In full-fledged preparation for the official launch of BRICS New Development Bank (NDB) as an extraordinary highlight event during the July Summit under his chairmanship, Russian President Vladimir Putin has ratified an agreement on the establishment of a $100 billion BRICS pool of currency reserves, according to a document published early May on Kremlin’s official website.
Putin signed the federal law “On ratification of the Treaty establishing the pool contingent of foreign exchange reserves of the BRICS countries.” The federal law was first passed by the State Duma (Lower House) on April 24 after series of parliamentary deliberations and was finally approved by the Federation Council (Upper House) on April 29, 2015.
The agreement provides for the establishment BRICS pool contingent of foreign exchange reserves in order to provide financial support in the event of the partners of the BRICS problems with dollar liquidity in their domestic financial systems. This means that the $100 billion pool will maintain financial stability of the BRICS countries and allow for defenses against market volatility. The fund is meant to shield the BRICS against “short-term liquidity pressures” and promote greater cooperation between the five member countries.
On July 15 last year, in the city of Fortaleza (Brazil), BRICS members (Russia, China, Brazil, India and South Africa) signed an agreement to establish the $100 billion development bank, as well as a $100 billion reserve currency pool. China is set to provide the largest share of $41 billion to the pool, while Russia, Brazil and India will provide $18 billion each. South Africa is set to chip in the remaining $5 billion.
The headquarter is expected to be based in China’s Shanghai. The group agreed that India will preside as president on its first year. Russia, meantime, will be the chairman of the representatives.
Professor Georgy Toloraya, an Executive Secretary at the National Committee on BRICS Studies, in an interview with Buziness Africa notes the significance of BRICS bank as a catalyst to other international financial institutions, and explains further that “the Asian Infrastructure Investment Bank (АIIB) is a regional bank while the New Development Bank (NDB) is supposed to have a global outreach.”
“The AIIB is technically China-dominated and will center on projects, interesting to China. The New Development Bank (NDB) will have equal representation. Thus, it’s influence in changing the global financial architecture can be bigger. But competition is a good thing for these two banks as well,” the Executive Director wrote in an email comment to Buziness Africa.
He also recalls Russia’s suggestion to reform the international financial and economic architecture (including the International Monetary Fund) in the context of new developments in the world economy taking into account the legitimate interests of all the countries in order to create a more representative, stable and predictable system, reduce risks of destabilization of monetary and stock markets related to the massive cross-border movements of capital.
Toloraya points out assertively that an effort should be to create the road map of investment cooperation in the BRICS framework, conclude a multilateral agreement on the encouragement and protection of investments, and to single out areas for intra-BRICS cooperation and to develop cooperation in new technologies.
Contributing to this discussion, Professor David Shinn, who is an Adjunct Professor of International Affairs at The George Washington University’s Elliott School of International Affairs, argues in an email interview that “the BRICS New Development Bank is not yet functioning and it is not clear how the five original partners will share power. Other countries have been invited to join the bank, which could further alter the decision making process.”
The idea is that the five countries contribute a total of $100 billion for an initial capitalization pool for the bank. Should some countries contribute more than others, it is safe to assume those countries will have more leverage than those who put in lesser amounts, the former U.S. Ambassador and now Professor argues, adding that “the devil is always in the detail.”
It is also important to remember that the bank is the first tangible result of the BRICS, five countries that have only one thing in common: at the time they joined BRICS they were the largest economies in their geographical regions. The Nigerian economy has now surpassed South Africa’s economy, so even this commonality is in question, he says.
“I don’t really see the BRICS New Development Bank as operating in competition with the Asian Infrastructure Investment Bank. There is much to be done in the developing world generally and Africa specifically that will accommodate both banks in addition to the contributions of the World Bank and African Development Bank. So long as the BRICS bank is run competently and follows international standards, I expect it will make a positive contribution. But first it has to open its doors and start making loans,” concluded Professor Shinn
According to the biographical history, David Shinn is an American diplomat and professor. He is currently an Adjunct Professor of International Affairs at The George Washington University’s Elliott School of International Affairs. He offers consultancy to the U.S. Government on the Horn of Africa and Sino-African relations. He served previously as an Ambassador to Ethiopia and Burkina Faso.
Undoubtedly, South Africa is a minority contributor to the total currency reserve pool (contingent reserve arrangement – CRA) but an equal contributor to the New Development Bank (NDB or BRICS Bank). With the CRA, the funds committed remain in possession of South Africa.
“The rhetoric is that South Africa’s voice in BRICS financial matters is not going to be compromised, despite being a minority contributor to the CRA, yet South Africa has been shut down in BRICS negotiation processes before and there is a strong tendency for this arrangement as well as the NDB, which will be headquartered in Shanghai, to be driven by China,” says Hannah Edinger, a Director at Frontier Advisory (a research, strategy and investment advisory firm that assists clients to improve their competitiveness in emerging market economies) headquartered in South Africa.
Similarly, Edinger further explains, the AIIB is China’s brainchild and one more initiative to give China a greater leadership voice in the region, given that reform of existing institutions such as the World Bank and broadly speaking global governance has been slow and not that reflective of China’s economic rise.
While focus of both the NDB and the AIIB will be on infrastructure project financing, I don’t think these two banks will necessarily go head to head in terms of competition. Even with the existing Asian Development Bank (ADB) in the region, there is room for co-financing of projects, given that in Asia the infrastructure funding gap is multiple trillions of dollars.
Underlining the high relevance of these two banks, Edinger told me that “in fact, India’s infrastructure deficit alone is already in the multiple trillions of dollars…. Current lending institutions in the regions are unlikely to fill this gap, and even when the NDB and the AIIB are at full lending capacity they might still not plug the deficit. Also, the NDB’s mandate will not only focus on Asia, but also on Latin America and sub-Saharan Africa. I think the challenge for both banks will be to find good projects.”
Alex Vines, a Director for the Africa Programme at Chatham House in London, explains to Buziness Africa that South Africa’s inclusion in the BRICS has been a way for the ANC government to leverage its foreign policy, and position itself within the emerging narrative on South-South cooperation and trade. Their support for the creation of a New Development Bank is a continuation of this, and although only Russia has ratified it so far, the South African’s are in the final stages of ratifications.
The Agreement on the New Development Bank that formerly established the bank at the VI BRICS summit in Brazil last year stated that each of the founding members will initially subscribe to an equal number of shares, indicating equal voting rights on those shares. The bank will invest primarily in infrastructure projects in both BRICS and non-BRICS countries, and the establishment of the first regional office in Johannesburg will give access to the African continent where infrastructure development needs are highest.
The establishment of the first regional office in Johannesburg will give a boost to South Africa’s attempts to market itself as the ‘gateway to Africa’, a position it has had difficulty maintaining against emerging regional hubs such as Lagos and Nairobi. The bank will also deepen the political relationship between China and South Africa.
“The NDB is the first tangible outcome from the BRICS organization, but the political relationship between China and South Africa extends outside the organization. China has become South Africa’s main trade partner, and South Africa is China’s largest partner on the African continent,” he wrote in an email to Buziness Africa.
Plans for the Asian infrastructure Investment Bank are still in their infancy, the MOU was only signed last October, but it looks like these institutions will complement, rather than compete with, each other.
Vines also said: “the establishment of the NDB was in part a reaction to under-representation in the existing international financial institutions, but it is unlikely that they will become direct competitors. It is estimated that the infrastructure investment requirement developing countries tops $1trillion per year, so there is plenty of room for new players in the marketplace, including the World Bank’s proposed Global Infrastructure Facility.”
In the case of the BRICS bank, Christopher Wood, a Researcher on Economic Diplomacy at the South African Institute of International Affairs (SAIIA), also explains in an email discussion recently…“China does not actually contribute more. All five countries are contributing $10 billion of callable capital to start with, giving them equal say in the decisions of the banks. Where China does contribute more is in the case of the Contingent Reserve Arrangement, which is a separate agreement that is a pool money that the five BRICS can draw on in times of financial crisis. The best way to think about the relationship between the two is that the BRICS New Development Bank is like the World Bank (providing funding for development projects), while the CRA is like the IMF (providing emergency funding in times of crisis).”
In the case of the CRA, South Africa does have a very small voice, but it’s not so important in this type of organization. The only decisions that will be made will be over whether to release funds to a country that requests help, and this would usually be an easy decision to make, based on hard economic evidence, according to Wood.
There are challenges to overcome. Researcher Wood thinks that “the bank’s short term challenges will be logistical, completing basic things like hiring staff, building internal operational procedures, and so on. Once this is completed, two larger challenges will present themselves. First, making a decision on what projects to fund, which will involve answering difficult questions on what type of projects the bank prioritizes, where it most wants to operate, and what role political priorities might play. Second, would be in building relationships with existing funders, like the World Bank and AIIB, to assure the BRICS bank doesn’t have to bear all the risk of the projects it gets involved in.”
On the other hand, Wood does not think China’s position in both the AIIA and BRICS bank indicates it wants to dominate the global space of these institutions, but certainly indicates it wants to play a bigger role. Traditional institutions are still dominated by developed countries and reforms that would give a bigger voice to countries like China have been very slow. In the Asian Development Bank, for example, the US and Japan each have more than twice as much voting power as China. The new institutions represent China’s frustration with the lack of reform and the persistence of a voting structure that doesn’t reflect its growth into a global superpower.
Chris Weafer, a Senior Partner with Macro Advisory, a consultancy advising macro hedge funds and foreign companies looking at investment opportunities in Russia, said in comments published recently that “within this new group, Russia certainly has a role because the country is the world’s biggest energy exporter and, on aggregate, the world’s biggest minerals exporter. Neither China nor India could sustain their current high pace of growth without either direct materials imports from Russia or, indirectly, from the global marketplace.”
He says “that alone justifies a seat at the BRICS table. Beyond that, Russia is already one of the largest consumer markets in the world and is, on a per capita and per household basis, the largest in the emerging market world.”
The idea to set up BRICS bank was first proposed by India and that topped the agenda at the summit of the group in New Delhi in March 2012. India believes a joint bank would be in line with the growing economic power of the five-nation group. The bank could firm up the position of BRICS as a powerful player in global decision-making. India believes that a BRICS bank could, among others, issue convertible debt, which would arguably be top-rated and can be bought by central banks of all BRICS countries. BRICS countries would thus have a vessel for investment risk-sharing.
The BRICS countries collectively represent about 26% of the world’s geographic area and are home to 42% of the world’s population. The BRICS consumer market is the largest in the world and is growing by $500 billion a year. Since the start of April, Russia has assumed the presidency of the BRICS group, taking over the position from Brazil. The next BRICS summit will take place in Ufa, the capital of Russia’s Volga republic Bashkiria, on July 8-10, 2015.
The Monetary Policy of Pakistan: SBP Maintains the Policy Rate
The State Bank of Pakistan (SBP) announced its bi-monthly monetary policy yesterday, 27th July 2021. Pakistan’s Central bank retained the benchmark interest rate at 7% after reviewing the national economy in midst of a fourth wave of the coronavirus surging throughout the country. The policy rate is a huge factor that relents the growth and inflationary pressures in an economy. The rate was majorly retained due to the growing consumer and business confidence as the global economy rebounds from the coronavirus. The State Bank had slashed the interest rate by 625 basis points to 7% back in the March-June 2020 in the wake of the covid pandemic wreaking havoc on the struggling industries of Pakistan. In a poll conducted earlier, about 89% of the participants expected this outcome of the session. It was a leap of confidence from the last poll conducted in May when 73% of the participants expected the State Bank to hold the discount rate at this level.
The State Bank Governor, Dr. Raza Baqir, emphasized that the Monetary Policy Committee (MPC) has resorted to holding the 7% discount rate to allow the economy to recover properly. He added that the central bank would not hike the interest rate until the demand shows noticeable growth and becomes sustainable. He echoed the sage economists by reminding them that the State Bank wants to relay a breather to Pakistan’s economy before pushing the brakes. The MPC further asserted that the Real Discount Rate (adjusted for inflation) currently stands at -3% which has significantly cushioned the economy and encouraged smaller industries to grow despite the throes of the pandemic.
Dr. Raza Baqir further went on to discuss the current account deficit staged last month. He added that the 11-month streak of the current account surplus was cut short largely due to the loan payments made in June. The MPC further explained that multiple factors including an impending expiration of the federal budget, concurrent payments due to lenders, and import of vaccines, weighed heavily down on the national exchequer. He further iterated that the State Bank expects a rise in exports along with a sustained recovery in the remittance flow till the end of 2021 to once again upend the current account into surplus. Dr. Raza Baqir assured that the current level of the current account deficit (standing at 3% of the GDP) is stable. The MPC reminded that majority of the developing countries stand with a current account deficit due to growth prospects and import dependency. The claims were backed as Dr. Raza Baqir voiced his optimism regarding the GDP growth extending from 3.9% to 5% by the end of FY21-22.
Regarding currency depreciation, Dr. Baqir added that the downfall is largely associated with the strengthening greenback in the global market coupled with high volatility in the oil market which disgruntled almost every oil-importing country, including Pakistan. He further remarked, however, that as the global economy is vying stability, the situation would brighten up in the forthcoming months. Mr. Baqir emphasized that the current account deficit stands at the lowest level in the last decade while the remittances have grown by 25% relative to yesteryear. Combined with proceeds from the recently floated Eurobonds and financial assistance from international lenders including the IMF and the World Bank, both the currency and the deficit would eventually recover as the global market corrects in the following months.
Lastly, the Governor State Bank addressed the rampant inflation in the economy. He stated that despite a hyperinflation scenario that clocked 8.9% inflation last month, the discount rates are deliberately kept below. Mr. Baqir added that the inflation rate was largely within the limits of 7-9% inflation gauged by the State Bank earlier this year. However, he further added that the State Bank is making efforts to curb the unrelenting inflation. He remarked that as the peak summer demand is closing with July, the one-way pressure on the rupee would subsequently plummet and would allow relief in prices.
The MPC has retained the discount rate at 7% for the fifth consecutive time. The policy shows that despite a rebound in growth and prosperity, the threat of the delta variant still looms. Karachi, Pakistan’s busiest metropolis and commercial hub, has recently witnessed a considerable surge in infections. The positivity ratio clocked 26% in Karachi as the national figure inched towards 7% positivity. The worrisome situation warrants the decision of the State Bank of Pakistan. Dr. Raza Baqir concluded the session by assuring that despite raging inflation, the State Bank would not resort to a rate hike until the economy fully returns to the pre-pandemic levels of employment and production. He further assuaged the concerns by signifying the future hike in the policy rate would be gradual in nature, contrast to the 2019 hike that shuffled the markets beyond expectation.
Reforms Key to Romania’s Resilient Recovery
Over the past decade, Romania has achieved a remarkable track record of high economic growth, sustained poverty reduction, and rising household incomes. An EU member since 2007, the country’s economic growth was one of the highest in the EU during the period 2010-2020.
Like the rest of the world, however, Romania has been profoundly impacted by the COVID-19 pandemic. In 2020, the economy contracted by 3.9 percent and the unemployment rate reached 5.5 percent in July before dropping slightly to 5.3 percent in December. Trade and services decreased by 4.7 percent, while sectors such as tourism and hospitality were severely affected. Hard won gains in poverty reduction were temporarily reversed and social and economic inequality increased.
The Romanian government acted swiftly in response to the crisis, providing a fiscal stimulus of 4.4 percent of GDP in 2020 to help keep the economy moving. Economic activity was also supported by a resilient private sector. Today, Romania’s economy is showing good signs of recovery and is projected to grow at around 7 percent in 2021, making it one of the few EU economies expected to reach pre-pandemic growth levels this year. This is very promising.
Yet the road ahead remains highly uncertain, and Romania faces several important challenges.
The pandemic has exposed the vulnerability of Romania’s institutions to adverse shocks, exacerbated existing fiscal pressures, and widened gaps in healthcare, education, employment, and social protection.
Poverty increased significantly among the population in 2020, especially among vulnerable communities such as the Roma, and remains elevated in 2021 due to the triple-hit of the ongoing pandemic, poor agricultural yields, and declining remittance incomes.
Frontline workers, low-skilled and temporary workers, the self-employed, women, youth, and small businesses have all been disproportionately impacted by the crisis, including through lost salaries, jobs, and opportunities.
The pandemic has also highlighted deep-rooted inequalities. Jobs in the informal sector and critical income via remittances from abroad have been severely limited for communities that depend on them most, especially the Roma, the country’s most vulnerable group.
How can Romania address these challenges and ensure a green, resilient, and inclusive recovery for all?
Reforms in several key areas can pave the way forward.
First, tax policy and administration require further progress. If Romania is to spend more on pensions, education, or health, it must boost revenue collection. Currently, Romania collects less than 27 percent of GDP in budget revenue, which is the second lowest share in the EU. Measures to increase revenues and efficiency could include improving tax revenue collection, including through digitalization of tax administration and removal of tax exemptions, for example.
Second, public expenditure priorities require adjustment. With the third lowest public spending per GDP among EU countries, Romania already has limited space to cut expenditures, but could focus on making them more efficient, while addressing pressures stemming from its large public sector wage bill. Public employment and wages, for instance, would benefit from a review of wage structures and linking pay with performance.
Third, ensuring sustainability of the country’s pension fund is a high priority. The deficit of the pension fund is currently around 2 percent of GDP, which is subsidized from the state budget. The fund would therefore benefit from closer examination of the pension indexation formula, the number of years of contribution, and the role of special pensions.
Fourth is reform and restructuring of State-Owned Enterprises, which play a significant role in Romania’s economy. SOEs account for about 4.5 percent of employment and are dominant in vital sectors such as transport and energy. Immediate steps could include improving corporate governance of SOEs and careful analysis of the selection and reward of SOE executives and non-executive bodies, which must be done objectively to ensure that management acts in the best interest of companies.
Finally, enhancing social protection must be central to the government’s efforts to boost effectiveness of the public sector and deliver better services for citizens. Better targeted social assistance will be more effective in reaching and supporting vulnerable households and individuals. Strategic investments in infrastructure, people’s skills development, and public services can also help close the large gaps that exist across regions.
None of this will be possible without sustained commitment and dedicated resources. Fortunately, Romania will be able to access significant EU funds through its National Recovery and Resilience Plan, which will enable greater investment in large and important sectors such as transportation, infrastructure to support greater deployment of renewable energy, education, and healthcare.
Achieving a resilient post-pandemic recovery will also mean advancing in critical areas like green transition and digital transformation – major new opportunities to generate substantial returns on investment for Romania’s economy.
I recently returned from my first official trip to Romania where I met with country and government leaders, civil society representatives, academia, and members of the local community. We discussed a wide range of topics including reforms, fiscal consolidation, social inclusion, renewably energy, and disaster risk management. I was highly impressed by their determination to see Romania emerge even stronger from the pandemic. I believe it is possible. To this end, I reiterated the World Bank’s continued support to all Romanians for a safe, bright, and prosperous future.
First appeared in Romanian language in Digi24.ro, via World Bank
US Economic Turmoil: The Paradox of Recovery and Inflation
The US economy has been a rollercoaster since the pandemic cinched the world last year. As lockdowns turned into routine and the buzz of a bustling life came to a sudden halt, a problem manifested itself to the US regime. The problem of sustaining economic activity while simultaneously fighting the virus. It was the intent of ‘The American Rescue Plan’ to provide aid to the US citizens, expand healthcare, and help buoy the population as the recession was all but imminent. Now as the global economy starts to rebound in apparent post-pandemic reality, the US regime faces a dilemma. Either tighten the screws on the overheating economy and risk putting an early break on recovery or let the economy expand and face a prospect of unrelenting inflation for years to follow.
The Consumer Price Index, the core measure of inflation, has been off the radar over the past few months. The CPI remained largely over the 4% mark in the second quarter, clocking a colossal figure of 5.4% last month. While the inflation is deemed transitionary, heated by supply bottlenecks coinciding with swelling demand, the pandemic-related causes only explain a partial reality of the blooming clout of prices. Bloomberg data shows that transitory factors pushing the prices haywire account for hotel fares, airline costs, and rentals. Industries facing an offshoot surge in prices include the automobile industry and the Real estate market. However, the main factors driving the prices are shortages of core raw materials like computer chips and timber (essential to the efficient supply functions of the respective industries). Despite accounting for the temporal effect of certain factors, however, the inflation seems hardly controlled; perverse to the position opined by Fed Chair Jerome Powell.
The Fed already insinuated earlier that the economy recovered sooner than originally expected, making it worthwhile to ponder over pulling the plug on the doveish leverage that allowed the economy to persevere through the pandemic. The main cause was the rampant inflation – way off the 2% targetted inflation level. However, the alluded remarks were deftly handled to avoid a panic in an already fragile road to recovery. The economic figures shed some light on the true nature of the US economy which baffled the Fed. The consumer expectations, as per Bloomberg’s data, show that prices are to inflate further by 4.8% over the course of the following 12 months. Moreover, the data shows that the investor sentiment gauged from the bond market rally is also up to 2.5% expected inflation over the corresponding period. Furthermore, a survey from the National Federation of Independent Business (NFIB) suggested that net 47 companies have raised their average prices since May by seven percentage points; the largest surge in four decades. It is all too much to overwhelm any reader that the data shows the economy is reeling with inflation – and the Fed is not clear whether it is transitionary or would outlast the pandemic itself.
Economists, however, have shown faith in the tools and nerves of the Federal Reserve. Even the IMF commended the Fed’s response and tactical strategies implemented to trestle the battered economy. However, much averse to the celebration of a win over the pandemic, the fight is still not through the trough. As the Delta variant continues to amass cases in the United States, the championed vaccinations are being questioned. While it is explicable that the surge is almost distinctly in the unvaccinated or low-vaccinated states, the threat is all that is enough to drive fear and speculation throughout the country. The effects are showing as, despite a lucrative economic rebound, over 9 million positions lay vacant for employment. The prices are billowing yet the growth is stagnating as supply is still lukewarm and people are still wary of returning to work. The job market casts a recession-like scenario while the demand is strong which in turn is driving the wages into the competitive territory. This wage-price spiral would fuel inflation, presumably for years as embedded expectations of employees would be hard to nudge lower. Remember prices and wages are always sticky downwards!
Now the paradox stands. As Congress is allegedly embarking on signing a $4 trillion economic plan, presented by president Joe Bidden, the matters are to turn all the more complex and difficult to follow. While the infrastructure bill would not be a hard press on short-term inflation, the iteration of tax credits and social spending programs would most likely fuel the inflation further. It is true that if the virus resurges, there won’t be any other option to keep the economy afloat. However, a bustling inflationary environment would eventually push the Fed to put the brakes on by either raising the interest rates or by gradually ceasing its Asset Purchase Program. Both the tools, however, would risk a premature contraction which could pull the United States into an economic spiral quite similar to that of the deflating Japanese economy. It is, therefore, a tough stance to take whether a whiff of stagflation today is merely provisional or are these some insidious early signs to be heeded in a deliberate fashion and rectified immediately.
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