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New Development Bank: A challenge or complement to financial system

, January 23, 2017, 0 Comments

new-development-bank-marketexpress-inChallenging the World Bank and the IMF as a response to their failed reforms or complementing the existing market players with efficiency and not a competition, the New Development Bank focuses beyond those things and tries to address the emerging country needs. Existing financial system where the World Bank and the IMF lend to countries facing a fiscal crisis is dominated by the American and European leadership (Silk, 2014).

This may be led to a thought for developing countries to create their financing system. The idea is to support the current financial system rather than stand as a rival in the market. Hence, the decision was made during the 6th BRICS summit (July 2014) to create a financial institution in cooperation with the existing financial architecture to support economic development in BRICS (Brazil, Russia, India, China and South Africa) countries. It will be based in Shanghai and India will preside over its operations for the first five years under the leadership of K.V. Kamath, followed by Brazil and then Russia. The BRICS bloc constitutes 43% of the total world’s population and generates roughly about 22% of global GDP (Maasdorp, 2015).

With an authorized capital base of $100 billion, the New Development Bank (NDB) will facilitate an additional pool of capital to the BRICS nations to fund their infrastructure plans and meet the aspirations of millions through sustainable development (PTI, 2015). Further, the $100bn currency reserve pool is likely to have a positive effect, to tackle future economic crises, forestall short-term liquidity pressures and strengthen the global financial safety net (Mathew, 2014). For example, Moscow suffered from massive currency volatility and struggled to attract investors since the outbreak of the crisis in Ukraine (AFP, 2015). Now, the NDB and a BRICS currency reserve pool are seen as an alternative to international financial institutions such as the IMF and World Bank, which are dominated by the United States.

Infrastructure development is a priority for the continued industrialization of the BRICS countries. In this direction, the cabinet has also approved the pact between EXIM Bank and the NDB to enhance trade and economic relations among countries (PTI, Cabinet Approves Pact Between EXIM Bank, New Development Bank, 2016). However, several misconceptions have surfaced with the NDB such as it was created as a rival to the World Bank and the IMF, the NDB, in particular, is a China-led institution, and it will not uphold the highest standards of good governance( Maasdorp, 2015).

The goal of the NDB is to establish the global, regional and local partnership with the new as well as established MDBs and with market participants. Therefore, it is clear that the NDB will not challenge the existing system of development finance rather it would improve the system. Moreover, the purpose of the World Bank was to make loans at concessional rates for big infrastructure projects, but recently focus is more on poverty alleviation, resource management and policy advice. Functions of the NDB and the World Bank are not coinciding at a global level.

Further, Dmitriev (CEO of RDIF) commented that “One of the goals of creating the New Development Bank is to create, in parallel with existing hard currencies, the mechanism which will allow our country to finance joint projects in local currencies.” (RT, 2015)

The NDB approved its first loan of worth $811 million in April 2016 to support renewable energy projects in each of the five countries. Also, the bank issued its first bond with five years of maturity in China and raised 3 billion Renminbi in July 2016. It is likely to have a $4 to $5 billion loan book in the next three years (Rebello, 2016). Continuous efforts and a good governance show a great beginning and hope for a bright future of the financial system of developing countries as sustainability is core to the bank’s approach. Russian Foreign Minister Sergei Lavrov stated at the summit that BRICS “illustrates a new, polycentric system of international relations” demonstrating the increasing influence of “new centers of power”. “It can help avoid another crisis (like 2008 financial crisis) through establishing a fund pool within the BRICS, which can help cushion instability in the currency market.” (AFP, 2015)

We can see the NDB as a response to the failed reforms at the IMF and World Bank as developing countries never got powers to increase their influence within those institutions. However, it is a gradual and steady process and unlikely to replace the World Bank and the IMF shortly (Chen, 2014). It is just a beginning of a new international economic order and not a threat to the other market participants. The issue is about the efficiency and not a competition. If developing countries are taking any initiatives to improve their financial system, then it would be a great opportunity globally as they serve the largest population of the world.

AFP. (2015). The BRICS countries just launched a rival to the IMF and World Bank. Business Insider.
Arcega, M. (2015). China Infrastructure Bank – World Bank Rival or Partner? VOA News.
Chen, D. (2014). 3 Reasons the BRICS’ New Development Bank Matters. The Diplomat.
Maasdorp, L. (2015). What is ‘new’ about the New Development Bank? World Economic Forum.
Mathew, J. (2014, July 16). $100bn New Brics Development Bank to Rival World Bank and IMF. International Business Times.
PTI. (2015). New Development Bank to set its own standards; no rivalry with others: K V Kamath. The Economic Times.
PTI. (2016, October 13). Cabinet Approves Pact Between EXIM Bank, New Development Bank.
Rebello, J. (2016). BRICS nations-led New Development Bank to raise up to $3billion in next 3 years . The Economic Times.
RT. (2015). BRICS bank has own goals, not designed to compete with likes of IMF & World Bank – VEB head. RT News.
Silk, R. (2014). 5 Things to Know About the New BRICS Bank. The Wall Street Journal.