The New Development Bank (NDB), an initiative of the BRICS nations, is facing an inevitable shift. While it was established to serve emerging economies and move away from dollar-dependence, global economic shifts are steering its path differently.
Its founding member, Russia, is grappling with sanctions, prompting a reconsideration of the bank’s strategy.
The local currency solution
With Johannesburg set to host a significant BRICS summit, there’s a pertinent issue on the table: ramping up local currency usage. The aim? To mitigate the risks associated with foreign exchange fluctuations.
But this isn’t merely about turning away from the dollar. It’s about survival and adapting to global economic climates. It’s no secret that the dollar’s strength has posed challenges for emerging markets, especially after Russia’s actions in Ukraine and the Federal Reserve’s response to inflation.
This strength has amplified the cost of dollar debt for these countries. The BRICS nations, recognizing these challenges, have consistently urged the NDB to lean into local currencies.
The aspiration? Ensuring the bank offers financial solutions that are aligned with the economic landscapes of its members. However, ambition and reality don’t always sync.
The bank’s vision of de-dollarizing finance and catering to emerging economies was hindered by external factors, notably Moscow’s involvement in Ukraine.
The BRICS bank isn’t serving member countries as effectively as they had hoped. But the message from BRICS to the NDB is clear: evolve and prioritize local currencies.
Challenges and prospects
In the wake of U.S. sanctions on Russia, the bank’s dollar dependence became its Achilles heel. The fallout was significant, with the bank’s borrowing costs soaring.
This had direct repercussions for the NDB’s loan strategies and ultimately led to a cutback in new lending. The dollar may dominate the financial universe, but relying solely on it is no longer feasible for the NDB.
Despite these challenges, the bank has shown resilience. It has approved loans worth billions for diverse projects, from urban infrastructure in Mumbai to sustainable energy solutions in Brasilia.
Yet, the total loans on its balance sheet are a stark reminder of its conservative approach in these tumultuous times. China, among the BRICS nations, stands out. The NDB’s local currency endeavors have found the most success in China, with a significant portion of its lending being in yuan.
This success is juxtaposed with the bank’s struggles in the U.S. dollar market. Other member nations, though trailing China, are showing promise. South Africa is gearing up for a debut bond release, and India is eyeing its first rupee bond launch by 2023’s end.
While challenges abound, the NDB’s spirit of expansion remains undeterred. With its original members being the five BRICS nations, the bank now encompasses eight member countries.
More nations are expressing interest, underscoring the bank’s potential in emerging markets. The upcoming BRICS summit presents a unique opportunity for the bank to engage with potential new members and redefine its future trajectory.
However, expansion isn’t without its caveats. The bank’s governance ensures that the founding members hold substantial power, which could deter potential new entrants.
They may question the inclusivity and representation within the bank. While the bank vouches for its “highly capitalized” nature and the consensus-driven decision-making approach, only time will tell if this is enough to inspire confidence among emerging economies.
