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BRICS set to establish new bank, contingency fund

They reflect nations' 'rising importance' on global stage, says ex-IMF official

LEADERS of the BRICS group of emerging economies (Brazil, Russia, India, China and South Africa) are expected to announce the launch of a US$50 billion new infrastructure development bank during a two- day meeting beginning today in the Brazilian city of Fortaleza. The bank is likely to open its doors in 2016.

They are also expected to announce a US$100 billion contingency reserves fund next year designed to assist member countries that are subjected to balance-of-payment problems caused by a sudden exodus of foreign capital.

Both developments have particular significance for the Asia region going well beyond the fact that China and India will be among the principal shareholders of the BRICS bank, which is expected to be called simply the New Development Bank.

The New Development Bank - which reports say could be headquartered in Shanghai or New Delhi - will be a competitor to the Manila-based Asian Development Bank (ADB) in some respects and possibly also to the planned Asia Infrastructure Investment Bank (AIIB) likely to be set up in Hong Kong.

The proposed new BRICS contingency reserves fund, meanwhile, will coexist alongside not only the International Monetary Fund (IMF) but also with the Chiang Mai Initiative Multilateralisation agreement (CMIM), a US$240 billion contingency reserves fund operated by the "Asean+3" group of nations.

The new BRICS bank and the proposed China-led AIIB are expected to gear up their shareholder capital to help meet the massive demand for financing new or replacement infrastructure, which in Asia alone is expected to cost US$8 trillion in coming years and some US$50 trillion globally.

The five BRICS members are likely to each contribute US$2 billion initially to the new bank's capital or US$10 billion in all, which will be supplemented by US$40 billion of contingent capital or guarantees from shareholders, making US$50 billion. This could be doubled over time.

By naming the new institution simply the New Development Bank, the BRICS nations have left open the door for other emerging economies such as Turkey, Mexico, Indonesia and Nigeria to join later as partners, according to some reports.

The proposed launch of the BRICS bank and of the joint contingency reserves fund represent "symbolically important steps", Charles Collyns, former IMF official and now global economist with the Institute of International Finance (IIF), was quoted as saying in Washington.

"It signals dissatisfaction of the BRICS countries with their position on the global economic stage," he told Reuters. "The fact that they are able to get together and agree on setting up these institutions is an important symbol of their rising importance."

ADB president Takehiko Nakao announced plans at the bank's annual meeting in the Kazakhstan capital of Astana earlier this year to beef up the ADB's own equity base from around US$16 billion to nearer US$50 billion. With an infrastructure financing need of some US$8 trillion over the current decade, or US$800 billion a year, Asia needs all the resources it can mobilise and new infrastructure banks could be welcome, he said.

Haruhiko Kuroda, who was ADB president until last year when he took over as governor of the Bank of Japan (BOJ), told BT during the meeting that proposals for a new infrastructure bank "would be good because there is huge demand building up in Asia". Another one or two banks "would not undermine the existing banks and agencies; rather, they could add (resources)", he added.

Meanwhile, Russian Finance Minister Anton Siluanov was reported as saying of the contingency reserves fund that "it is important for our countries to have this buffer, a so-called mini-IMF, a financial organisation which could quickly react to capital outflows, providing liquidity in hard currency - in particular, in US dollars".