Leaders of the Brics nations will showcase a new currency reserve fund and development bank this week. Critics say neither is enough to revive the group’s waning clout.
Brazil, Russia, India, China and South Africa will approve the creation of a $100 billion (R1.7 trillion) reserve fund and $50bn bank at their two-day summit starting today in Brazil.
But the measures are not big enough to boost growth or cohesion in the group as foreign investor sentiment sours and member states focus on issues close to home, such as Brazil’s elections, Russia’s intervention in Ukraine and India’s new economic policy plans.
“It’s hard to see a lot of impetus at this stage for the Brics in general and for these initiatives in particular,” said Arvind Subramanian, a senior fellow at the Peterson Institute for International Economics. “There’s going to be a lot of attention on domestic issues.”
The group’s track record in pursuing a common agenda on the world stage has been mixed.
“It’s easier to say what the Brics aren’t than what they are,” José Alfredo Graça Lima, the under-secretary for political affairs at Brazil’s foreign ministry, said.
The five countries failed to agree on candidates to head the World Bank in 2012 and the International Monetary Fund (IMF) in 2011, two posts at the heart of their demands for more say in global economic matters.
In addition, the Brazil summit is unlikely to provide a common front to push ahead global trade talks, even though the World Trade Organisation (WTO) is headed by a Brazilian – Roberto Azevedo.
Brazil itself has increased protectionist measures under President Dilma Rousseff.
“I wouldn’t say there will be a common outcome in that sense, but certainly there will be discussion on WTO matters,” Sujata Mehta, the secretary for economic relations at India’s foreign ministry, said.
India and South Africa had signalled they might backtrack on a trade facilitation agreement reached at the WTO talks in Bali in December last year, wrote Carlos Braga and Jean-Pierre Lehmann, professors at Swiss business school IMD.
Still, Indian Prime Minister Narendra Modi was unlikely to rock the boat at the summit, said NR Bhanumurthy, an economist at the National Institute of Public Finance and Policy, a government-backed research institute in New Delhi.
“Domestic issues are dominating his agenda,” he said.
The new development bank, which would not impose policy requirements on borrowers, would help fill fast-growing infrastructure financing needs, Kevin Gallagher, a professor of international relations at Boston University, said.
The Brics could also use it to put pressure on developed countries, particularly the US, to advance stalled measures to make global financial institutions more equitable, he said.
“They can say, ‘look, we have an alternative,’” Gallagher said. “It gives you a lot of political leverage.”
With an expected start-up capital of $50bn, the bank could lend $3.4bn a year in a decade, according to a March study by the UN Conference on Trade and Development. That compares with the $61bn the World Bank expects to lend this year.
The bank would eventually open membership to non-Brics countries and coincided with plans for an Asian infrastructure development bank spearheaded by Beijing, according to an official at the Brazilian Finance Ministry, who asked not to be named.
The Brics bank, along with the separate $50bn Asian infrastructure bank, was a way for China to get higher returns on its $3.9 trillion reserves than it did from buying US treasuries, said Oliver Rui, a professor of finance and accounting at the China Europe International Business School in Shanghai.
Subramanian said multilateral lending agencies were also a way for Beijing to legitimise investments abroad after backlashes in Africa against Chinese investment.
China will fund $41bn of the currency reserve agreement, which member countries will be able to tap in case of balance of payment deficits.
South Africa will earmark $5bn of its reserves and the remaining countries will set aside $18bn each.
Details on the functioning of the $100bn agreement, which amounts to 2 percent of the Brics nations’ pooled reserves, have yet to be worked out.
Each country would have a limited amount of cash it could draw on from the currency reserve. Lenders had an opt-out clause, allowing them to drop out of the agreement any time, the Brazilian official said.
“There are many unanswered questions still,” Domenico Lombardi, the director of global economy at the US-based Centre for International Governance Innovation, said. “The measures are more symbolic, designed to show they have alternative instruments to the IMF and World Bank.” – Bloomberg