Another lender?: Analysts tip-toe around BRICS’s new bank

ISLAMABAD: 

For long, Pakistan has remained dependent on west-dominated global financial institutions. But, as a strategic shift in the global economy gets under way – from the developed to the largest and fastest growing economies – the country can benefit from the New Development Bank (NDB) recently formed by the growing economies.

Known as BRICS, founding members of the NBD – Brazil, Russia, India, China and South Africa – have for the time being restricted membership to themselves. However, in principle, they have agreed to expand membership to other countries.

The bank will be headquartered in Shanghai, China with its first president from India. The newly born financial institution is widely perceived an alternate to global financial hegemony of the US and Europe.

The new financial institution will help break the monopoly of the World Bank (WB) and International Monetary Fund (IMF), which will benefit countries like Pakistan, according to an official of a multinational financial institution.

But for a country like Pakistan, heavily dependent on the west, there will understandable be pros and cons of joining a new bloc, according to analysts. They said Pakistan should become a member of the NDB at the earliest but will have to weigh in foreign policy implications before joining the club.

It opens the door for Pakistan to get funding other institutions decline to give. However, experts say that “it is too early” to expect that the NDB will replace the WB or the IMF. They say it will take at least 10 to 15 years before the NDB is counted as a near rival to the established global lenders.

The NDB will be one more window for getting finances for infrastructure projects but it will also not offer free lunch, said Dr Abid Hasan, a former operation WB advisor. The NDB might have less stringent conditions but it will ensure that its money is safely returned, he added.

Dr Hasan said there is a possibility that the NDB will raise funds by floating bonds like the WB and the Asian Development Bank. Bond investors will also seek solid guarantees and eventually the NDB will have to adopt policies which give comfort to investors, he added.

Pakistan’s ambitions to join the new club may face resistance from archrival India but it can successfully counter the Indian factor with the help of China and Brazil, said analysts. They said China is the dominant force among the five members and is considered close to Islamabad. Brazil may also neutralise political ambitions of India, the former being an important supplier of defence equipment to Pakistan.

The response of the US and European investors to the NDB will be another important factor for the new financial institution becoming a rival to the Bretton Woods System, comprising the WB and the IMF.

The Bretton Woods System are predominately Western institutions and over the years have been used for political purposes by the US and Europe.

The loans these institutions offer to developing economies like Pakistan are always linked to painful structural re-adjustments that create social and political troubles in the recipient countries.

Initially, the NDB will finance infrastructure and sustainable development projects, with $50 billion in capital. The BRICs have also announced a $1000billion Contingent Reserve Arrangement (CRA), to tide over members in financial difficulties. The CRA is going to be a substitute of the IMF, according to analysts. But it will take time till the NDB and CRA become global.

Each BRICS country will contribute $10 billion to the bank’s capital stock. China will provide 40% of a $100-billion Contingency Reserve Arrangement. While the NDB will have contributions from all five member countries, the dominant player in the organisation will be China.

China’s underline aim is that it wants Yuan become a global exchange currency —an objective that remained unfulfilled due to strong US influence.