The BRICS New Development Bank (NDB) completes six years since its inception in July 2021. Considered as the most successful initiative of the BRICS grouping so far, the NDB was proposed at the fourth BRICS summit 2012 in New Delhi, where the leaders of Brazil, Russia, India, China and South Africa considered the possibility of setting up a new development financing institution, to be led by the BRICS nations, to mobilise resources for infrastructure and sustainable development projects in member countries and other developing countries.
The decision to set up the bank was taken at the fifth BRICS summit in Durban (2013) and the agreement formally establishing the bank was signed in 2014 at the sixth BRICS summit in Fortaleza. It entered into force in July 2015. Six years on, the NDB is now evolving from a start-up to a fully functioning multilateral development bank. The sixth anniversary of the bank is an opportune time to pause and reflect on the successes and failures of the bank and the challenges it faces going forward.
Three successes of the bank are worth highlighting. Over the past six years, the bank has received the following ratings: AA+ long-term issuer credit ratings from S&P and Fitch; AAA foreign currency long-term rating from the Japan Credit Rating Agency (JCR); AAA institutional rating from the Chengxin and Lianhe rating agencies; AAA rating from the Analytical Credit Rating Agency (ACRA).
The bank has approved USD 15 billion for over 53 projects and has created a Project Preparation Fund to support bankable projects in member countries by enhancing the NDB’s project preparation capability, facilitating the undertaking of feasibility studies and supporting project implementation.
It has upheld its commitment to make local currency funding available to all member nations and has been able to successfully register local currency bond programs in China, South Africa and Russia thus far. It plans to initiate similar programs in India and Brazil as well. Historically, multilateral development banks raise funds in currencies like the US dollar or the euro. With the objective of safeguarding against the volatility in currency markets and to stay away from the dependence on Western markets, the move to raise funds in local bond markets of member countries has been applauded by bankers and analysts around the world.
Gauging the need to contribute to global efforts to tackle the ongoing COVID-19 pandemic, the bank has introduced a Coronavirus Combating Bond and two COVID Response Bonds (of USD 1.5 billion for three years and USD 2 billion for five years). Green finance has also been a priority of the bank since its first green bond was initiated in 2016 in the China Interbank Bond Market.
Despite these successes, the NDB is subjected to constant comparisons with the China-led Asian Infrastructure Investment Bank (AIIB). Unlike the AIIB, the NDB does not have a wider state-led geopolitical strategy. While the NDB was set up with the objective of financing infrastructure projects in member countries, the AIIB is being seen as the financing arm of China’s Belt and Road Initiative.
Unlike other multilateral financial institutions, including the AIIB, the NDB’s ownership structure is unique. The five countries have an equal vote share and have pooled in the same amount of capital on inception. No member country has any veto power. It was designed in this manner to recognise the shifts in the geoeconomic heft of nations like India and China, particularly, and to acknowledge their desire to take on a bigger role in the governance of the new financial architecture, that will place developing countries and emerging economies on the same global footing as developed countries. It marked a move from the hegemony that the countries of the Western, developed world had in existing multilateral institutions, like the World Bank and the Asian Development Bank (ADB), to name a few. It was also done this way to recognise the need for increased investments in long-term and new sustainable infrastructure in developing countries, that would come from developing countries.
Despite this, critics highlight the unequal weight and influence that China enjoys in the bank. China managed to pitch for the bank’s headquarters to be located in Shanghai, the country’s financial capital. Chinese credit rating agencies were the first to give the bank high ratings for its activities and the most bond issuances the bank has undertaken so far have been in the China Interbond Market.
Another drawback of the NDB that has restricted its scope is its policy thus far, to finance projects by itself. Due to a lean membership, it also has access to a smaller pool of funds than the AIIB. The NDB does have MoUs with banks like the African Development Bank and the EXIM Bank of China on strategic, technical and operational cooperation. But these have not culminated in any co-financing arrangements. In contrast, the AIIB co-finances projects with other lenders, like the World Bank, the ADB and the European Bank for Reconstruction and Development (EBRD). It has 103 member countries (as of May 2020) and thus a greater reach and access to a larger pool of funds.
The expansion of the NDB to include more member states from the developing and emerging world has been under discussion for the last few years. The merits and demerits of an enlarged membership are still being debated. If it is opened up to some developed countries, it can beef up its funding capacity and improve its credit rating scores further. But it will lose its original purpose – to break the hegemony of Western countries on the multilateral banking system. That said, it is too early to say whether the NDB, or the AIIB, will be serious competitors to the multilateral development banks of the Bretton Woods system. The bank will need to seriously revisit its original mandate and decide whether an expansion is the need of the hour or whether their lean structure is more important to their strategy for the next few years.
The NDB’s General Strategy 2017–2021 mentions the operational and institutional outcomes that it hoped to achieve by 2021. They are as follows:
While the bank has made progress on the first five objectives, its aim to expand membership and have a reinforced capital base is still underway. The bank will formulate its next General Strategy in the coming year, with a renewed set of outcomes and objectives. The international community will be on the lookout to see how far it progresses on meeting the six goals mentioned in its strategy document and whether or not expansion of the bank’s membership will be a priority.
The political turmoil in and between member countries is another challenge that the bank faces. Relations between China and India have since soured, political instability and economic crisis has gripped South Africa and Brazil, and Russia faces economic and political sanctions, making it difficult to lend money to Russian infrastructure companies. The BRICS nations are located in different geographies around the world. They have different growth strategies, competing global priorities and different resources available to them, making joint decisions difficult.
The task the bank has at hand going forward is tough – continuing to advance infrastructure and sustainable development projects in developing countries in the middle of a global pandemic, in a world that faces a rough political, economic and social climate amid a plethora of actors and players.
Views expressed by the author are personal and need not reflect or represent the views of Centre for Public Policy Research.
Purvaja Modak is a Research Fellow, International Relations – Geoeconomics at CPPR. Her research focuses on issues of global economic governance, international trade and finance, economic diplomacy and multilateral financial institutions.
Prior to joining CPPR, she was a Researcher for Geoeconomic Studies and the Manager of the Research Office at Gateway House: Indian Council on Global Relations, a Mumbai based foreign policy think tank.. She was a fellow at the 2nd G20 Global Leadership Programme 2019, hosted by the Korean Development Institute (KDI) and the Korean Ministry of Strategy and Finance. Purvaja has also held Research Assistant and Research Associate positions in her academic departments at both Bachelors and Masters levels. She has also interned at Reliable Investments, an exclusive franchisee of Motilal Oswal Securities Ltd.
She holds a Masters degree in Economics (MA) from the University of Mumbai with a focus on international trade, finance and regional monetary arrangements and a Bachelors Degree in Economics (BA) from Jai Hind College, Mumbai.