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The New Development Bank and the BRICS Contingent Reserve Agreement

The Leaders of the group of five BRICS nations- Federative Republic of Brazil, the Russian Federation, the Republic of India, the People’s Republic of China and the Republic of South Africa had decided to establish a multilateral development bank and also of a reserve fund back in July, 2014 in their sixth summit at Fortaleza, Brazil. It was agreed upon that the Bank will begin its operations and the agreement will come into force once all the member-countries deposited their instruments of ratification with Brazil. Subsequently, it was on February 25, 2015 that the Prime Minister of India, Mr. Narendra Modi, approved the setting up of the bank and the reserve.

The bank is supposed to act as a counterweight to powerful international lenders like the International Monetary Fund and the World Bank because they are largely dominated by the United States, the European Union or the other four countries that have the ‘veto’ power.[1] If statistics are to be believed, the four original BRIC countries account for more than 25 per cent of global GDP, covering about 41.4 per cent of the world population. However, they lag far behind the developed nations in terms of infrastructure which is what has encouraged the BRICS nations to come up with the concept of the New Development Bank.

The main aim of the bank is that of fostering greater cooperation among the member countries in terms of financial and developmental agendas. Therefore, unlike the World Bank, which assigns votes based on capital share, the New Development Bank will assign one vote to each participating country and no country shall be given the veto power.[2] It is a fact known to all that the IMF and the World Bank have had declining reputations as international organizations. Therefore, by correcting the mistakes that they committed, the New Development Bank may actually prove to be a good step in realizing its aims and objectives.

An official release by the Press Information Bureau by the Government of India states that the bank will aim at mustering available resources for infrastructure and sustainable development projects in BRICS, other emerging economies and developing countries to complement the prevailing efforts put in by multilateral and regional financial institutions for global growth and development.[3] Talking about the structure and objectives of the bank, its primary focus would be infrastructure projects. The maximum authorized lending has been fixed at $34 billion annually. It has been decided upon that the five member countries would contribute $10 billion each to the bank once it gets established. The share capital of one member country cannot be increased unless the other four agree on it. Moreover, new members are allowed to join the Bank but the BRICS capital share should not fall below 55 per cent.

Along with the approval to establish the New Development Bank, the Contingent Reserve Agreement was also given the sanction. This CRA will help India and other signatories to anticipate immediate liquidity pressures, provide mutual support and strengthen financial stability through currency exchanges to help alleviate balance of payment crisis situations. The preamble to the treaty establishing the Contingent Reserve Agreement also states that the arrangement will contribute in strengthening the global financial security net and complement similar existing international arrangements.[4]

Coming to the point as to how this development bank and the reserve agreement is going to help India, it must be borne in mind that up until now, infrastructure financing in India was being done either by the Government or by existing multilateral development banks. These were usually supplemented by contributions from the private sector through Public-Private Partnerships. However, financing had become a serious concern because of declining resources of existing Multilateral Development Banks and risk-averse private sector. Hence, establishment of this bank will make available additional resources thereby recycling the savings accumulated in emerging countries.[5]

By signing this agreement, the BRICS nations have taken a positive step towards ensuring economic cooperation in pursuance of common goals. The reserve agreement, by providing a back-up safety net arrangement, will ensure evenhandedness as well as inclusiveness by allowing the Government of India to go ahead with bold but necessary policy decisions without any international pressure that could lead to domestic imbalances and worsen balance of payment position.[6] Moreover, the arrangement is supposed to aid the needs of an emergent economy as ours by enhancing access to foreign exchange reserves.

Before the arrangement and the development bank were given any approval, the International Monetary Fund was the major safety net that was available in cases of balance of payment crisis situations. However, since India and other emerging economies did not have much say in the IMF decisions, there was a need to come up with an alternative. The Bank and the arrangement should prove to be just the same: an alternative approach for countries like Brazil, Russia, India, China and South Africa. Not only this, this initiative can also prove to be a way of engaging the member countries of the BRICS in a more fruitful and beneficial manner among each other.

[1] Anita Powell, BRICS Leaders Optimistic about New Development Bank, Voice of America, March 27, 2013 <http://www.voanews.com/content/brics-summit-leaders-optimistic-about-new-development-bank/1629583.html> last accessed March 5, 2015.

[2] Prabhat Patnaik, The BRICS Bank, People’s Democracy <http://peoplesdemocracy.in/2014/0727_pd/brics-bank> March 4, 2015.

[3] Agreement on the New Development Bank and the BRICS Contingent Reserve Agreement, Press Information Bureau, February 25, 2015 <http://pib.nic.in/newsite/PrintRelease.aspx?relid=115907> last accessed March 5, 2015.

[4] Treaty for the Establishment of a BRICS Contingent Reserve Agreement, VI BRICS Summit, July 15, 2014 <http://brics6.itamaraty.gov.br/media2/press-releases/220-treaty-for-the-establishment-of-a-brics-contingent-reserve-arrangement-fortaleza-july-15> last accessed March 5, 2015.

[5] Agreement on the New Development Bank and the BRICS Contingent Reserve Agreement, Press Information Bureau, February 25, 2015 <http://pib.nic.in/newsite/PrintRelease.aspx?relid=115907> last accessed March 5, 2015.

[6] Ibid.

About the Author

Soumya TiwariSoumya Tiwari is pursuing her B.A. LL.B. (Hons.) degree from Dr. Ram Manohar Lohiya National Law University, Lucknow and is currently in her third year. Her areas of interest are substantive criminal law and intellectual property rights law. She has a keen interest in research work and has been adjudged as the best researcher at the 7th edition of GNLU International Moot Court Competition, 2015. In her free time, she loves to read and is passionate about singing. She is currently interning with the Model Governance Foundation.

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