New Development Bank and Bangladesh

Global finance is dominate by the Western world through the Bretton Woods Institutions likes of World Bank, International Monetary Fund and also the Asian Development Bank. These do not have the capacity to finance the huge funds for all the nations.

The world's infrastructure financing gap is currently estimated to be US$ 90 trillion by 2030. Professor Nicholas Stern of London School of Economics and former World Bank chief economist Joseph Stiglitz came up with the idea of a new development bank at World Economic Forum at Davos in 2011 as a way for emerging markets with large trade surpluses to recycle those savings into productive investments in their own countries, such as infrastructure.

Developing countries are frustrated over the influence and control over WB, IMF and ADB. As for example, the (BRICS nations) account for more than 25 per cent of global economic output, but have 10.3 per cent of quota in the IMF. European countries, on the other hand, have 27.5 per cent of the voting weight, but make up 18 per cent of global economic output. In addition to this inequality, there is a tradition of management dominated by Western world. The head of the management rule require a European to always head the IMF and an American the World Bank. Against this context, the NDB represents, together with the Beijing-based Asian Investment Infrastructure Bank (AIIB), a financing alternative to the Bretton Woods institutions of the IMF and the World Bank that have underpinned the global economic order since their founding in 1944. The NDB follows the establishment of two other China-led institutions over the past year: the AIIB and the Silk Road Fund (SRF).

Another reason behind the establishment of the NDB lies in the BRICS countries’ frustration in the World Bank’s and the International Monetary Fund’s (IMF) delay in reforming their procedures so that voting weight and influence are more commensurate with economic size and contributions to such bodies. The voting power of each NDB member will equal its subscribed shares in the capital stock of the bank. Since the initial subscribed capital ($50 billion USD) is equally distributed amongst the founding members, each member state will have an equal twenty per cent share in the bank’s capital and, consequently, equal voting rights (at least in the beginning). The voting calculation mechanism that ensures that NDB members have equal voting rights or, as the case may be in the future, voting rights proportionate to their actual shares, is the key feature that differentiates the NDB from other international financial institutions, such as the World Bank and the IMF.

The role of international financing agencies was not up to the expectation of developing and recognizing this shortfall of resources of developing countries particularly significant in emerging markets, governments of the Brazil, Russia, India, China and South Africa (BRICS) countries decided in 2015 to create their own financial institution, the New Development Bank (NDB). It is a multilateral development bank (MDB) established with the objective of financing infrastructure and sustainable development projects in BRICS and other emerging economies and developing countries. NDB’s work complements the efforts of multilateral and regional financial institutions, toward global growth and development. Its ownership structure is unique, as the BRICS countries each have an equal share and no country has any veto power. Against this context, the NDB represents, together with the Beijing-based Asian Investment Infrastructure Bank (AIIB), a financing alternative to the Bretton Woods institutions of the IMF and the World Bank that have underpinned the global economic order since their founding in 1944.

The NDB promises to provide not only a new source of funding for energy and other infrastructure projects globally but to also represent a new way of providing such funding. The NDB's aspiration to meet the vast and unfulfilled infrastructure requirements of its member countries, whilst retaining a deliberate focus on sustainable development, represents a bold departure from approaches currently followed by its counterpart institutions. The NDB's efforts to promote what it broadly labels as 'sustainable infrastructure' is thus both welcome and laudable.

NDB has head quarter in Shanghai and accounts for five massive emerging countries (BRICS) with 41 per cent of the world's populations, 22 per cent of the world GDP and one of the largest land masses of the world. The work is centered around maximizing the impact of development in a fast, flexible and efficient manner. The bank is set to support public or private projects through loans, guarantees, equity participation and other financial instruments. It has three achievements that are worth highlighting. These are: a loan book of 30 billion, one AAA and two AA+ international credit ratings and the successfully launch of capital-raising activities in local currencies. BRICS countries are switching to national currencies instead of the US dollar, which remains the default currency for global trade, even among BRICS countries.

Since its establishment six years ago, NDB has approved about 80 projects in all of its member countries, totalling a portfolio of US$ 30 billion. Projects in areas such as transport, water and sanitation, clean energy, digital infrastructure, social infrastructure and urban development are within the scope of the NDB.

The bank has a mandate to finance infrastructure and sustainability projects in BRICS and other emerging and developing countries “to complement the existing efforts of multilateral and regional financial institutions for global growth and development”. The NDB mandate clearly indicates that it should be involved in projects where private capital is not capable or unwilling, as the case may be, to make major investments due to potential low profitability and long payback periods. NDB will finance projects in member countries and eventually other developing nations through loans, guarantees, credit and equity investments. There are signs that energy will be a key focus of activity for the bank, as well as infrastructure projects that fall within China’s “One Belt, One Road” concept for improving connectivity in Eurasia.

NDB is guided by four defining principles: (1) It will be professional, efficient, transparent and green. (2) “Professional” should reassure the international community that the NDB will be properly run as a global rules-based (rather than political) institution, (3) With a focus on “next practice, not best practice.” (4) “Efficient” echoes with a leaner management structure than the World Bank and aim at faster decisions.

The NDB will have a Board of Governors, a Board of Directors, a President and four Vice-Presidents. The President of the bank will be elected from one of the founding members on a rotational basis, and there will be at least one Vice-President from each of the other founding members.

The bank has been welcomed by the developing countries as their governments are often unable to mobilize adequate revenue mobilization efforts as well as the shrinking of external lending avenues in the wake of LDC graduation has become a cause of consternation of the policy makers. The revenue mobilization by the Bangladesh government remain undoubtedly abysmal as the tax-GDP ratio hovers around 9 per cent being one of the lowest in the South Asian region.

It has been projected that Bangladesh requires over $928 billion between 2017-2030. These amounts are around 20 per cent of the GDP. This estimate, however, doesn't consider the pandemic induced economic disruption. The ongoing pandemic has worsened the tax collection and the graduation from the LDC status is set to reduce the grant and soft loans from the external financial institutions which will render prevailing financial avenues inadequate. NDB has already approved Bangladesh as a new member and the country can hope to get due support from this new lending institution.

The writer is a legal economist. He can be contacted at [email protected]