BRICS’ $100 billion development bank to challenge IMF and World Bank

17 July 2014   Category: News, Asia, China, Global, India, Europe, Brazil, Russia, South Africa   By Derek Au

The leaders of the five BRICS nations have agreed to establish a US$100 billion development bank to finance infrastructure projects and assist developing countries in financial dire straits, in what some have interpreted as a move to challenge the dominance of the International Monetary Fund (IMF) and World Bank in these spheres.

The bank, known as The New Development Bank (NDB), was announced as part of the sixth BRICS Summit in Fortaleza in Northeastern Brazil, attended by the leaders of Brazil, Russia, India, China and South Africa.

It will start out with an initial authorised capital of $100 billion, with an initial subscribed capital of $50 billion, shared equally among the BRICS nations.

The countries also agreed to set up a $100 billion currency reserve pool, known as the Contingent Reserve Pool (CRP), which will serve as a lender of last resort to countries facing balance of payment difficulties. China will contribute the largest amount of $41 billion to the fund pool, followed by $18 billion from each of Brazil, India and Russia, while South Africa will pay $5 billion.

The NDB still requires approval from lawmakers in each of the BRICS countries, which could take a number of months. The bank will be based in Shanghai, while its selection of chief executive officer will rotate around the five countries, starting with India.

One economist told Asia Asset Management that the new institutions could be interpreted as a challenge to the long-standing order of the World Bank and IMF. The former provides funds for infrastructure projects in developing countries, while the latter lends to nations facing severe short-term financial difficulties.

Raymond Yeung, ANZ’s Greater China senior economist, said: “Perhaps [the BRICS] countries think their views are outside the mainstream at the international level – especially at the IMF’s level. So the IMF may have overlooked the voices from some of the developing countries in the past years. Sometimes, things are skewed to the interests of developed countries, especially the US. This may result in China to hope the NDB can increasingly help the developing countries achieve financial stability.”

Brazil’s president said that the establishment of the two institutions represented the growing political clout of the BRICS countries internationally. “The BRICS are gaining political weight and demonstrating their role in the international arena,” Dilma Rousseff was quoted by Bloomberg as saying.

In a statement, the IMF welcomed the announcement of both the NDB and CRP, and said it was open to cooperation. "IMF staff would be delighted to work with the BRICS team dedicated to this project with a view to reinforcing the cooperation among all parts of the international safety net," IMF Managing Director Christine Lagarde said in a statement.