NEW DEVELOPMENT BANK: DE-DOLLARISATION, CHALLENGES, WAY FORWARD

Why In News?

As India hosts the 18th BRICS Summit in New Delhi, policy debates have intensified over why the New Development Bank has failed to emerge as an autonomous alternative to the Western-led Bretton Woods system.

What is the New Development Bank (NDB)?

NDB is a treaty-based multilateral development institution conceptualized and established by the original BRICS economies (Brazil, Russia, India, China, and South Africa).

Formally agreed upon at the 6th BRICS Summit in Fortaleza, Brazil (2014), the Agreement on the New Development Bank entered into force in July 2015, marking the operationalization of South-South multilateral lending.

Headquartered in Shanghai, China, the bank operates regional offices including the Africa Regional Center (Johannesburg), the Americas Regional Office (São Paulo), the Eurasian Regional Center (Moscow), and the Indian Regional Centre at GIFT City (Gandhinagar).

The bank's charter directs it to mobilize resources for infrastructure and sustainable development projects in BRICS and other emerging market economies and developing countries (EMDCs).

Article 1 of the NDB Articles of Agreement clarifies that the bank was designed to complement, rather than substitute, existing multilateral and regional financial institutions for global growth.

Why was the BRICS Bank Created?

Circumventing Bretton Woods Stagnation: Emerging economies faced systemic resistance from the US and Europe regarding voting quota reforms at the International Monetary Fund (IMF) and the World Bank.

Addressing Massive Infrastructure Financing Deficits: Traditional multilateral development banks (MDBs) left developing nations with an estimated annual infrastructure financing gap exceeding $1.5 trillion, especially in sustainable transport, clean energy, and water management.

Eliminating Intrusive Policy Conditionalities: Western development loans historically carried rigid structural adjustment conditionalities, forcing developing borrowers into austerity, deregulation, and institutional restructuring.

Elevating the Voice of the Global South: Created to institutionalize a non-Western multilateral forum where developing nations set lending priorities without being subjected to donor-driven geopolitical vetoes.

Institutionalizing South-South Economic Solidarity: Provided a practical mechanism to channel surplus capital from fast-growing emerging markets into green infrastructure, regional connectivity, and industrial modernization across developing geographies.

What are the Major Features of the NDB?

Equal Shareholding Among Founding Members: Unlike the World Bank or IMF where voting power is weighted by economic capital or historical privilege, each founding BRICS nation was allocated an exact 20% equal shareholding and voting weight, ensuring no single nation holds a veto.

Broad Membership Classification: Open to any member state of the United Nations, maintaining a legal mandate that the aggregate voting power of the founding BRICS members cannot fall below 55%.

Dual Sovereign and Non-Sovereign Window: Extends loans not only directly to national governments (sovereign lending) but also to state-owned enterprises, municipal authorities, and private corporate developers without mandatory state guarantees.

Institutional Commitment to Local Currency Financing: Mandated under General Strategy (2022–2026) to denominate at least 30% of its total financing commitments in the domestic currencies of its member countries.

Rotation of Executive Leadership: Establishes a rotational leadership structure for its Presidency among founding members.

What has the NDB Achieved So Far?

Clean Energy and Decarbonization Funding: Channeled funds into wind, solar, hydropower, and transmission grid modernizations across Brazil, India, and China.

Transformative Urban Transportation Systems: Financed major mass rapid transit systems, including metro rail expansions in Mumbai, Delhi-NCR, Indore, and São Paulo.

Water Security and Sanitation Networks: Funded clean drinking water access, ecological restoration of river basins, and drought-proofing rural irrigation networks.

Emergency Pandemic Support Facilities: Disbursed rapid-response emergency program loans totaling $10 billion during the COVID-19 pandemic to finance public health infrastructure and socioeconomic safety nets.

Green Bond Market Pioneer: Issued successful green and sustainable development bonds in Chinese Renminbi (RMB) and South African Rand (ZAR), setting benchmarks for local currency debt issuance.

Why NDB Not Become a Complete Alternative?

Structural Subordination to International Capital Markets: The NDB raises the vast majority of its capital by issuing bonds on international markets (London, New York); to keep borrowing costs affordable, it must retain an AA+ credit rating from Western agencies (Fitch, S&P).

Compliance with Western Sanctions Regimes: Following the 2022 Russia-Ukraine war, Western credit rating agencies downgraded the NDB; to prevent a collapse of its market access, the NDB froze all new lending to Russia, highlighting that it cannot operate independently of Western financial coercion.

Severe Scale Disparity with Bretton Woods Giants: With a total subscribed capital of $50 billion and annual disbursements hovering around $1–$2.5 billion, the NDB remains dwarfed by the World Bank Group, which commits over $80 billion annually.

Persistent Dominance of Dollar-Denominated Lending: Despite extensive political rhetoric advocating de-dollarisation, nearly 70% of the NDB’s loan book remains denominated in US dollars, leaving borrowers exposed to currency fluctuations.

Geopolitical Frictions Among Founding Members: Strategic rivalries—most notably the Sino-Indian border tensions—impede deep financial integration, joint currency arrangements, and multilateral capital expansions.

What are the Major Challenges Facing the NDB?

Geopolitical Polarization Post-2022: The bank was forced to halt operations in Russia to protect its access to Western capital markets, creating internal diplomatic tension with a founding shareholder.

Asymmetry in Economic Weight (The China Factor): China’s economy is larger than all other BRICS economies combined; other members remain cautious about avoiding a scenario where Western dominance is merely replaced by Chinese financial hegemony.

Stiff Competition from Established MDBs: The World Bank, Asian Development Bank, and European Investment Bank possess century-old relationships, extensive concessional pools, and entrenched field offices across developing nations.

Balancing Sovereign vs. Commercial Prudence: Pressures to finance risky projects in lower-income countries clash with the fiduciary requirement to protect the bank's liquidity ratios and credit rating.

Managing Expansion Frictions: Integrating diverse new members with divergent geopolitical allegiances (e.g., UAE, Egypt, Iran) complicates consensus-based decision-making.

What are the Limitations of BRICS Financial Cooperation?

The Illusion of a Unified "BRICS Currency": Divergent economic structures, differing inflation targets, and capital controls make a shared BRICS currency economically unfeasible in the foreseeable future.

Divergent Strategic Priorities: While China and Russia favor using BRICS as a geopolitical anti-Western instrument, India and Brazil view the grouping as a non-Western developmental and reformist platform.

Absence of Integrated Cross-Border Payment Grids: Initiatives like "BRICS Pay" remain fragmented pilot projects, constrained by SWIFT dominance and national regulatory compliance hurdles.

Incompatible Monetary Systems: Members range from strict managed-float regimes with closed capital accounts (China) to inflation-targeting, open floating regimes (India, Brazil, South Africa).

Weak Intra-Bloc Financial Interdependence: Intra-BRICS trade remains heavily skewed toward bilateral exchanges with China, while financial flows and direct investments between other members remain modest.

Way Forward

Executing Phased Sovereign Capital Injections: Founding members must double the bank’s paid-in capital base from $10 billion to $25 billion to enhance its balance-sheet leverage and self-financed lending ceiling.

Accelerating Local Currency Bond Issuances: Expand bond issuances across domestic emerging markets, utilizing local credit ratings to float Rupee-denominated and Real-denominated bonds to finance local projects.

• Example: NDB's Panda Bond Program in the China Interbank Bond Market, successfully raising over 94 billion RMB to fund domestic green infrastructure without foreign exchange risk.  

Establishing a Dedicated Concessional Window for Low-Income Countries: Formulate a low-interest concessional arm supported by member donations to provide grants and soft loans to vulnerable Global South nations.

• Example: Asian Development Fund (ADF) of the Asian Development Bank delivers grants and highly concessional assistance to the region's poorest economies.

Deepening Synergies with National Development Banks: Establish co-financing partnerships with national domestic financial vehicles like India’s NaBFID, Brazil’s BNDES, and the China Development Bank.

Protecting Institutional Neutrality from Geopolitical Shocks: Develop legal mechanisms and alternative reserve asset backing to insulate the bank's operational lending from unilateral secondary sanctions.

Conclusion

The New Development Bank embodies South-South cooperation, but its dependence on Western capital markets, dollar funding, and credit ratings keeps it operating within the existing global financial order rather than as a full alternative.

Source: THEHINDU