The government of Indian Prime Minister Narendra Modi will oversee initial operations of a $100 billion development bank set up by the so-called BRICS group of economies.
The bank and currency reserve pool was unveiled on Tuesday by leaders of Brazil, Russia, India, China and South Africa and is seen as a rival to Western-dominated institutions such as the World Bank and International Monetary Fund.
The bank – named the New Development Bank (NDB) – will fund infrastructure projects in the BRICS countries and will be based in Shanghai.
India will oversee the bank’s operations during the first five years of operations.
The institution is seen as the first major achievement of the BRICS countries – Brazil, Russia, India, China and South Africa – since they got together in 2009 to press for a bigger say in the global financial order which is dominated by the United States and Europe.
The BRICS were forced to coordinate efforts to prop up their economies owing to capital outflows in the wake of the 2008 global financial crisis.
The new bank reflects the growing influence of the BRICS, which account for almost half the world’s population and about one-fifth of global economic output.
The bank will begin with a subscribed capital of $50 billion divided equally between its five founders, with an initial total of $10 billion in cash put in over seven years and $40 billion in guarantees.
It is scheduled to start lending in 2016 and be open to membership by other countries, but the capital share of the BRICS cannot drop below 55 percent.
The contingency currency pool will be held in the reserves of each BRICS country and can be shifted to another member to cushion balance-of-payments difficulties. This initiative gathered momentum after the reverse in the flows of cheap dollars that fueled a boom in emerging markets for a decade.
“It will help contain the volatility faced by diverse economies as a result of the tapering of the United States’ policy of monetary expansion,” Brazilian President Dilma Rousseff said.
“It is a sign of the times, which demand reform of the IMF,” she told reporters.
China, holder of the world’s largest foreign exchange reserves, will contribute the bulk of the contingency currency pool, or $41 billion. Brazil, India and Russia will chip in $18 billion each and South Africa $5 billion.
If a need arises, China will be eligible to ask for half of its contribution, South Africa for double and the remaining countries for the amount they put in.
China’s official Xinhua news agency, citing unidentified sources at the Chinese Finance Ministry, said the new bank would give developing countries a greater say in the international financial order, a theme President Xi Jinping struck ahead of the summit.
The new bank “will promote the global system of economic governance to develop in a just and fair direction,” the agency said.
Negotiations over the headquarters and first presidency lasted until the eleventh hour due to differences between India and China.
Negotiations to create the bank dragged on for more than two years as Brazil and India fought China’s attempts to get a bigger share in the lender than the others.
In the end, Brazil and India prevailed in keeping equal equity at its launch, but fears linger that China, the world’s No. 2 economy, could try to assert greater influence over the bank to expand its political clout abroad.
China, however, will not preside over the bank for two decades.