BRICS DEVELOPMENT BANK – a Ne

AFRODAD Policy Briefing OCTOBER 2013 BRICS DEVELOPMENT BANK: A new model for Africa Introduction There are however more questions than answers as to how much money each of the five countries will provide as seed capital, During the fifth BRICS summit held in Durban, when it will be launched, its location, its South Africa, from 26-27 March, 2013, the governance structure, how the bank intends joint statement from the BRICS leaders to finance projects and its likely benefit or announced that they have agreed to impact ? As with such proposals, the devil is establish a New Development Bank. The in the details. Besides lack of specific idea of setting up a BRICS Development information around the Bank, the viability Bank as an alternative to the World Bank and and feasibility of such a scheme is difficult to International Monetary Fund came from assess. The Thekwane Declaration has India at the 2012 meeting of the outlined an action plan of ministerial and Organisation's finance ministers in Mexico. high level officials meeting to facilitate on- The Bank that the BRICS seeks to establish is going dialogue on the country positions and expected to emphasize on infrastructure priorities. In these meetings issues around the development and sustainable bank formation will be clarified and finalised. development. According to the BRICs, the This brief elucidates reasons behind the BRICs bank will not be a competitor for the formation of the Bank and also examines the World Bank or the Africa Development Bank likely benefits and challenges of the new but will compliment funds that are existing BRICS Development Bank. through the multilateral institutions that cannot meet the financing needs of the emerging economies. The new Bank is Who are the BRICS? expected to work closely with existing multilateral development banks tapping BRICS is an acronym for Brazil, Russia, India, skills and expertise from the long China and South Africa and is a group of the experienced institutions for it to be fastest growing markets of the world. The operational and gain momentum. If the BRICS countries see the group as a proposed Bank becomes a reality, the continuation of the partnership that was institution would be the first major multi- established in 1955 when countries of Asia lateral lender to emerge since the European and Africa met at the Bandung Conference Bank for Reconstruction and Development. to form the Non- Aligned Movement (NAM). AFRICAN FORUM Policy Briefing 2013 AND NETWORK ON DEBT AND 1 DEVELOPMENT BRICS DEVELOPMENT BANK: A new model for Africa OCTOBER 2013 This was a historic watershed in the increase commerce between the BRICS international relations of developing and other emerging economies. The BRICS countries as it was necessitated by the then have noted that long term financing growing cold war bipolarisation. The NAM market in many developing countries were countries concerted and affirmed that they relatively undeveloped; therefore the Bank would not be aligned neither to the east nor will compliment the available resources the west, but pursue their own path and from multilateral development banks strategy under the guidance of the (MDBs) as the latter cannot fully meet the “Bandung Principles” of South-south financing needs of emerging economies. relations. It is against these same principles The new bank would provide loans to that the BRICS countries have individually developing countries towards emerged to assume new economic development of ports, roads, and other rankings. In 2010, China became the infrastructural projects necessary for trade. second biggest economy in the world while India currently stands as the 10th largest While these five countries have also (GDP) in nominal terms. In 2011 Brazil stood increased contributions to the IMF, they as the world's sixth largest economy, Russia have however expressed frustration at the was ranked ninth and South Africa twenty- marginal role in the institutions' decision sixth. making processes that are dominated by industrialised countries, particularly the G7. The BRICS bloc occupies 30% of the global The presidential selection and quota territory. It represents about 40% of world's restrictions have perpetuated the western population and account for 17% of world dominance. Africa has been allocated just trade. It is responsible for a fifth of global three seats on the Bank's 25-seat Board. gross domestic product (GDP). The Loan conditionality's applied by IMF/ WB contribution to global economic growth has been questioned by both Africans and over the last decade has reached 50% other emerging economies. It is against this which makes the group the leading power single power dominance that has in global economic development. BRICS compromised the work of the Breton Woods combined reserves are, its economic Institutions and further led to the idea of a growth has been substantial with 4% GDP new Bank by the BRICS with a view to 1 compared to 0,7% for the G7 nations. With balance the IMF/WB institutions. The new much reserve pool of funds available, the Bank will give the BRICS a better bargaining BRICS countries felt that the money could or negotiating power over voting rights in be used by emerging economies to address the Breton Woods Institutions. balance of payments or crisis situations. Benefits of the new BANK Rational for creation of Bank There are several benefits that are likely to The Bank is aimed at capacitating its accrue when the Bank is operational. members with a way to provide money for Ideally the BRICS bank act as an alternative investment in targeted infrastructure mechanism to development finance as projects among themselves and also to opposed to the priorities of the lending AFRICAN FORUM AND NETWORK ON Policy Briefing 2013 DEBT AND DEVELOPMENT 2 BRICS DEVELOPMENT BANK: A new model for Africa OCTOBER 2013 institutions such as the World Bank and IMF. establishment of the new Bank seems to Some experts see the Bank as a useful create a new source of development for institution to facilitate accessibility of the continent. BRICS are attracted by the information. Traditionally the BRICS benefits of diversification of African economies as the preferred gateway to economies have been known for not untapped market of one billion African availing information on their engagements consumers. activities to the world. It thus becomes an opportunity for them to get to know each Holding of the fifth meeting of the BRICs other too. countries in Durban, Africa was seen as an opportunity for Africa strengthening its ties Most BRICs nations and other emerging with these major economies. In fact Africa nations have already adopted the policy of has demonstrated huge potential in terms conducting trade among themselves using of economic development prospects, own currencies. To date two agreements abundant natural resources, growing have been signed among the developed consumers power and favourable Banks of Brazil, India, Russia, China and demographics. AS a result the BRICs are South Africa, where local currencies' loans now Africa's largest trading partner. The will be made available for trade between BRICS share in FDI inward stock and FDI member states. The use of real, rouble, inflows to Africa reached 14% and 25% rupee, remnbi and rand amongst respectively. Trade between the BRICS and themselves has allowed them to diversify Africa reached a record high of US$ 340m in their foreign currency exchange reserves. 2012, ten times higher than the values This presented growing risks of major recorded in 2002. Currently the BRICS trade 2 more with Africa than it does with member currencies such as euro and dollar crisis. This states thus Africa stands to benefit more will weaken the advantage of the US the from the formation of the Bank. world major trading currency and also help to even out the political and economic global power imbalance. Challenges The bank initiative is likely to fill any current With scanty details around the new Bank, gaps in financing including access to the viability and feasibility or otherwise of finance for small and infrastructure projects such a bank is difficult to assess. The details particularly those that have been remain to be worked out before the neglected by the private sectors and also proposed bank can become fully support infrastructure projects that improve operational. Although the idea of a BRICs the lives of people. Bank is ideal in terms of a comprehensive “multi-lateral framework of cooperation,” The new bank could hold great benefits for Africa. According to the AFDB, the the BRICS countries however have differing continent needs US$93 billion every year to economic weights and striking balance fund its infrastructure requirements which is that would avoid dominance by one or two not met by the current financial institutions.3 countries in the management of the Bank. As the BRICS are consolidating their position Some analysts see China which has huge in Africa through massive investment, the reserves and investments in Africa and AFRICAN FORUM Policy Briefing 2013 AND NETWORK ON DEBT AND 3 DEVELOPMENT BRICS DEVELOPMENT BANK: A new model for Africa OCTOBER 2013 other emerging economies overriding decision making process and leadership of the Bank. The start up capital has been debated and the BRICS agreed to start with US$50billion which would be shared among the five member states but this is still to be finalised. The location of the Bank is one among other issues on the table and there are indications that China would prefer it to be in Africa while others would want it to be in their own countries. The Bank is likely to experience challenges if it is to adopt lending conditions and other provisions like donor driven priorities and strategies of current development finance institutions that have been unfavourable and unpopular with recipient countries.

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