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Joint Site of Ministries of Foreign Affairs of BRICS Member States

Thursday, September 15, 2016

Brics Bank Well Positioned to Deliver on its Niche Developmental Mandate

by Farhana Paruk

WITH initial loans of $811m to its five founding members — Brazil, Russia, India, China, and SA — the New Development Bank (Brics Bank), which was established in July 2014 and became operational in July 2016, is set to affect other emerging economies that have a shared economic development philosophy.

One of the primary objectives of the bank is to fund infrastructure and renewable energy projects and to satisfy the aspirations of millions of people through sustainable development. By making this the focus of its policy, the bank has an important role with huge potential to address the increasingly huge demands being placed on infrastructural financing in view of the low growth rate in the Brics member countries. Because the existing development banks were unable to bridge the gap for infrastructure finance, the Brics Bank was established to alleviate the problem of securing long-term development financing.

It is in its infancy, and is often referred to as the "baby bank". It was launched at a time of very volatile global markets and there was scepticism among economists and development planners whether the bank would be able to meet its short-term goals and put in place sustainable long-term policies.

Because existing development banks were unable to bridge the gap for infrastructure finance, the Brics Bank was established to alleviate the problem of securing long-term development financing.

However, it has achieved some of its milestones. All the Brics countries have made their first tranche of paid-in capital, on time and in full. The bank has established its governance structure with the voting rights shared equally among the five founding members.

To reduce exchange-rate risks when borrowing, the bank has started extending loans in domestic currencies. This is particularly important as developing countries struggle with high interest rates that are pegged to the dollar, leading to spiralling debt.

During a recent visit to New Development Bank in Shanghai, I was impressed with the team of high-energy, professional staffers, driven by an urgency to address the economic challenges confronting their countries.

The bank’s South African vice president and chief financial officer, Leslie Maasdorp, says it is looking at innovative ways of dealing with the immediate challenges that its members face. The R2bn loan to Eskom is part of a policy to ensure that countries have adequate sustainable energy that has a long-term impact on economic growth.

Stable and sustainable energy projects feed into the paradigm of SA’s National Development Plan. Increased investment creates greater stability in energy outputs, reducing the scourge of load shedding, which has had a devastating impact on production in the manufacturing and retail sectors, mining, healthcare, and education.

In providing loans to its members, the bank has to avoid committing the cardinal sins of the World Bank and IMF in trying to micro-manage economies through structural adjustments programmes that ruined many underdeveloped and developed African countries, causing great poverty and unemployment, especially among women.

While investment in state-owned enterprises is welcomed, the danger is that it could be seen as an economic bail-out for failed government policies.

Eskom has experienced numerous turnaround strategies and government injection of capital, but without clear spending guidelines from the bank, accountability could become a major issue when projects face high risk and no returns.

One of the dangers facing the bank is any further downturn in its members economies that could see them reducing their contributions to the bank’s investment portfolio. To obviate this possibility, the bank’s instruments have to be much more diverse in meeting constrained and shrinking economies’ needs.

One of these instruments is to start discussions with private enterprise to develop private-public partnerships at a global level.

It will help ensure that citizens of member countries feel that they have a stake in the bank’s affairs, and that it truly fulfils its developmental mandate.

The bank could, for example, provide funding for small-and medium-sized enterprises in the renewable energy sector.

The bank is ideally positioned to be a global player in developmental funding once its triple A rating — derived from China’s rating — is given international ranking. This will build confidence.

It is important for the bank not only to be perceived as being credible, but also that it is well received in western capitals, as a positive rating could be viewed as offering succour against the upheavals in developing markets.

Source: Business Day