BRICS bank vis-a-vis IMF

China Daily (Canada) - - COMMENT -

Last week’s agree­ment by the five BRICS mem­ber states to es­tab­lish a devel­op­ment bank along with a cur­rency re­serve pool, they called the Con­tin­gency Re­serve Ar­range­ment, set off a storm of commentary sug­gest­ing that these new in­sti­tu­tions would be ri­vals to the­World Bank and the In­ter­na­tion­alMone­tary Fund. But the key ques­tion of how they will op­er­ate re­mains unanswered, per­haps be­cause the five coun­tries haven’t yet agreed on it among them­selves. Per­haps, they will also be mar­ginal play­ers on the global stage in the fore­see­able fu­ture.

The re­sources the BRICS bank (the of­fi­cial name is the New Devel­op­ment Bank), given its size, can mo­bi­lize will de­pend on sev­eral fac­tors, in­clud­ing how cheaply it can bor­row from in­ter­na­tional mar­kets, how quickly it scales up its lend­ing and cap­i­tal base, and the av­er­age du­ra­tion of loans.

Tak­ing other devel­op­ment banks as a guide, we (at Cap­i­tal Eco­nom­ics) es­ti­mate that loans could av­er­age $5-10 bil­lion a year over the com­ing decade. That’s less than one-third, tak­ing the up­per limit into con­sid­er­a­tion, of the $32 bil­lion that the­World Bank ex­tended last year. More sig­nif­i­cantly per­haps, it is also a frac­tion of the amount lent abroad by China Devel­op­ment Bank, which now lends a sim­i­lar amount to emerg­ing economies each year as the­World Bank. Viewed from this per­spec­tive, the World Bank al­ready has a pow­er­ful ri­val from within the BRICS bloc.

In­deed, an unanswered ques­tion is whether the BRICS bank will sub­sti­tute for or sup­ple­ment the ac­tiv­i­ties of the CDB. It could, for ex­am­ple, be used as a way to give mul­ti­lat­eral cover to loans that would be con­tentious com­ing from one of China’s State-owned banks. In that case, the cre­ation of the BRICS bank may not lead to any sub­stan­tial in­crease in lend­ing to the emerg­ing world.

Another unanswered ques­tion is for whom is the BRICS bank. The guid­ing sen­ti­ment be­hind its cre­ation is a view that fi­nance from the ex­ist­ing devel­op­ment lenders such as the­World Bank comes with too many strings at­tached. If con­di­tions are light and in­ter­est rates low, de­mand for BRICS bank loans will be strong (Ar­gentina stands out as an ob­vi­ous early can­di­date). But the is­sue of which projects to fund could prove con­tentious to the BRICS bank’s mem­bers.

Last week’s agree­ment stated that the BRICS bank would lend both within the BRICS coun­tries and to other emerg­ing economies. But its lend­ing ca­pac­ity will be lim­ited, par­tic­u­larly in the early years, cre­at­ing the po­ten­tial for ten­sion be­tween those want­ing to use the bank to sup­port do­mes­tic devel­op­ment ob­jec­tives, and those look­ing to sup­port com­mer­cially vi­able projects wher­ever they might be. The fact that it took five years of talks to get the BRICS bank deal signed sug­gests that, be­hind the scenes, the BRICS mem­ber states have strug­gled to ar­rive at a con­sen­sus.

If the BRICS bank has been set up as a smaller ri­val to the­World Bank, the CRA looks like an al­ter­na­tive to the IMF, al­beit much smaller in size and am­bi­tion. The CRA is a sys­tem of cur­rency swap agree­ments be­tween the BRICS economies— in other words, agree­ments to lend to each other if some mar­ket dis­rup­tion makes it dif­fi­cult for them to ac­cess the needed for­eign ex­change.

The agree­ments will only ex­ist on pa­per un­til the cur­rency swaps are ac­ti­vated in the event of a cri­sis. There will be no pool of jointly man­aged re­serves wait­ing for a rainy day. In this, the CRA re­sem­bles not so much the IMF as the Chi­ang Mai Ini­tia­tive, which was es­tab­lished by Asian coun­tries’ gov­ern­ments af­ter the Asian fi­nan­cial cri­sis and which re­mains to this day an agree­ment on pa­per only. While the IMF has been ac­tive in re­cent years in lend­ing to strug­gling economies around the world, the swaps agreed un­der the Chi­ang Mai Ini­tia­tive have never been used. This is one rea­son to be cau­tious about the im­pact the CRA will have.

Another is­sue is the BRICS bank’s size. The agreed swaps add up on pa­per to only $100 bil­lion, com­pared with the more than $1 tril­lion pledged or com­mit­ted to the IMF. But the main rea­son to ques­tion the talk of the CRA chal­leng­ing the IMF is that it will be lim­ited to the five BRICS economies. For any other economies that run into trou­ble fi­nanc­ing ex­ter­nal obli­ga­tions, the IMF is likely to re­main the prime mul­ti­lat­eral source of sup­port. The au­thor is chief Asia econ­o­mist at Cap­i­tal Eco­nom­ics, a Lon­don-based in­de­pen­dent macroe­co­nomic re­search con­sul­tancy.

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