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BRICS mulls formation of new development bank: Nirmal Bang

BRICS countries are mulling the formation of a new development bank, which aims to fund infrastructure and allied projects throughout developing nations, says Nirmal Bang research report.

May 04, 2013 / 04:09 PM IST

In 2009 when the first BRIC (Brazil, Russia, India, China) summit was held in Russia, it was mocked at and called as an insignificant meeting between a few countries. As years passed and alliances between member countries grew, the West, which was going through an economic turmoil, sat up and took notice.

By then, BRICS (now including South Africa) had shifted its focus to Asia and Africa and when the 5th BRICS summit was held on 27th March '13 in Durban, South Africa, every developed country in the world was watching closely. BRICS was no longer a small gathering of a select few countries.

Statistics will help understand the significance of BRICS. BRICS countries represent almost 3 billion people, with a combined nominal GDP of US $14.9 trillion as of 2013, which in simpler terms means about 40% of all the people on planet earth, 15% of global trade and 25% of the world's GDP.

The story of BRICS summit started with the meeting of foreign ministers of the initial four BRIC states (Brazil, Russia, India, and China) in New York in September '06, which was followed by a series of high-level meetings and finally a full-scale diplomatic meeting, which was held in Yekaterinburg, Russia, on 16th May '08, which placed the foundation of the BRICS summit.

On 16th June '09, the first ever BRIC summit was held in Yekaterinburg. The focus of the first summit was on how the four countries could better co-operate with each other in terms of development as well as on improving the global economic situation.

South Africa began its efforts to join the BRIC group in 2010 and became an official member of the group on 24th Dec '10. When South Africa successfully hosted the latest BRICS summit in March, this year, it proved that it had the capability of becoming a full member of BRIC.

This year at the BRICS summit India's Prime Minister Manmohan Singh in a statement to the media after the plenary session of the summit informed, "The BRICS platform has evolved tremendously since the first summit at Yekaterinburg in 2009. Our agenda encompasses diverse areas, including global economic developments, peace and security, reforms of political and economic institutions of global governance, international trade, sustainable development and food as well as energy security. We have just concluded very fruitful discussions on many of these issues."

Thanks to host country, South Africa, the theme of the summit was - ‘BRICS and Africa: Partnership for Development, Integration and Industrialization.' A declaration called the ‘eThekwini Declaration and Action Plan' was issued after the fifth BRICS summit at Durban in South Africa. The declaration underlines the need to widen and also deepen co-operation between the BRICS countries.

Experts believe the decision to make BRICS summit Africa-centric was taken because BRICS nations want to position South Africa as the gateway to Africa, which will take them a step ahead of the West. This also suits the purpose of South Africa, which has growing designs for dominance over other African countries.

It is important to note that almost 25% of FDI from China, Russia and India goes to Africa. In the next few years, China plans to give Africa $20 billion in loans.

Interestingly, parallel to the BRICS summit, a BRICS business forum was also held, which discussed issues related to infrastructure, energy, financial services and agro-processing. Following the recommendation of this forum, a BRICS Business Council has been formed which will comprise of five top business leaders from each of the member states.

Apart from the council, there was a discussion on linking BRICS countries through a high-capacity optic fibre cable network of 28,400 km. "This will remove the dependency on developed countries as interconnection points by providing a direct route among BRICS countries," said South Africa's President Jacob Zuma.

However, the center of the discussion at the summit was the idea of creating a BRICS-led development bank, which was proposed by India's Prime Minister Manmohan Singh at the BRICS summit held in New Delhi, in the year 2012.

The proposal saw some resistance in New Delhi, but in Durban all member countries agreed upon the creation of the development bank. Para 9 of the declaration states: "Following the report from our Finance Ministers (FMs), we are satisfied that the establishment of a New Development Bank is feasible and viable. We have agreed to establish the New Development Bank."

While details of the bank have not been finalized, it is expected that the bank will have an initial capitalization of $50 billion, with focus on infrastructure development. Many experts see the move as a challenge to the dominance of the dollar.

Another significant development at the latest BRICS summit was the discussion regarding the establishment of a financial safety net by pooling foreign exchange reserves. The members agreed to create a US$ 100 billion Contingent Reserve Arrangement (CRA) by trading in their currencies for some transaction.

This fund will safeguard member states from short-term liquidity pressures, thereby strengthening financial stability.

As per the action plan, the summit will be followed by several year-round meetings and discussions between ministers and businessmen of member nations to further increase trade and co-operation between BRICS countries.

According to experts, the summit really was a success in many ways as the eThekwini Declaration is in a way similar to the Delhi Action Plan declared in the year 2012 at the New Delhi BRICS summit, which was largely fulfilled. In Durban, further progress in discussion was seen on a broad range of subjects but in terms of deliverables, not much was achieved at the summit.

Source: Nirmal Bang's Beyond Market

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