Time for a SAARC bank
Source: By Arvind Mehta: The Financial Express
The general assessment of the Brics development bank is that this is a wakeup call for the developed Western economies, long used to dominating the international financial architecture which includes the World Bank and IMF. While China, India and others had been willing to increase their equity contribution and voting strength in these multilateral institutions, the Western economies largely did not want any change in the status quo. The pace of change, if any, was to be managed slowly. This meant that the concerns of the emerging economies found lower priority over the financial concerns of the West.
The 6th Summit of the Brics nations, held in Brazil, facilitated some pragmatic negotiations that gave birth to the new bank. China got the headquarters, India got the first presidency, and all partners got proportional share with equal contributions to paid-up capital and rotating, five-year presidencies.
The world got a new multilateral institution that, in the long run, could counter-balance the needs of the emerging economies with the developed economies. It is actually a win-win for all. The balance-of-payments surplus economies of China and oil/gas-rich economies have a new multilateral agency which serves as an intermediary for parking of their long-term surpluses at more attractive terms than the US treasury bonds. These savings can be on-lent through the New Development Bank (as the Brics bank is being called)—for badly required long-term infrastructure funds. World GDP growth and trade can get a further boost—which would be beneficial for the developed economies in finding better trade and investment avenues. So, actually nobody loses through the creation of this new multilateral financing institution.
If there is one region that is starved of capital for developing infrastructure, it is South Asia. Home to a quarter of the world population, it has the potential to be the next driver of world GDP growth, even as the growth rate of China finally starts slowing down in the coming decades.
What holds back South Asia is its immense infrastructure capital requirement for high-speed rail corridors, seamless inter-country highways, shipping and port infrastructure, airports and air connectivity, energy transmission grids including oil and gas pipelines, telecom and internet bandwidth, irrigation, power and drinking water projects. South Asia has the capacity to absorb, over the next decade, capital inflows of more than $200 billion per annum for its infrastructure requirements. The World Bank, The Asian Development Bank, NDB and private sector investment flows will not be adequate.
This is the reason why India should take the lead for a new SAARC Development Bank (SDB). This will help supplement the capital flows that may take place through other multilateral institutions. Being anchored within South Asia, it would work as a regional development bank. The SDB would leverage its own capital base for raising tier 2 capitals, as also borrowing long-term funds based upon its balance sheet strength.
China is already pitching an Asia Infrastructure Development Bank to India. There is no doubt that China sees this as an opportunity to expand its project exports markets in Asia. While India could partner China to a limited extent in this concept, its own long-term future interests are more intimately attached to what happens in its immediate neighbourhood. On this account alone, India needs to strongly champion the creation of an SDB. If it is a question of a limited kitty being available to help setting up of regional banks, India’s priority should be the SDB.
Consensus in SAARC can sometimes be difficult. India will need to do the championing. If there is no firm consensus, the initial start for a regional development bank can be a coalition of willing founding-members. As in the case of the Brics bank, there could be an option for countries to join later, with the proviso that collective voting rights of the founder-members would remain above 50%. It is quite likely that given the long-term importance of this region, countries such as Japan, China, South Korea and even the US and EU would be interested in engaging with such a bank through tier 2 capital contribution.
The NDB has been structured with an initial subscribed capital of $50 billion—$10 billion in cash and $40 billion in guarantees. The SDB could be kick started on a more modest scale, with a total initial subscribed capital of, say, $10 billion. Members of SAARC could contribute proportionately less (if they so desire) than India’s contribution. The voting rights would, of course, be in proportion to the respective contributions.
The SAARC Chamber of Commerce met recently in New Delhi and, with the active support of participating members such as Bangladesh, Bhutan, India, Maldives and Nepal, decided to petition the political leadership of their respective countries for setting up of a SAARC Development Bank.
The Brics bank has become a reality because of the push that China gave to the concept at the previous summit. The SAARC Development Bank can become a reality only if India gives this concept a push at the next SAARC summit, scheduled to be held in Nepal in November 2014.
SAARC is home to one-fourth of the world’s population and almost half of the world’s poor. But it has immense potential for great economic growth and needs large capital flows to build its economic infrastructure and human capital skills. Prime Minister Narendra Modi recently asked the Indian Space Research Organization to work towards a SAARC satellite. India needs to ask all SAARC countries to work towards a SAARC bank.
The general assessment of the Brics development bank is that this is a wakeup call for the developed Western economies, long used to dominating the international financial architecture which includes the World Bank and IMF. While China, India and others had been willing to increase their equity contribution and voting strength in these multilateral institutions, the Western economies largely did not want any change in the status quo. The pace of change, if any, was to be managed slowly. This meant that the concerns of the emerging economies found lower priority over the financial concerns of the West.
The 6th Summit of the Brics nations, held in Brazil, facilitated some pragmatic negotiations that gave birth to the new bank. China got the headquarters, India got the first presidency, and all partners got proportional share with equal contributions to paid-up capital and rotating, five-year presidencies.
The world got a new multilateral institution that, in the long run, could counter-balance the needs of the emerging economies with the developed economies. It is actually a win-win for all. The balance-of-payments surplus economies of China and oil/gas-rich economies have a new multilateral agency which serves as an intermediary for parking of their long-term surpluses at more attractive terms than the US treasury bonds. These savings can be on-lent through the New Development Bank (as the Brics bank is being called)—for badly required long-term infrastructure funds. World GDP growth and trade can get a further boost—which would be beneficial for the developed economies in finding better trade and investment avenues. So, actually nobody loses through the creation of this new multilateral financing institution.
If there is one region that is starved of capital for developing infrastructure, it is South Asia. Home to a quarter of the world population, it has the potential to be the next driver of world GDP growth, even as the growth rate of China finally starts slowing down in the coming decades.
What holds back South Asia is its immense infrastructure capital requirement for high-speed rail corridors, seamless inter-country highways, shipping and port infrastructure, airports and air connectivity, energy transmission grids including oil and gas pipelines, telecom and internet bandwidth, irrigation, power and drinking water projects. South Asia has the capacity to absorb, over the next decade, capital inflows of more than $200 billion per annum for its infrastructure requirements. The World Bank, The Asian Development Bank, NDB and private sector investment flows will not be adequate.
This is the reason why India should take the lead for a new SAARC Development Bank (SDB). This will help supplement the capital flows that may take place through other multilateral institutions. Being anchored within South Asia, it would work as a regional development bank. The SDB would leverage its own capital base for raising tier 2 capitals, as also borrowing long-term funds based upon its balance sheet strength.
China is already pitching an Asia Infrastructure Development Bank to India. There is no doubt that China sees this as an opportunity to expand its project exports markets in Asia. While India could partner China to a limited extent in this concept, its own long-term future interests are more intimately attached to what happens in its immediate neighbourhood. On this account alone, India needs to strongly champion the creation of an SDB. If it is a question of a limited kitty being available to help setting up of regional banks, India’s priority should be the SDB.
Consensus in SAARC can sometimes be difficult. India will need to do the championing. If there is no firm consensus, the initial start for a regional development bank can be a coalition of willing founding-members. As in the case of the Brics bank, there could be an option for countries to join later, with the proviso that collective voting rights of the founder-members would remain above 50%. It is quite likely that given the long-term importance of this region, countries such as Japan, China, South Korea and even the US and EU would be interested in engaging with such a bank through tier 2 capital contribution.
The NDB has been structured with an initial subscribed capital of $50 billion—$10 billion in cash and $40 billion in guarantees. The SDB could be kick started on a more modest scale, with a total initial subscribed capital of, say, $10 billion. Members of SAARC could contribute proportionately less (if they so desire) than India’s contribution. The voting rights would, of course, be in proportion to the respective contributions.
The SAARC Chamber of Commerce met recently in New Delhi and, with the active support of participating members such as Bangladesh, Bhutan, India, Maldives and Nepal, decided to petition the political leadership of their respective countries for setting up of a SAARC Development Bank.
The Brics bank has become a reality because of the push that China gave to the concept at the previous summit. The SAARC Development Bank can become a reality only if India gives this concept a push at the next SAARC summit, scheduled to be held in Nepal in November 2014.
SAARC is home to one-fourth of the world’s population and almost half of the world’s poor. But it has immense potential for great economic growth and needs large capital flows to build its economic infrastructure and human capital skills. Prime Minister Narendra Modi recently asked the Indian Space Research Organization to work towards a SAARC satellite. India needs to ask all SAARC countries to work towards a SAARC bank.
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