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Brics bank formally created but won’t be operational for at least two years

25th July 2014

By: Keith Campbell

Creamer Media Senior Deputy Editor

  

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The leaders of the five Brics (Brazil, Russia, India, China and South Africa) countries signed an accord officially creating the New Development Bank, more popularly called the Brics Bank, at the recent Brics Summit in Fortaleza, Brazil. The signing was the outcome of two years of negotiations. In addition, the creation of an anti-crisis fund (the Contingency Reserve), to act as a means to help countries suffering from financial turbulence and originally announced in 2012, was also made official.

The bank will have an initial capital of $50-billion, with each Brics country contributing $10-billion. In each case, $2-billion of this will be in cash and $8-billion in guarantees. However, an increase of this total of up to $100-billion has been authorised. The Brics countries have seven years to meet their financial commitments to the bank. It is possible that loans could be made to countries outside the Brics group and additional countries will be allowed to join the bank, although the five founder countries will maintain an minimum joint shareholding of 55%. The Brazilian newspaper O Estado de São Paulo reports that the most optimistic forecasts are that the bank will start functioning in 2016. Brazilian Finance Minister Guido Mantega said it was “very early” to talk about the interest rates likely to be charged on the bank’s loans, but that they would be at “reasonable levels”. Countries seeking loans would have to meet “normal requirements”, including environmental and social obligations.

The Contingency Reserve will total $100-billion, of which China will contribute $41-billion, Brazil, India and Russia $18-billion each and South Africa $5-billion. The fund can be activated when a member country is having balance of payments problems. It would receive funds in dollars and, in return, transfer funds in its own currency to the contributing countries. This would be to save its international reserves. There would be agreed time periods for these activities. It has not yet been determined if any country outside Brics could make use of the anti-crisis fund.

The governance structure of the bank will be headed by a Governors Council, composed of the Ministers of Finance of the member countries, which will be responsible for the strategic direction of the institution and make the most important decisions. Under it will be a Administrative Council (or Board) which will be responsible for implementing the directives of the Governors Council. The bank’s head office will be in Shanghai, China. The first president of the bank will be appointed by India, the first president of the Governors Council by Russia and the first president of the Administrative Council by Brazil. What does South Africa get? To host the bank’s African Regional Centre.

The president of the bank will have a five-year term and the post will rotate between the five Brics countries. India will be followed by Brazil, then Russia, then South Africa and then China. So a South African should take up the presidency some 15 years from now (at the earliest).

For South Africa, a country that had ambitions to host the bank’s head office, a mere regional centre (plus a promise of the bank presidency 15 or more years from now) is quite a come down. It is, of course, a reminder of how much smaller and weaker South Africa is, in comparison to the other Brics countries. But it may also be the first fruits of South Africa being firmly pushed into second place in Africa’s economic rankings by Nigeria. South Africa’s admission to Brics was justified on its status as Africa’s leading economy. But South Africa has failed to keep that status, effectively undermining the group’s pretensions and so embarrassing the other Brics members.

Of course, both the New Development Bank and the Contingency Reserve fund have to be ratified by the Parliaments of the member countries. In the case of China, this, in reality, would be merely a rubber stamping process. Political dynamics and parliamentary majorities in India, Russia and South Africa suggest that ratification should be straightforward in those countries.

In Brazil, however, things are different. The country goes to the polls on October 5 for national Presidential and Congressional elections. It is certain that the new bank and fund will not be ratified before the elections – even the critically important Budget Directives Law is most unlikely to be passed by the Chamber of Deputies until after the people have voted, while the Senate will sit on only two days before the elections, namely August 5 and 6. (Legally, Senators and Deputies can only go on holiday if the Budget Directives Law has been passed; so the Congress will not go into recess – however, no formal sessions will be scheduled, so the politicians won’t have to stay in the capital, Brasília!)

And after the elections? That depends on the results. If current President Dilma Rousseff is re-elected with a strong supporting bloc in the Congress, the ratification will go smoothly. If she is re-elected but her congressional bloc is cut to pieces (polls indicate that her Workers Party is even more unpopular than she currently is), and the Congress is dominated by the opposition, ratification will be slow and difficult and may not happen. The two leading alternative candidates are Aécio Neves of the Brazilian Social Democratic Party (which, along with the Democratic Party, forms the core of the opposition) and former Rousseff ally Eduardo Campos of the Brazilian Socialist Party (which is centrist, not leftist). Should Campos win, it is likely that Brazil would ratify the new bank and fund. Should Neves triumph, all bets are off: the opposition has never endorsed any of the foreign policy initiatives and programmes of Rousseff or her predecessor, Luiz Inácio Lula da Silva. A Neves victory would certainly be followed by major changes in Brazilian foreign policy. What is not known is how major these changes would be.

To be elected President in Brazil in the first round of voting, a candidate needs 50% plus one vote. At the start of the month, a respected poll put Rousseff on 38%. There is, however, still more than two months to go. But we could end up with a Rics bank rather than a Brics bank.

Edited by Martin Zhuwakinyu
Creamer Media Senior Deputy Editor

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