JABULANI SIKHAKHANE: New Development Bank not a weapon against the West
Contrary to some perceptions, the Brics initiative works hand in hand with the Bretton Woods institutions
The decision by the New Development Bank (NDB) to put on hold new transactions in Russia is yet another reminder that the bank has no intention of living up to uninformed expectations that it will supplant the World Bank and other multilateral institutions dominated by Western nations.
The bank said last week it had placed on hold new deals with Russia because of “unfolding uncertainties and restrictions”, a reference to the sanctions Western countries have imposed on Russia after it invaded neighbouring Ukraine. The “NDB will continue to conduct business in full conformity with the highest compliance standards as an international institution”, the bank said.
The NDB had lent Russia $3.5bn — 14% of its lending portfolio — by the end of December 2020, according to its last published annual report. The bank’s decision makes sense since it is dependent on the global financial system for its operations. It accounts in US dollars, the world’s dominant reserve currency, and has in recent years also borrowed in the greenback.
From inception more than six years ago, the NDB has made it clear that it seeks to complement the existing efforts of multilateral and regional financial institutions. This was spelt out in its articles of agreement and has been repeated in its annual reports as well as other documents. The bank’s twin, the contingency reserve arrangement, which seems to have quietly disappeared, was also structured to complement the work of the IMF.
Yet in the popular imagination, the bank continues to be seen as an alternative to the World Bank and other multilateral institutions dominated by Western countries. By agreement, the US appoints the president of the World Bank and the European nations appoint the IMF MD. Attempts by developing countries to challenge these arrangements have not yielded any results.
The decision by Brazil, Russia, India, China and SA (Brics) to establish the NDB was seen in some quarters as a challenge to the Western-dominated multilateral institutions, notwithstanding the bank’s founding agreement.
The bank’s articles of agreement say that its mission is to mobilise funds for infrastructure and sustainable development projects in the Brics bloc and other emerging market and developing economies, “complementing the existing efforts of multilateral and regional financial institutions for global growth and development”. It “shall also co-operate with international organisations and other financial entities”.
International co-operation is a recurring phrase in its key documents, including annual reports. Its business model replicates that of traditional multilateral development banks. It “issues bonds in international markets and in the domestic markets of its member countries”. To fulfil its mission, the bank needs to continue to have access to international financial markets as well as borrow at low rates so it can lend at “competitive interest rates” to its member countries.
If it were to continue funding Russia, the bank’s access to international financial markets, as well as its rating by credit ratings agencies, would be threatened. The bank’s problems may still deepen, though, depending on how long Russian sanctions remain in place as well as the damage to the Russian economy. The latter would affect the country’s ability to service its loans, including those from the NDB.
The contingency reserve arrangement was meant to assist a member country that found itself unable to finance its international payments, including imports of goods and services as well as the repayment of foreign loans. This is commonly referred to as short-term pressure on the balance of payments, a record of a country’s financial transactions with the rest of the world.
Similarly, the contingency reserve arrangement was seen by some as a masterstroke by the Brics countries to weaken the IMF’s grip on global finance. Well, they hadn’t read the arrangement’s founding clauses.
To qualify for access to borrowings from the contingency reserve arrangement, a member country could not be in arrears with multilateral — read IMF and World Bank — or regional financial institutions, including the NDB. In addition, the country seeking assistance was expected to be up to date with its obligations to the IMF to submit the information required for its surveillance function. “Surveillance” in IMF language means a review by the fund of a country’s policies and national, regional and global economic and financial developments.
So, the idea that Brics initiatives, of which the most prominent thus far has been the NDB, will supplant Western-dominated multilateral financial institutions is a pipe dream.
• Sikhakhane, a former spokesperson for the finance minister, National Treasury and SA Reserve Bank, is editor of The Conversation Africa. He writes in his personal capacity.
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