Monday, 14 October 2013

Could BRICS Bank help repair the International Financial Architecture?


Could  BRICS Bank help repair the International Financial Architecture?

BRICS Bank is not about bringing order to global financial disorder, but is mired in geopolitical realities as well. Even though the bank is in an embryonic state, it is gearing itself up to stand up to the Bretton Woods Institutions and neoliberal ideology with its south-centred, state-aided capital accumulation. How, if at all is BRICS Bank going to differ from seven-decades old institutions is a contentious issue?

One of the objectives of Contingent Reserve Arrangement (CRA), the idea behind BRICS Bank is to complement existing financial arrangements. At both the DurbanSummit in March and the G20 in Russia a month back, critical details like bank capitalization, institutional leadership and location could not be sorted out. It goes without saying that $50 Billion BRICS Bank capitalization and $100 Billion CRA would be pale in comparison to serious financial meltdowns. Add to that the 2013 economic upheavals in BRICS economies, thanks to US Fed’s Quantitative Easing, when BRICS currencies tanked and resulted in dramatic outflows of capital from the emerging markets, the honeymoon period for emerging economies culminated in recrimination. This deceleration means that the booming emerging economies will no longer make up for weakness in rich countries, according to magazine, The
Economist. 

According to Chinese economic experts, the BRICS bloc is already showing signs of rupture in material ways, leaving only China to push ahead through the storm. As Tsinghua University economist Li Dokui remarked, the end of the US Fed’s Quantitative Easing is “good news for the renminbi” because it need no longer rise in value – but meantime, “the concept of the BRICS may vanish, leaving just China versus other emerging economies”. According to Merrill Lynch economist Lu Ting, “China will be largely immune to the impact due to its sustained current-account surplus, low foreign debt, huge exchange reserves, high savings and capital controls”. But there are streaks of optimism, where fiscal austerity and credit constraint could elevate the mood in BRICS, even though strategies advocated have so far not had any discernible effect on the financial volatility.

Thus, it was genuine to ask if BRICS really posed a challenge to Bretton Woods Institutions. After all, there was an alternative already in place that they could have supported: the Bank of the South. Founded by the late Venezuelan president Hugo Chavez in 2007 and supported by Argentina, Bolivia, Brazil, Ecuador, Paraguay and Uruguay, Banco del Sur already has $7-billion in capital. It offers a more profound development finance challenge to the Washington Consensus, especially after Ecuadoran radical economists improved the design.

Most ironically, the “left-talk” that pervades most of BRICS foreign policy is countered by “walk-right” by Central Banks in these nations, thus rupturing further the North-South political confrontation, but at the same time unable to build an economic bridge.

Himanshu

Wednesday, 9 October 2013

Government of India Approaches World Bank for Infrastructure Funding Facility



If one were to go by Prime Minister’s address to the nation on Independence Day about kick-starting new infrastructure projects, then possibly the first step has been taken with the approach to World Bank to the tune of $1 Trillion for projects. India wants the Bank to provide for loans by setting up a Global Infrastructure Finance (GIF). This GIF would have contributions from sovereign wealth funds and pension funds as well, in order to derive higher returns as compared to direct investment in projects. Importantly, by parking the funds with the WB, they transfer the risk accordingly.

Half of the funds are to come from private sector for projects whose time period is extended till 2017. Government, in order to promote long-term and low-cost funding for the infrastructure sector has roped in six Infrastructure Debt Funds (IDFs), which are a new category of financial intermediaries to refinance loans. Of the six, four are non-banking financial companies, while two are mutual funds.

What many of the developing countries are hoping for is to have one final push at the Global Infrastructure Finance at the autumn meeting in Washington DC to boost financial morale, which has been hit by fears of an adverse impact of US Fed’s moves to withdraw the stimulus package. This mechanism would help fund developing countries’ requirements for long-term resources, especially at a very reasonable cost.

For India, which is in the thick of economic woes, the growth has been sluggish, and with further opening up of the economy and doors for foreign direct investment, all that the government at the centre can hope for is to return back to a high trajectory of growth by calling in more investments. The government strongly believes that such a lending mechanism would also help shrink the current account gap, thus relaxing pressure on the depreciating currency.


Himanshu

Tuesday, 8 October 2013

Structural Measures on their way to Nepal...Courtesy India and the IMF?


In order to stave off any negative impacts from India’s crisis-ridden economy, Nepal has been recommended by the IMF to tighten its own monetary policy thereby reducing the gap in the interest rates between the two countries. Why would such a condition be prescribed in the first place is gauged by the fact that Nepal’s banking sector suffers from vulnerability in proportion to India’s economic rides. This connection is made through India’s current CAD and Nepal’s low production. Despite efforts by the Central Bank of Nepal to obligate banks of at least 12 percent of their lending to agriculture and hydropower sectors in addition to refinancing at lower interest rates for productive sector, a noticeable capital flight to India takes place whenever there is a drop in the interest rates in Nepal. Regarding the differences in the interest rates between the two countries the logic behind Central Bank’s policy of not allowing the banks and financial institutions to keep their spread rate higher than 5 percent was guided by the aim to keep interest rates on deposits on the higher side.

Tighter monetary policies in India along with excess liquidity in Nepal expose financial vulnerabilities of both nations vis-à-vis one another. Nepal’s growth has been stitched into India’s protracted economic slowdown by virtue of key trading partnership. India’s high inflation along with Nepali currency’s depreciation against the dollar will add inflationary pressure on Nepal. IMF recommends the Himalayan country to do away with its tendency of bunching up capital expenditure at the end of the fiscal year and push forward capital spending by investing in physical infrastructure, education, health and sanitation. What is interesting is IMF’s advice to Nepal in refraining from toying with the exchange rate peg with Indian rupee, as doing so would reduce former’s competitive edge. In a nutshell, depreciation of the currency is an opportunity to benefit from increased international competitiveness to be boosted by structural measures to lower the cost of doing business. 

Himanshu