BRICS Ink $50 Billion Lender in World Bank, IMF Challenge
By Raymond Colitt, Unni Krishnan and Arnaldo Galvao
Leaders of the five BRICS nations agreed on the structure of a $50 billion development bank by granting China its headquarters and India its first rotating presidency. Brazil, Russia and South Africa were given posts or units in the new bank.
The leaders also formalized the creation of a $100 billion currency exchange reserve, which member states can tap in case of balance of payment crises, according to a statement issued at a summit in Fortaleza, Brazil.
Both initiatives, which require legislative approval, are designed to provide an alternative to financing from the International Monetary Fund and the World Bank, where BRICS countries have been seeking more say. The measures coincide with a slowing of economic growth in the five countries to about 5.4 percent this year from 10.7 percent in 2007, according to economists surveyed by Bloomberg.
“The BRICS are gaining political weight and demonstrating their role in the international arena,” Brazilian President Dilma Rousseff said after a signing ceremony.
IMF Managing Director Christine Lagarde congratulated the BRICS on establishing the reserve arrangement and said the Washington-based lender would be “delighted” to work together on the international safety net designed to preserve financial stability, according to an e-mailed statement.
Until the eve of the summit, India and South Africa had vied with China to host the headquarters of the bank, dubbed the New Development Bank, whose membership may eventually be extended to other countries.
Russia’s Finance Minister Anton Siluanov told reporters that the BRICS decided in favor of Shanghai because the city offers better infrastructure, opportunities to capture private funding, and is home to more investors than the competitors.
Each member country got something out of the deal. The first chairman of the Board of Governors will be from Russia, while the first chairman of the Board of Directors will be Brazilian. South Africa will establish an African regional center for the bank, which may not get off the ground for two years, according to Carlos Cozendey, secretary for international affairs at Brazil’s Finance Ministry.
Founding members have equal voting rights. Of the total subscribed capital, $40 billion are callable shares. Payment of the remaining $10 billion of paid-in shares will be made over seven years.
Unlike the IMF and World Bank, which are managed by Europeans and Americans, the BRICS bank “is quite democratic,” Brazilian Finance Minister Guido Mantega told reporters. Yet the idea is not to compete with the Washington-based institutions but complement them, Rousseff said in Brasilia today on the second day of the summit that includes leaders from Latin America. “We have no interest in giving up the IMF — on the contrary, we we are interested in democratizing it, making it more representative.”
Each member country has the right to withdraw different amounts from the joint currency reserves, according to a statement from Brazil’s central bank. China can withdraw half the amount it earmarks or $20.5 billion. Brazil, Russia, and India may withdraw the same amount they commit or $18 billion, while South Africa can tap $10 billion, twice its contribution.
“It’s a type of insurance policy,” said Mantega.
The BRICS have evolved from the original term coined in 2001 by then-Goldman Sachs Group Inc. economist Jim OâNeill to describe the growing weight of the largest emerging markets in the global economy. In 2011, South Africa joined to give the BRICS a broader geographic representation.
“Separately, all the BRIC economies in the last two years have slowed, so there is quite a lot of attention on the declining economic influence of them,” O’Neill said in an interview with Bloomberg TV India. “But I think that the general Western view is just wrong. Even at the slower rate of growth, they are, their importance to the world continues to rise.”
There are still plenty of opportunities for business, and the newly-created development bank will help those opportunities become reality, said Jorge Gerdau Johannpeter, chairman of Brazilian steelmaker Gerdau SA.
“The bigger the financing possibilities, the bigger the chances of implementing projects,” Gerdau told reporters at the summit.
The biggest winner among the BRICS and its newly created bank may be South Africa, as it stands to gain financial expertise, investment and trade, said Colin Coleman, the Johannesburg-based head of Goldman Sachs Group Inc. in sub-Saharan Africa, who attended the BRICS Business Council meeting.
“Arguably we have the greatest amount to benefit because we’re partnering diplomatically and otherwise with some of the world’s most important emerging-market economies,” Coleman said in a phone interview.
While BRICS trade ministers in a joint communique said that member countries stood by the World Trade Organization’s Bali agreement, Brazil’s Trade Minister Mauro Borges said he understood India had certain concerns about its implementation and that the BRICS countries didn’t intend to forge a common stance on the issue.
BRICS share of world exports rose to 16 percent in 2011, from 8 percent in 2001.
Russia also proposed at the summit in the northeastern coastal city of Fortaleza the creation of an Infrastructure Fund during the summit, Kirill Dmitriev, chief executive officer of the Russian Direct Investment Fund, told reporters. The fund could start up as early as next year, he said.