and hasten the internationalisation of the Renminbi (RMB). Just before the G20/IMF meetings it was announced that 68-year-old Chen Yuan, sometimes called the world’s most powerful banker, was giving up his position heading the state-run China Development Bank to spearhead China’s preparations for the BRICS bank.  The CDB has assets of $1.2 trillion including an overseas portfolio of $250 billion. China wants the BRICS bank to be headquartered in Shanghai.

Early discussions proposed capitalising the bank at $50 billion but the number could be higher.  China would put up perhaps 40% of the money. To soothe concerns about Chinese dominance, Brazil, India and Russia would each contribute from 15% to 18% so that their collective share would exceed that of China. South Africa, a much smaller economy, would contribute around 5%.

But nothing of substance has been decided.  Big questions like voting shares, procurement procedures, opening the membership to outsiders, headquarters, name, and the nationality of the bank’s president have not yet been addressed. 

At Durban the BRICS leaders declared that they would create a development bank and announce particulars at their March summit in Brazil. Their finance ministers will survey technical progress when G20 ministers meet in Moscow in July and the leaders will convene informally at the September G20 summit hosted in Saint Petersburg by Vladimir Putin. 

Russia, by inside accounts, is the nation dragging its feet on the BRICS bank. Along with India it worries about Chinese dominance. And since the collapse of the Soviet Union 22 years ago, Moscow has not been a major player in development assistance. It is wary of lending to developing countries and has incurred large losses on the loan portfolio inherited from the USSR.  Presenting itself as an emerging economy on a par with India, China and Brazil has not been easy for what was a super-power during the cold war.

Trevor Manuel, SA’s Planning Minister, who was in Washington for the G20/IMF/World Bank meetings, welcomed the prospect of the new bank financing some of the big infrastructure projects identified in the national development plan. Lamido Sanusi, the chief of Nigeria’s central bank and a sceptic about China’s rapidly increasing role in Africa, similarly said the BRICS bank would be good for Africa. “Any bank that offers low-interest loans to African countries is a good thing,” he said. Sanusi added that he hopes the planned bank will choose infrastructure projects that will enhance the export potential of Africa’s manufacturing and processing sectors.

Economics columnist Barry Wood was for two decades the chief economics correspondent of Voice of America radio.

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