Mar. 26, 2013 (TSR-Agencies) – The Brics grouping of emerging powers on Tuesday reached a deal to establish a development bank that would rival Western-backed institutions, Finance Minister Pravin Gordhan told AFP.
“It’s done,” Gordhan said after meeting with his counterparts from Brazil, Russia, India and China.
“We made very good progress, the leaders will announce the details,” he added, just hours before a summit in the South African port city of Durban.
The bank is likely to focus on infrastructure financing, a direct challenge to seven decades of dominance by the World Bank.
It is the first time since the inaugural Brics summit four years ago that the group matches rhetorical demands for a more equitable global order with concrete steps.
Together the Brics account for 25% of global GDP and 40% of the world’s population.
But members say institutions like the World Bank, the International Monetary Fund and the United Nations Security Council are not changing fast enough reflect their new-found clout.
The World Bank has traditionally been led by an American and the IMF has been led by a European thanks to an unwritten transatlantic carve-up made possible by skewed voting weights.
There is no Latin American or African permanent member of the UN Security Council, and India – despite it’s vast population and nuclear capabilities – remains a non-veto-wielding member.
Details of how the BRICS bank would work have yet to be finalised, but diplomats say it could start with $10 billion seed money from each country.
That would be dramatically scaled back from initial, more ambitious proposals for a $50 billion buy in from each country.
The exact role of the bank is also up for debate.
In the face of competing policy demands, Brics negotiators had been under pressure to come up with an agreement that proves the grouping is relevant.
And to reach a deal that would send a strong message to the United States and Europe that the current balance of power is untenible, which they have now.
But an Indian diplomat involved in the talks said many of the details are likely to be left for another day, allowing leaders to announce a deal, however tentative.
The bank is not likely to be up and running for years.
Brazil’s central bank chief also said there was also good progress made on a deal to establish currency swap lines, which is likely to be worth in the region of $100bn.
“We are working on it,” said Alexandre Tombini.
The fund would be used to draw on in times of liquidity or other crises and to encourage trade.
Securing both deals is a thumb in the eye to those who argue the Brics is little more than a talking shop for disgruntled nations.
It is also a boon for Brics leaders many who have tethered their reputations to a deal.
Xi Jinping has underscored the growing importance of the group by making Durban his first summit as China’s president.
In a keynote speech in Tanzania on Monday Xi vowed Beijing’s “sincere friendship” with the continent, and a relationship that respects Africa’s “dignity and independence.”
Meanwhile host President Jacob Zuma has lauded the summit as a means of addressing his country’s chronic economic problems including high unemployment.
“Brics provides an opportunity for South Africa to promote its competitiveness” Zuma said in a speech on the eve of the summit.
“It is an opportunity to move further in our drive to promote economic growth and confront the challenge of poverty, inequality and unemployment that afflicts our country.”
But the Brics nay-sayers are unlikely to be dissuaded.
“Ironically it may be the cleavages within the Brics grouping that more accurately hint at the future of the global order: tensions between China and Brazil on trade, India on security, and Russia on status highlight the difficulty Beijing will have in staking its claim to global leadership,” said Daniel Twining of the German Marshall Fund.
Leaders will try to counter that view when the summit begins at 17:30 GMT, when more details of the Brics development bank are likely to be known.
Diplomats say it could start with $10bn seed money from each country, but the exact role of the bank is up for debate.
Indian officials have pressed for a Brics-led South-South development bank, recycling budget surpluses into investment in developing countries.
Many developing nations inside and outside Brics will hope that is a way of tapping China’s vast financial resources.
Meanwhile China would no doubt like the bank to invest in trade-multiplying projects.
Aside from the development bank, the group will also try to establish a foreign exchange reserve pool worth as much as $240 billion to be drawn on in financial crises.
China has the world’s largest foreign exchange reserves, worth $3.31 trillion at the end of 2012, establishing currency swap lines could help other BRICS tap that massive resource, to which China is the world’s largest.
Brazil also signed a bilateral accord with China to promote trade in their national currencies.
Brics leaders will also establish business and think tank councils and launch an investigation into how trade can be more balanced, with other Brics countries exporting more to China. They will also discuss a ranking system for non-western universities.
With Syria’s two-year long civil war escalating through the suspected use of chemical weapons, Brics leaders will also have to weigh a call from President Bashar al-Assad to intervene.
In a message to the summit leaders Assad asked “for intervention by the Brics to stop the violence in his country and encourage the opening of a dialogue, which he wishes to start,” said his senior adviser Bouthaina Shaaban after he delivered the message to South African President Jacob Zuma.
South Africa: An ideal home for BRICS bank
South Africa was well positioned to become the home of the Brics development bank because of its solid financial legal framework, auditing abilities and concrete international financial connections, Standard Bank joint chief executive Sim Tshabalala said in a panel discussion in Durban yesterday.
Speaking at the curtain raiser hosted by Standard Bank for the fifth Brics summit, Tshabalala said South Africa had what it took to host such a bank. “We have one of the most highly ranked financial systems globally,” he said.
South Africa ranks first out of 144 countries for the strength of its auditing and reporting standards and the efficacy of corporate boards, according to the World Economic Forum’s Global Competitiveness Report 2012-2013. This puts it well ahead of its Brics counterparts, namely Brazil, Russia, India and China.
In terms of the soundness of banks, South Africa comes in second (with Canada in first place), while Brazil is ranked 14, India 38 and Russia 132.
Finance ministers from the five Brics countries were expected to table their country reports on the feasibility of the development bank, media reports said at the weekend. The bank was expected to start with capital of $50 billion (about R465bn), with each country contributing $10 billion.
President Jacob Zuma said in Pretoria yesterday that the major output for the Brics summit would be the establishment of the development bank, which would assist in mobilising resources for infrastructure and sustainable development projects in the Brics bloc and other emerging economies.
Trade unionists welcomed the idea of a development bank but said it should “primarily be developmental in character”.
In a declaration released yesterday by the second Brics trade union forum in Durban, the trade unionists said: “We envisage the Brics development bank solely owned by Brics, publicly funded, taking all decisions on consensus, promoting trade based on own currencies of its member countries, with a core focus on infrastructure and development in consultation and approval by all stakeholders, inclusive of the community and trade unions.”
They added that unions should be represented at the highest levels.
Tshabalala said Standard Bank was looking forward to discussions and decisions around the development of the institution.
Local banks would get involved only once all policies and the framework had been put in place, he said.
“It is too early for us to deliberate on the actual set-up of this bank,” Tshabalala said.
“We hope that the decision regarding this financial institution would be one of the outcomes of the summit.”
Tshabalala added that although discussions about the bank were at an early stage, its impact on the rand would depend on various issues. These included the structure of the bank’s balance sheet, how it was capitalised and where the bank raised its capital.
“It would also depend on how much South Africa contributes to the bank.”
Tshabalala said policymakers would engage the commercial banks as soon as it was appropriate.
As part of engaging other African leaders, Zuma will host the Brics Leaders Africa Dialogue Forum Retreat.
The retreat will reflect on infrastructure development, as well as integration and industrialisation, which are aligned to Africa’s own priorities, for the mutual benefit of Brics countries and the continent.
Zuma said Brics fitted well with the country’s National Development Plan objectives of raising employment through faster economic growth, improving the quality of education, and skills development.
In 2012, South Africa’s total trade with the other Brics countries was R294bn, which was 11 percent higher than the 2011 figure of R264bn.