This article explores systemic and market barriers preventing the wider use of BRICS national currencies in trade, including currency swaps mechanisms and reasons for BRICS exporters’ preference not to use national currencies. Design flaws are outlined in the New Development Banks’ Contingency Reserve Arrangement (CRA) in the context of de-dollarizing BRICS trade, namely its IMF linkage requirements and limited scope, symptomatic of a lack of trust between BRICS member states. The current levels of de-dollarization in Russia’s intra-BRICS settlements (as a representative sample) are used to find gaps between Russia’s stated de-dollarization goals and current initiatives, and market barriers are identified to explain this gap. Finally, the components of market mechanisms needed to de-risk Intra-BRICS trade and overcome the identified barriers are outlined.
Background to Challenge
The 2017 BRICS New Development Bank’s strategy report The Role Of BRICS In The World Economy & International Development detailed a long-term vision of the direction BRICS countries’ economic cooperation was headed in. The strategy report made the case that reforms in the existing western institutions would not be in BRICS countries’ favour in the near future, and hence emphasized the importance of a new Multilateral Clearing Union (MCU) which would serve as an intra-BRICS currency swap pool and tackle balance of payment shortcomings, trade finance, financial crisis aversion, and an overall restoration of sovereignty by de-dollarizing BRICS trade (NDB, 2017). This intention was also echoed in the 2017 BRICS Xiamen Summit declaration, which stated:
“We agree to …enhance currency cooperation, consistent with each central bank’s legal mandate, including through currency swap, local currency settlement, and local currency direct investment….We commend the progress in concluding the Memoranda of Understanding among national development banks of BRICS countries on interbank local currency credit line and on interbank cooperation in relation to credit rating.”
In parallel to the Xiamen summit, the R5+ (Real, Ruble, Rupee, Renminbi, Rand, in addition to the currencies of BRICS+ countries) currency initiative was launched, which sought to stimulate the use of national currencies for “investments, long-term projects, creation of common payment card systems and common settlement/payment systems, cooperation in promoting BRICS+ currencies towards reserve currency status.”
The New Development Bank’s proposed Multilateral Clearing Union was manifested in the form of a $100 billion Contingency Reserve Arrangement (CRA) that BRICS countries devised as a pool to swap currencies in times of need, increasing national currency settlement. The CRA included two currency swap instruments to support short-term balance of payment (BoP) pressures between a country’s current and capital accounts: 1) a liquidity instrument to provide support in response to current BoP gaps, and 2) a precautionary instrument to buffer against future BoP gaps. A country’s access to the shared capital funds was limited by conditionality, as only 30% of accessible funds (“de-linked portion”) were available on demand, whereas the majority, 70% of accessible funds require on-track arrangements with the IMF, as the CRA’s rationale document explains:
“Where financing in excess of this 30% limit is required, an ‘IMF-linked portion’ will be made available. This will allow the country access to the remaining 70%, provided that a conditionality-based agreement with the IMF is concluded” (Biziwick, M., Cattaneo, N. and Fryer, D., 2015 (p. 316)).
Of importance, it is worth noting that rather than having a mechanism for direct currency swaps, a swap transaction was defined as “the Requesting Party’s central bank purchases US dollars (USD) from the Providing Party’s central bank in exchange for the Requesting Party Currency, and repurchases on a later date the Requesting Party Currency in exchange for USD” (Biziwick et al., 2015 (p. 316)).
As a result, the CRA’s IMF linked component and USD reserve currency status raise questions about whether there is a potential mismatch between the stated goals of the MCU and the CRA’s implementation mechanism. In the RISS Joint Research Paper Use of national currencies in international settlements: Experience of the BRICS countries, Karataev et al state:
“Though the BRICS countries have established a Contingent Reserve Arrangement… the currency swap under this arrangement is one between US dollar and local currencies of BRICS, not one among the BRICS currencies. Currently, there are few local currency swap agreements in force (between Russia and China, China and South Africa)” (Karataev et al., 2017 (p.110).
The key barriers hindering the CRA’s success towards its stated goals, including the CRA’s promissory model, limited size (mirroring the limited paid-in capital allocated to BRICS’ New Development Bank), and IMF linking, stem from the CRA modelling itself after the ASEAN+3 Chiang Mai currency swap initiative, which had a limited scope, operated on a promissory model rather than an actual capital pool, and carried a significant IMF-linked portion due to the lack of financial surveillance capacity and moral hazard borrowing risk (Biziwick et al., 2015 (p. 318)). On a macro level, “the CMI/CMIM arrangement has been criticized as utterly ineffective (it did not play any role in the 2008 crisis, for example), and the concern is that, by adopting its form, the CRA is condemning itself to a similar fate. Size and IMF linking (along with the lack of a rapid response facility) seem to have been major problems with the CMI/CMIM arrangement…the IMF linking seems hard to reconcile with the intention to provide a counterweight to the IMF ” (Biziwick et al., 2015 (p. 318)). Thus, as was the case with the Chiang Mai currency swap initiative, the BRICS NDB’s CRA’s promissory model, limited size (mirroring the limited paid-in capital allocated to BRICS’ New Development Bank), and IMF linking all stem from a fundamental lack of trust between BRICS member countries on their self-reliance for monitoring and governance of each others’ and common funds.
Despite their stated desire to break away from IMF’s conditionalities and dollar-denominated trade, at least in the CRA, a greater trust has been placed in the IMF for monitoring conditions for credit swaps. BRICS countries have thus inadvertently followed precedents set by hegemons.
This status quo is not inevitable, and can easily be overcome by coordinated CRA reform to introduce an internal trust-ensuring credit mechanism amidst financial instruments in national currencies to build the foundation for true independence from IMF and dollar-denominated transactions.
Market barriers to BRICS Trade De-Dollarization:
In addition to the CRA design flaws, BRICS Trade De-Dollarization is also held back by market barriers. As a representative sample to measure progress in de-dollarization, the currency composition of Russia’s publicly available intra-BRICS trade settlement since the launching of prominent de-dollarization initiatives in 2017 can be examined, as shown in figure 1 below. The percentage of Russian exports to BRICS countries settled in dollars has fallen from its peak of above 80% in Q1 2018 to 33.2% as of first quarter of 2020 (CBR, 2020). While Russian exports to BRICS have de-dollarized recently, it is apparent that rather than BRICS currencies, the Euro has replaced the dollar as the dominant export settlement currency (Russia is receiving only 13% of its exports in Rubles as of Q1 2020).
Figure 1: Settlement Currency Percentage for Russian Exports to BRICS (CBR, 2020)
This is due to Russian energy exporters preferring to denominate contracts in Euros rather than Rubles recently, for the same reason they previously preferred to denominate contracts in Dollars: greater volume of Rubles received in case of depreciation. By contrast, Russian imports from BRICS countries are still largely settled in Dollars as of Q1 2020, though there is a gradual de-dollarization trend present. The “other” currency slowly rising in imports settlements most likely being largely comprised of the Renminbi Yuan, as China and Russia have been accelerating ruble and yuan use in trade since 2019. Despite this, as demonstrated in Figure 1, it is worthy to note that Russia’s inter-BRICS trade is by far settled mostly in Dollars and Euros rather than Rubles or any other BRICS currency, indicating a gap of between Russian traders’ settlement currency choice and BRICS de-dollarization priorities.
To explain this phenomenon in greater detail, Karataev et al. outlined two key fundamental market barriers preventing the use of national currencies for BRICS trade finance specifically which need to be overcome as a supplement intra-BRICS currency swaps:
1. Currency Volatility:
Exchange rate fluctuations create uncertainty in optimizing settlement pricing and profitability at time of contract fulfilment from both exporters’ and importers’ perspective- “Exporters will seek to denominate their contracts in foreign exchange when their national currency is devaluing. It will allow them to receive additional profits in the national currency…(whereas) importers shall be encouraged to invoice a contract price in their national currency in order to reduce costs and prevent a decline in demand as a result of rising prices.” (Karataev et al., 2017 (p.20)).
2. Global Commodity Benchmarks:
“Exporters of similar goods [i.e. commodities]… will seek to establish the contract price in the same currency as their competitors. That allows them to neutralize more successfully the adverse exchange rate fluctuations resulting in considerable price changes and therefore prevent the risk of reducing demand. As a result, the market price of such goods is denominated mostly in the US dollar….the global commodities exchange trade in these goods plays a significant role…if the global commodities market’s impact on the pricing model will decrease, the use of the USD as invoicing currency will decline too.” (Karataev et al., 2017 (p.19)).
Thus, the dominant factors preventing BRICS currency usage in trade were exchange rate fluctuations causing exporters to optimize profit margins by using foreign exchange (typically denominated in dollars), and industry benchmarks for export goods pricing, especially the influence of global commodities exchanges denominated in dollars. Amongst BRICS countries, this holds true for the largest Russian energy exporters, who often prefer to be paid in dollars or euros in order to maintain standardized price points and obtain additional rubles in case of depreciation.
However, empirical research demonstrated by Nakajima et al. with the vine copula method and value-at-risk model has found that using BRICS currencies in energy trade resulted in more stable prices and avoided translation risks compared to using dollars due to counter-balancing movements with oil prices (Nakajima et al, 2020). Thus, though dollar-denominated oil contracts may provide short-term gains for exporters, the overall commodity trade between BRICS countries would benefit from the use of national currencies. In addition, though the Euro is replacing the Dollar as Russia’s preferred export settlement currency within BRICS, the Euro poses lesser but similar risks to being weaponized by sanctions, given that it is still a third party non-BRICS currency and European Union sanctions against Russia could be expanded in the near future in light of political events unfolding in 2020 (i.e. EU-Russia differences over Belarus protests, Navalny incident, etc.).
To overcome the remaining barriers to using national currencies, current steps being taken in BRICS include developing an in-house settlement system for trade finance based on Russia’s SPFS alternative to SWIFT, linking domestic payment systems to create the New International Payment System (NIPS), and researching feasibility requirements towards a common BRICS cryptocurrency. In addition, while progress has been made in diversifying the NDB’s loan denominations to include more local currencies, with a goal of 50% project financing in the near future according to NDB’s president, the more widespread internationalization of BRICS currencies would require mature bond markets to be created in all BRICS countries to compete with western bond markets. This was initiated by the creation of BRICS Local Currency Bond Fund during the 2017 BRICS Xiamen Summit declaration:
“We agree to promote the development of BRICS Local Currency Bond Markets and jointly establish a BRICS Local Currency Bond Fund, as a means of contributing to the capital sustainability of financing in BRICS countries, boosting the development of BRICS domestic and regional bond markets, including by increasing foreign private sector participation, and enhancing financial resilience of BRICS countries.“
Though these steps are cumulatively designed to increase autonomy over intra-BRICS fund flows, they do not, however, address the fundamental gap in de-risking the barriers to using national currencies in BRICS settlements which are holding back their more widespread use. Central Bank of Russia Governor Dr Elvira Nabiullina echoed this sentiment in 2019 when she claimed that while gold-pegged cryptocurrencies are being researched, it was more important to develop international settlements using national currencies. Thus, while BRICS payment and settlement systems are being integrated, BRICS local bonds are being developed, direct currency swap lines are being expanded, and an intra-BRICS cryptocurrency architecture conceptualized and brought to market, a crucial intermediate supplementary step in de-dollarizing inter-BRICS trade finance is establishing de-risked and mutually trustable intra-BRICS trade contracts to expand national currency settlement, overcoming the market barriers mentioned previously.
Gap Identification: Steps Needed for De-Risking Trade
Karataev et al. proposed a multi-tiered circular system whereby national and intra-BRICS financial institutions complement and coordinate with BRICS trade settlement transactions to create a robust system for using local currencies. The components steps were outlined as follows: 1) direct currency trading expansion and lowering transactions costs 2) creation and use of hedging instruments in BRICS currency pairs which would reduce risk management costs 3) widening of Swap Agreements and limiting liquidity risk, 4) local currency bond market development in conjunction with trade and development goals 5) trade surplus re-investment into local bond markets 6) diversification of bond markets and BRICS policy coordination for using these instruments to achieve currency internationalization goals (Karataev et al., 2017 (p. 111)).
Out of these measures, the CRA was designed to meet the needs of step 3, whereas progress has been started on steps 4-6 by the New Development Bank based on initiatives launched during the Xiamen summit. However, concrete initiatives are needed to fulfil steps 1 and 2. Karataev et al. specified three key exchange mechanisms in particular which need to be established to lower transaction costs and de-risk the use of national currencies in intra-BRICS trade contracts to overcome the aforementioned barriers for steps the first two steps mentioned above:
- BRICS Interbank foreign exchange market, whereby “companies should be able to purchase/sell a currency quickly and without additional costs to make settlements in such currency. This presumes the existence of a highly developed and liquid interbank and forex markets with large numbers of participants and convertible financial instruments” (Karataev et al., 2017 (p.18)).
- Currency Hedging instruments — “It will be necessary to encourage trading directly in BRICS currencies that will significantly contribute to lowering costs. This step [BRICS Trading pairs] has to be augmented with the creation and use of hedging instruments in BRICS currency pairs which might allow to reduce risk management costs. During the first stage leading public banks of BRICS countries may function as market makers on currency pairs to provide necessary liquidity.” (Karataev et al., 2017 (p.110)).
- BRICS Commodify Exchange — “Launching of a Commodity Exchange or some type of an e-trading platform for trade in goods and derivatives of various kinds can be one more instrument contributing to enhancing LCY [local currency] use in settlements in the BRICS countries…raw material trade could be mediated by setting market prices denominated in local currencies. With appreciable quantity of foreign investors trading on the exchange, this will lead to the internationalization of contracts denominated in local currencies” (Karataev et al., 2017 (p.112)).
In addition to the above three suggested exchanges, intra-BRICS trade de-dollarization requires the IMF-linked portion of the CRA to be removed to enable direct currency swaps to take place, granted the existence of bilateral swap agreements between all BRICS countries. A necessary replacement for the IMF on-track arrangement must be established between BRICS countries: a counter-party de-risking mechanism which serves as an independent source of trust to validate the fulfilment criterion of trade-necessitated direct currency swaps, thus eliminating the need for IMF on-track arrangements and consequent USD conversion.
Currently, all BRICS countries are largely reliant on western facilities for the above four types of exchanges. SWIFT largely dominates international interbank transfer settlement, with the Russian and Chinese SWIFT alternatives operating mostly domestically, though there are plans for integration of BRICS settlement systems as mentioned previously. BRICS countries have yet to develop a comprehensive intra-BRICS hedging mechanism for mitigating currency volatility risk directly independent of dollar and euro-denominated western capital markets.
Conclusions and Recommendations:
BRICS countries have maintained a longstanding goal of de-IMFing and de-dollarizing their trade settlements and reserves in order to increase their sovereignty over transactions and avoid currency crisis, and proposed the creation of a Multilateral Clearing Union towards that goal. However, design flaws in the Multilateral Clearing Union, a lack of an independent credit monitoring mechanism, and lack of currently de-risking mechanisms in intra-BRICS trade finance prevented the wider use of national currencies.
To overcome the reluctance of BRICS traders to take trade finance loans and settle in BRICS national currencies, there is a need to introduce forward hedging options with minimal cost of carry so traders can avail direct hedging options simultaneously with trade contracts to de-risk their trade contract in national currencies. As Karatev et al. concluded, in the long term goal, boosting demand for direct BRICS currency settlement would itself partially smooth out some of the volatility experienced by cyclical western capital flight, thus lowering the risk premium and cost of carry for forward contracts, making BRICS currencies the natural preferred choice in trade finance (Karataev et al., 2017 (p.110).
After a currency options market, a BRICS commodity exchange specifically needs to be created in which commodity prices are denoted in national currencies, and are accompanied by derivatives and other risk hedging options that minimize the combined effects of currency and commodity price fluctuations, essentially serving as a favoured market for BRICS commodity importers and exports to set contracts in national currencies and have instruments to de-risk any expected volatility. The most significant example of a local currency commodity exchange within BRICS was the Petro-Yuan futures market launched in China in 2016, which served as a viable alternative to the dominant dollar-denominated WTI and Brent oil exchanges. Though Russia has set up a similar exchange in the form of the Ural Oil Futures market, work remains to be done to achieve maturity and usage to the level of established commodities exchanges.
Combined with direct currency swap lines and an intra-BRICS free trade zone, the implementation of the above mechanisms would lower the transaction cost of BRICS national currency trade settlement, by lowering the risk premium for importers and exporters to set contracts in national currencies amidst exchange rate uncertainty. Thus, these exchanges would fulfil the BRICS goals of “focus[ing] joint efforts on providing companies engaged in foreign trade from BRICS countries with the same, or lower transaction (compliance) costs, guarantees of settlement and risk management that they currently have in utilizing the dollar, euro or yen” (Karataev et al., 2017 (p.110-111)).
In 2018, export-oriented development banks from all BRICS countries signed a MoU to enhance understanding of distributed ledger or blockchain technology for solving challenges in trade finance, with the aim of identifying areas to improve operational efficiencies and tackle common financial challenges. In 2019, the BRICS Business Council formed a working group exploring how a special trade-facilitating BRICS crypto-currency could be created to ensure the smooth flow of paperless document flow for trade obligations.
In fact, creating a specialized crypto-currency for document flow is not necessary to meet the BRICS goal of de-risking national currency trade settlement. The simplest yet most advanced and low-cost blockchain feature to enable the above four exchanges to take place directly between BRICS traders and banks (and allow a seamless disintermediation of transactions between separate parties without the need for outside third parties such as IMF) are Smart Contracts, an original feature of Ethereum networks but later adapted by other blockchain networks. Smart Contracts allow for multiple parties to program and pre-set conditional criterion for contracts based on fulfilment of services or market conditions, and automate the verification of fulfilment criterion via decentralized external verification engines known as Oracles, which are blockchain middleware that create a secure connection between Smart Contracts and various off-chain resources required for fulfilment. Funds needed to execute the contract can be temporarily pre-stored in a linked virtual escrow-like account associated with the contract to guarantee fund availability at the time of execution. Once the contract execution date arrives and conditional fulfilment checks have been completed, Smart Contracts self-execute and disburse associated payments to the contracting parties, automating execution and settlement and eliminating contract disputes and counter-party non-fulfilment risks.
Due to their automated fulfilment capabilities and dis-intermediation of third party legal and settlement entities, Smart Contracts are starting to be gain traction in western consortiums for trade finance, currency trading, and commodity trading in the mainstream dollarized economy. Trade Finance systems based on Smart Contract are currently enabling on average a 35% reduction in costs and the elimination of the 1–2 weeks of processing time for settlements, in addition to removing room for manual errors.
The author has proposed a solution implementing the above exchanges using Smart Contracts to De-Risk and De-Dollarize Intra-BRICS Trade—further details on this solution beyond those mentioned in this article can be seen in the December 2020 issue of the BRICS Journal of Economics.
Printed Sources Cited:
- Biziwick, M., Cattaneo, N. and Fryer, D. (2015) “The rationale for and potential role of the BRICS Contingent Reserve Arrangement.” South African Journal of International Affairs. 22:3, 307-324.
- Central Bank of Russia Trade Finance Settlement Data. “Credit Statistics” http://www.cbr.ru/vfs/statistics/credit_statistics/cur_str.xlsx translated into English, plotted in Excel.
- Nakajima, Tadahiro, Yijin, He and Hamori, Shigeyuki. (2020). Can BRICS’ currency be a hedge or a safe haven for energy portfolio? An evidence from vine copula approach. The Singapore Economic Review. 65(4) 805-836. https://doi.org/10.1142/S0217590820500174.
- NDB – New Development Bank. (2017) “The Role Of BRICS In The World Economy & International Development” BRICS New Development Bank Strategy Report. https://reddytoread.files.wordpress.com/2017/09/brics-2017.pdf.
From our partner RIAC
Covid-19 and food crisis
COVID-19 has hit at a time when food crisis and malnutrition are on the rise. According to the most recent UN projections, the pandemic-induced economic slump would cause as many as 132 million people to be hungry. This would be in addition to the 690 million people going hungry now. At the same time, 135 million people suffer from acute food insecurity and in need of urgent humanitarian assistance. Although the pandemic’s transmission has slowed in certain countries and cases have decreased, COVID-19 has resurfaced or is spreading rapidly in others. This is still a global issue that needs a worldwide solution.
This epidemic threatens both lives and livelihoods. COVID-19 has had a wide-ranging and disruptive influence on the agriculture system. We fear a worldwide food crisis unless we act quickly, which may have long-term consequences for hundreds of millions of children and adults. This is mostly due to a lack of food availability — as wages decline, remittances decline, and in certain cases, food prices rise. Food insecurity is increasingly becoming a food production concern in nations that already have high levels of acute food insecurity.
Agriculture continues to serve a reliable and major part in world economy and stability, and it remains the primary source of food, income, and work for rural communities, even in the face of a pandemic. The impact of the COVID-19 pandemic on the agricultural system and sector has been wide-ranging, causing unprecedented uncertainty in global food supply chains, including potential bottlenecks in labor markets, input industries, agriculture production, food processing, transportation and logistics, as well as shifts in demand for food and food services.
The COVID-19 epidemic not only created a new sort of agricultural catastrophe, but it also occurred at a difficult moment for farmers. In most years during the last few years, global commodity output has exceeded demand, resulting in lower prices. In 2013, the Food and Agricultural Organization (FAO) predicted decreased global agricultural output growth due to limited agricultural land development, rising production costs, expanding resource restrictions, and increasing environmental concerns.
An expanding global population remains the main driver of demand growth, although the consumption patterns and projected trends vary across countries in line with their level of income and development. Average per capita food availability is projected to reach about 3,000 kcal and 85 g of protein per day by 2029. Due to the ongoing transition in global diets towards higher consumption of animal products, fats and other foods, the share of staples in the food basket is projected to decline by 2029 for all income groups. In particular, consumers in middle-income countries are expected to use their additional income to shift their diets away from staples towards higher value products. Meanwhile, environmental and health concerns in high-income countries are expected to support a transition from animal-based protein towards alternative sources of protein.
When people suffer from hunger or chronic undernourishment, it means that they are unable to meet their food requirements – consume enough calories to lead a normal, active life – over a prolonged period. This has long-term implications for their future, and continues to present a setback to global efforts to reach Zero Hunger. When people experience crisis-level, acute food insecurity, it means they have limited access to food in the short-term due to sporadic, sudden crises that may put their lives and livelihoods at risk.
However, if people facing crisis-level acute food insecurity get the assistance they need, they will not join the ranks of the hungry, and their situation will not become chronic
It is clear: although globally there is enough food for everyone, too many people are still suffering from hunger. Our food systems are failing, and the pandemic is making things worse.
How Bangladesh became Standout Star in South Asia Amidst Covid-19
Bangladesh, the shining model of development in South Asia, becomes everyone’s economic darling amidst Covid-19. The per capita income of Bangladesh in the fiscal year 2020-21 is higher than that of many neighbouring countries including India and Pakistan. Recently, Bangladesh has agreed to lend $200 million to debt-ridden Sri Lanka to bail out through currency swap. Bangladesh, once one of the most vulnerable economies, has now substantiated itself as the most successful economy of South Asia. How Bangladesh successfully managed Covid-19 and became top performing economy of South Asia?
In March 1971, Sheikh Mujibur Rahman declared their independence from richer and more powerful Pakistan. The country was born through war and famine. Shortly after the independence of Bangladesh, Henry Kissinger, then the U.S. national security advisor, derisively referred to the country as a “Basket Case of Misery.” But after fifty years, recently, Bangladesh’s Cabinet Secretary reported that per capita income has risen to $2,227. Pakistan’s per capita income, meanwhile, is $1,543. In 1971, Pakistan was 70% richer than Bangladesh; today, Bangladesh is 45% richer than Pakistan. Pakistani economist Abid Hasan, former World Bank Adviser, stated that “If Pakistan continues its dismal performance, it is in the realm of possibility that we could be seeking aid from Bangladesh in 2030,”. On the other hand, India, the economic superpower of South Asia, is also lagging behind Bangladesh in terms of per capita income worth of $1,947. This also elucidates that the economic decisions of Bangladesh are better than that of any other South Asian countries.
Bangladesh’s economic growth leans-on three pillars: exports competitiveness, social progress and fiscal prudence. Between 2011 and 2019, Bangladesh’s exports grew at 8.6% every year, compared to the world average of 0.4%. This godsend is substantially due to the country’s hard-hearted focus on products, such as apparel, in which it possesses a comparative advantage.
The variegated investment plans pursued by the Bangladesh government contributes to the escalation of the country’s per capita income. The government has attracted investments in education, health, connectivity and infrastructure both from home and abroad. As a long-term implication, investing in these sectors helped Bangladesh to facilitate space for businesses and created skilled manpower to run them swiftly. Meanwhile, the share of Bangladeshi women in the labor force has consistently grown, unlike in India and Pakistan, where it has decreased. And Bangladesh has maintained a public debt-to-GDP ratio between 30% and 40%. India and Pakistan will both emerge from the pandemic with public debt close to 90% of GDP.
Bangladesh’s economy and industry management strategy during Covid-19 is also worth mentioning here since the country till now has successfully protected its economy from impact of pandemic. At the outset of pandemic, lockdowns and restrictions hampered the country’s overall productivity for a while. To tackle the pandemic effect, Bangladesh introduced improvised monetary policy and fiscal stimuli to bring them under the safety net which lifted the situation from worsening. Government introduced stimulus package which is equivalent to 4.3 percent of total GDP and covers all necessary sectors such as industry, SMEs and agriculture. These packages are not only a one-time deal, new packages are also being announced in course of time. For instance, in January 2021, government announced two new packages for small and medium entrepreneurs and grass roots populations. Apart from economic interventions, the government also chose the path of targeted interventions. The government, after first wave, abandoned widespread lockdown and adopted the policy of targeted intervention which is found to be effective as it allows socio-economic activities to carry on under certain protocols and helps the industries to fight back against the pandemic effect.
Another pivotal key to success was the management of migrant labor force and keeping the domestic production active amidst the pandemic. According to KNOMAD report, amidst the Covid-19, Bangladesh’s remittance grew by 18.4 percent crossing 21 billion per annum inflow where many remittance dependent countries experienced negative growth rate. Because of the massive inflow of remittance, the Forex reserve of Bangladesh reached at 45.1 billion US dollar.
Bangladesh’s success in managing COVID19 and its economy has been reflected in a recent report “Bangladesh Development Update- Moving Forward: Connectivity and Logistics to strengthen Competitiveness,” published by World Bank. Bangladesh’s economy is showing nascent signs of recovery backed by a rebound in exports, strong remittance inflows, and the ongoing vaccination program. Through financial assistance to Sri Lanka and Covid relief aid to India, Bangladesh is showcasing its rise as an emerging superpower in South Asia. That is why Mihir Sharma, Director of Centre for Economy and Growth Programme at the Observer Research Foundation, wrote in an article at Bloomberg that, “Today, the country’s 160 million-plus people, packed into a fertile delta that’s more densely populated than the Vatican City, seem destined to be South Asia’s standout success”. Back in 2017, PwC (PricewaterhouseCoopers) report also predicted the same that Bangladesh will become the largest economy by 2030 and an economic powerhouse in South Asia. And this is how Bangladesh, a development paragon, offers lessons for the other struggling countries of world after 50 years of its independence.
Build Back Better World: An Alternative to the Belt and Road Initiative?
The G7 Summit is all the hype on the global diplomatic canvas. While the Biden-Putin talk is another awaited juncture of the Summit, the announcement of an initiative has wowed just as many whilst irked a few. The Group of Seven (G7) partners: the US, France, the UK, Canada, Italy, Japan, and Germany, launched a global infrastructure initiative to meet the colossal infrastructural needs of the low and middle-income countries. The Project – Build Back Better World (B3W) – is aimed to be a partnership between the most developed economies, namely the G7 members, to help narrow the estimated $40 trillion worth of infrastructure needed in the developing world. However, the project seems to be directed as a rival to China’s Belt and Road Initiative (BRI). Amidst sharp criticism posed against the People’s Republic during the Summit, the B3W initiative appears to be an alternative multi-lateral funding program to the BRI. Yet, the developing world is the least of the concerns for the optimistic model challenging the Asian giant.
While the B3W claims to be a highly cohesive initiative, the BRI has expanded beyond comprehension and would be extremely difficult to dethrone, even when some of the most lucrative economies of the world are joining heads to compete over the largely untapped potential of the region. Now let’s be fair and contest that neither the G7 nor China intends the welfare of the region over profiteering. However, China enjoys a headstart. The BRI was unveiled back in 2013 by president Xi Jinping. The initiative was projected as a transcontinental long-term policy and investment program aimed to consolidate infrastructural development and gear economic integration of the developing countries falling along the route of the historic Silk Road.
The highly sophisticated project is a long-envisioned dream of China’s Communist Party; operating on the premise of dominating the networks between the continents to establish unarguable sovereignty over the regional economic and policy decision-making. Referring to the official outline of the BRI issued by China’s National Development and Reform Commission (NDRC), the BRI drives to: “Promote the connectivity of Asian, European, and African continents and their adjacent seas, establish and strengthen partnerships among the countries along the Belt and Road [Silk Road], set up all-dimensional, multi-tiered and composite connectivity networks and realize diversified, independent, balanced, and sustainable development in these countries”. The excerpt clearly amplifies the thought process and the main agenda of the BRI. On the other hand, the B3W simply stands as a superfluous rival to an already outgrowing program.
Initially known as One Belt One Road (OBOR), the BRI has since expanded in the infrastructural niche of the region, primarily including emerging markets like Pakistan, Bangladesh, and Sri Lanka. The standout feature of the BRI has been the mutually inclusive nature of the projects, that is, the BRI has been commandeering projects in many of the rival countries in the region yet the initiative manages to keep the projects running in parallel without any interference or impediment. With a loose hold on the governance whilst giving a free hand to the political and social realities of each specific country, the BRI program presents a perfect opportunity to jump the bandwagon and obtain funding for development projects without undergoing scrutiny and complications. With such attractive nature of the BRI, the program has significantly grown over the past decade, now hosting 71 countries as partners in the initiative. The BRI currently represents a third of the world’s GDP and approximately two-thirds of the world’s entire population.
Similar to BRI, the B3W aims to congregate cross-national and regional cooperation between the countries involved whilst facilitating the implementation of large-scale projects in the developing world. However, unlike China, the G7 has an array of problems that seem to override the overly optimistic assumption of B3W being the alternate stream to the BRI.
One major contention in the B3W model is the facile assumption that all 7 democracies have an identical policy with respect to China and would therefore react similarly to China’s policies and actions. While the perspective matches the objective of BRI to promote intergovernmental cooperation, the G7 economies are much more polar than the democracies partnered with China. It is rather simplistic to assume that the US and Japan would have a similar stance towards China’s policies, especially when the US has been in a tense trade war with China recently while Japan enjoyed a healthy economic relation with Xi’s regime. It would be a bold statement to conclude that the US and the UK would be more cohesively adjoined towards the B3W relative to the China-Pakistan cooperation towards the BRI. Even when we disregard the years-long partnership between the Asian duo, the newfound initiative would demand more out of the US than the rest of the countries since each country is aware of the tense relations and the underlying desperation that resulted in the B3W program to shape its way in the Summit.
Moreover, the B3W is timed in an era when Europe has seen its history being botched over the past year. Post-Brexit, Europe is exactly the polar opposite of the unified policy-making glorified in the B3W initiate. The European Union (EU), despite US reservations, recently signed an investment deal with China. A symbolic gesture against the role played by former US President Donald J. Trump to bolster the UK’s exit from the Union. As London tumbles into peril, it would rather join hands with China as opposed to the democrat-regime of the US to prevent isolation in the region. Despite US opposition, Germany – Europe’s largest economy – continues to place China as a key market for its Automobile industry. Such a divided partnership holds no threat to the BRI, especially when the partners are highly dependent on China’s market and couldn’t afford an affront to China’s long envisaged initiative.
Even if we assume a unified plan of action shared between the G7 countries, the B3W would fall short in attracting the key developing countries of the region. The main targets of the initiative would naturally be the most promising economies of Asia, namely India, Pakistan, or Bangladesh. However, the BRI has already encapsulated these countries: China-Pakistan Economic Corridor (CPEC) and Bangladesh-China-India-Myanmar Economic Corridor (BCIMEC) being two of the core 6 developmental corridors of BRI.
While both the participatory as well as the targeted democracies would be highly cautious in supporting the B3W over BRI, the newfound initiate lacks the basic tenets of a lasting project let alone standing rival to the likes of BRI. The B3W is aimed to be domestically funded through USAID, EXIM, and other similar programs. However, a project of such complex nature involves investments from diverse funding channels. The BRI, for example, tallies a total volume of roughly USD 4 to 8 trillion. However, the BRI is state-funded and therefore enjoys a variety of funding routes including BRI bond flotation. The B3W, however, simply falls short as up until recently, the large domestic firms and banks in the US have been pushed against by the Biden regime. An accurate example is the recent adjustment of the global corporate tax rate to a minimum of 15% to undercut the power of giants like Google and Amazon. Such strategies would make it impossible for the United States and its G7 counterparts to gain multiple channels of funding compared to the highly leveraged state-backed companies in China.
Furthermore, the B3W’s competitiveness dampens when conditionalities are brought into the picture. On paper, the B3W presents humane conditions including Human Rights preservation, Climate Change, Rule of Law, and Corruption prevention. In reality, however, the targeted countries are riddled with problems in all 4 categories. A straightforward question would be that why would the developing countries, already hard-pressed on funds, invest to improve on the 4 conditions posed by the B3W when they could easily continue to seek benefits from a no-strings-attached funding through BRI?
The B3W, despite being a highly lucrative and prosperous model, is idealistic if presented as a competition to the BRI. Simply because the G7, majorly the United States, elides the ground realities and averts its gaze from the labyrinth of complex relations shared with China. The only good that could be achieved is if the B3W manages to find its own unique identity in the region, separate from BRI in nature and not rivaling the scale of operation. While Biden has remained vocal to assuage the concerns regarding the B3W’s aim to target the trajectory of the BRI, the leaders have remained silent over the detailed operations of the model in the near future. For now, the B3W would await bipartisan approval in the United States as the remaining partners would develop their plan of action. Safe to say, for now, that the B3W won’t hold a candle to the BRI in the long-run but could create problems for the G7 members if it manages to irk China in the Short-run.
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