Big BRICS for smaller nations: How unconditional can the NDB conditions be?

Jim O’Neill would have never imagined his intellectual exercise will turn into flesh and blood one day –the “accidentally” huddled initials of geographically disparate nations will become so real to make the New Development Bank (NDB).

For the Global South, the NDB - seeded with $50 billion from $10 billion contribution of each of the five signatories against the authorized initial capital of US$ 100 billion – is an assertion of being able to stand independent without handholding by the Western-backed IMF or World Bank.

And for smaller developing countries beyond BRICS it means emancipation from the harsher conditions of the World Bank and IMF aid who usually tag privatization and liberalization as an obligation to their loans.

An Oxfam paper cites the case of the Republic of Mali where the World Bank and the IMF had made their budget aid conditional on the privatization of Malian electricity and its cotton sector leading to hiked electricity prices and adversely affecting cotton farmers. A Norwegian government study of the IMF in 2006 had found 26 out of 40 poor countries had privatization and liberalization conditioned to their IMF loans.

So certainly an NDB is a hope of an alternative which may treat them with more empathy as they eagerly look forward to the possible accessing of the $100 billion Contingency Reserve Arrangement (CRA).

The NDB will finance infrastructure and sustainable development projects – a huge need especially as more countries try to graduate from low-income status.

Luciano Coutinho, Brazilian economist and President of the Brazilian Development Bank, talking to Al Jazeera estimated an immediate need for $600bn to $700bn in new investment in infrastructure in developing countries.

Countries like Bangladesh need at least $5 billion a year for the next 10 to 15 years to build necessary infrastructure. According to UNCTAD investment inflows are dismal in the country mainly because of infrastructure gaps. For Nepal, electricity and transport are the two major developmental needs.

Credit worthiness

For the NDB to build its initial credibility, it will have to maintain high standards of lending and ensure minimal defaulters. The two most important questions are how to create strong and efficient domestic financial structures that could work in tandem with the regional institution and extend high quality loans to improve its credit rating. And if it has to earn profits on the loans – which it should for future expansion – NDB will also have to charge an interest rate.

While smaller developing countries could borrow from the NDB without facing austere conditions, presenting a viable domestic environment for investment – most of which are plagued by inefficient governance and the poor ability of repayment even with a concessional interest rate – will be a challenge.

Additionally a professional assessment of each project on its soundness and possibility of success will be extremely crucial and even stringent if NDB is serious about its effectiveness. How well will a low income country do on the radar of feasibility of its project is another question.

As Vikram Nehru, Senior Associate, Asia Program, Bakrie Chair in Southeast Asian Studies, Carnegie Asia Program says, “The New Development Bank will have to borrow from capital markets to leverage its equity and will therefore need to charge an interest rate that will be close to the IBRD interest rate. This means that the NDB's clients are most likely to be creditworthy developing countries. In the initial period, it is very likely that the NDB will lend only to the BRICS themselves, but gradually more developing country members could be added as potential borrowers. The upshot is that low income developing countries are very unlikely to gain access to NDB resources, at least not for the foreseeable future and under its current proposed design.”

Jim O’Neill would have never imagined his intellectual exercise will turn into flesh and blood one day –the “accidentally” huddled initials of geographically disparate nations will become so real to make the New Development Bank (NDB).

For the Global South, the NDB - seeded with $50 billion from $10 billion contribution of each of the five signatories against the authorized initial capital of US$ 100 billion – is an assertion of being able to stand independent without handholding by the Western-backed IMF or World Bank.

And for smaller developing countries beyond BRICS it means emancipation from the harsher conditions of the World Bank and IMF aid who usually tag privatization and liberalization as an obligation to their loans.

An Oxfam paper cites the case of the Republic of Mali where the World Bank and the IMF had made their budget aid conditional on the privatization of Malian electricity and its cotton sector leading to hiked electricity prices and adversely affecting cotton farmers. A Norwegian government study of the IMF in 2006 had found 26 out of 40 poor countries had privatization and liberalization conditioned to their IMF loans.

So certainly an NDB is a hope of an alternative which may treat them with more empathy as they eagerly look forward to the possible accessing of the $100 billion Contingency Reserve Arrangement (CRA).

The NDB will finance infrastructure and sustainable development projects – a huge need especially as more countries try to graduate from low-income status.

Luciano Coutinho, Brazilian economist and President of the Brazilian Development Bank, talking to Al Jazeera estimated an immediate need for $600bn to $700bn in new investment in infrastructure in developing countries.

Countries like Bangladesh need at least $5 billion a year for the next 10 to 15 years to build necessary infrastructure. According to UNCTAD investment inflows are dismal in the country mainly because of infrastructure gaps. For Nepal, electricity and transport are the two major developmental needs.

Credit worthiness

For the NDB to build its initial credibility, it will have to maintain high standards of lending and ensure minimal defaulters. The two most important questions are how to create strong and efficient domestic financial structures that could work in tandem with the regional institution and extend high quality loans to improve its credit rating. And if it has to earn profits on the loans – which it should for future expansion – NDB will also have to charge an interest rate.

While smaller developing countries could borrow from the NDB without facing austere conditions, presenting a viable domestic environment for investment – most of which are plagued by inefficient governance and the poor ability of repayment even with a concessional interest rate – will be a challenge.

Additionally a professional assessment of each project on its soundness and possibility of success will be extremely crucial and even stringent if NDB is serious about its effectiveness. How well will a low income country do on the radar of feasibility of its project is another question.

As Vikram Nehru, Senior Associate, Asia Program, Bakrie Chair in Southeast Asian Studies, Carnegie Asia Program says, “The New Development Bank will have to borrow from capital markets to leverage its equity and will therefore need to charge an interest rate that will be close to the IBRD interest rate. This means that the NDB's clients are most likely to be creditworthy developing countries. In the initial period, it is very likely that the NDB will lend only to the BRICS themselves, but gradually more developing country members could be added as potential borrowers. The upshot is that low income developing countries are very unlikely to gain access to NDB resources, at least not for the foreseeable future and under its current proposed design.”

Vreeland speculating a probable situation of Chinese domination feels it is a paradoxical state with each having equal voting power over the NDB, the institution lacks a leader. So it is unclear how they will resolve differences in opinions as they develop down the road.

“With strong leadership, however, comes the potential for the leader to use its influence over the NDB to promote a strategic agenda. Consider the lending patterns at the Bretton Woods institutions. While much of their lending is driven by objective economic indicators, research has also shown that countries that are economically or strategically important to the largest shareholders (mainly the United States) receive better treatment than other countries. In my research with Axel Dreher (Heidelberg University) and Jan-Egbert Sturm (ETH), we have shown that countries serving on the UN Security Council, countries that are strategically important to the United States for their votes, receive more loans from the World Bank and the IMF, and lighter IMF conditionality.

One can therefore imagine that were China to take a stronger leadership role at the NDB, the institution might provide more favorable loans to countries that follow policies in line with China's preferences on all sorts of issues like Taiwan and the South China Sea. “

But many say NDB is a different ballgame altogether. Here China – with a foreign currency reserve of up to $4 trillion, needs to showcase itself as a team player to ensure smooth running of the bank through which it will also get access to new investment opportunities.

Dr Victoria V. Panova, Associate Professor, Department of International Relations and Foreign Policy of Russia MGIMO-University, MFA Russia agrees: ”Yes, China is most powerful of the five but recent negotiations showed they are eager for compromise. They managed to push for Shanghai as the HQ, but on the other hand India acquired for the first 6 years the chair, South Africa managed to secure a regional office, and concerns of the other four but China on one country - one voice were taken into account, which is probably most important of all.”

However Panova adds that while for all practical reasons there will be an equal play within the group, as the BRICS become too assertive and too real there could be external forces trying to create a dent. “American strategy of surrounding China and exploiting South China and East China Seas or dragging Russia into conflict around Ukraine is parts of this policy to weaken the stands of the BRICS countries in all areas - be it political, economic, and financial. Those five together became too assertive and too real. What BRICS should do - they basically have to stand by each other and not allow outsiders to split their ranks.”

So while China for now may choose to play a collaborative role in NDB, the BRICS leaders will most likely prefer a balanced assortment of loans comprising both middle and low income countries. However, during the initial phase when the NDB endeavors to find its feet, it’s the borrowers with better repayment capability and sound governance – presumably middle income countries – who will reap the benefits of the NDB resources.

The statements, views and opinions expressed in this column are solely those of the author and do not necessarily represent those of RT.