What can the new members expect from the New Development Bank?

The New Development Bank (NDB) founded by Brazil, Russia, India, and China in 2014, with South Africa joining a little later, appears poised to expand its membership as evident from the Indian Prime Minister's verbal invitation to Bangladesh on December 17^th to join. Earlier in November 2020, Marcos Troyjo, the NDB President disclosed that NDB has leaped forward in the membership expansion of the Bank. "I am confident we will be able to announce new members very soon," Mr. Troyjo added.

Few people really know of the NDB even though it involves five massive emerging countries (BRICS) with 41% of the world's populations, 22% of the world GDP and some of the largest land masses of the world. According to NDB's General Strategy: 2017 – 2021, NDB is a multilateral development bank "that builds on the experiences of existing institutions to design policies and practices capable of living up to the challenges posed by global trends." It emerged from the growing role of BRICS and other emerging market and developing countries in the world economy, "and their greater willingness to act independently in matters of international economic governance and development."

What does NDB gain by expanding membership?

Expanding the NDB's membership will help boost the Bank's business growth.  This is crucial to its long-term development. In their second annual meeting in 2017, the Board of Governors had agreed to "prepare a list of targeted countries to be invited for admission to the NDB". Dozens of nations apparently want to become members of the bank although none have yet joined.

Expanding the membership from the five founding members is considered a key for the bank to become a truly global player. NDB membership is one way to defer the more contentious issue of the expansion of BRICS' membership itself. Membership will also set the pattern of BRICS+ cooperation with developed countries, other emerging economies, and developing countries, thus ensuring geographic diversity with a mix of advanced, middle income and lower-income countries.

New membership will allow NDB to grow its business by funding infrastructure that integrates a region with the core BRICS country. New membership means more resources to integrate the neighborhood with the respective BRICS. The expansion will help improve the subscribed capital beyond the $50 billion and AA+ credit rating of the Bank.

Why should new members be interested?

According to various NDB policy documents, "NDB lends directly to a member government or against its sovereign guarantee to the project executing agency such as its appointed agency, banks, instrumentality, or political subdivision." NDB also provides sovereign guaranteed loans to financial intermediaries in its member countries for on-lending. Its Board of Directors (BOD) can exceptionally approve a specific project in a nonmember emerging economy or developing country. NDB is also looking to diversify by pivoting towards investing in private sector firms and projects. NDB accepts parameters of compliance with environmental and social standards designed by the borrowers.

NDB provides foreign exchange and national currency denominated loans at floating interest rates linked to an appropriate bench-mark rate at cost plus a fixed NDB lending spread determined at the time of loan approval. To provide loans in members' currencies, it relies on on-shore and off-shore markets in those currencies.

NDB's US dollar denominated loans are linked to 6-month London inter-bank offered rate (LIBOR) and Euro denominated loans are linked to 6-month European inter-bank offer rate (EURIBOR) plus a lending spread. The lending spread has a "cost spread" to cover operations costs and a reasonable return on capital and a "maturity premium" to cover the additional risk associated with longer term loans. Pricing for floating-rate national-currency denominated loans comprise a NDB cost spread over the national bench-mark rate or cost of its funds and a maturity premium.

The NDB lending spread for all sovereign guaranteed loans is determined based on the rates applicable at the time of the loan approval. NDB charges maturity premium linked to the tenor of the loan at the rates determined by the BOD for all loans with an average repayment maturity (including the grace period) longer than eight years but not exceeding 19 years.

The lending rates on both foreign and national currency loans are reset every six months on interest payment date. NDB levies a front-end fee and a commitment charge as determined by the BOD. It also adds a country risk premium to an eligible non-member country.

The NDB received AA+ credit ratings from Fitch and Standard & Poor's as well as AAA ratings from the Japan Credit Rating Agency and the Analytical Credit Rating Agency. This has allowed the Bank to raise funds at competitive rates. 

How has the NDB fared?

Since its inception, NDB has invested in 65 projects totaling $21 billion spanning clean energy, transport infrastructure, water resource management, urban development, environmental efficiency, and social infrastructure.  It is expecting approvals to reach $26 billion by the end of 2020. NDB has also begun co-financing projects funded by other Multilateral Development Banks.

A large part of the NDB's portfolio of infrastructure projects thus far consist of financing for government-sponsored or government-backed public sector firms, with 80% of approvals in 2019 concentrated on sovereign and sovereign-guaranteed operations.

NDB lending in local currencies comprise 27% of the project approvals, highest for MDBs and growing. In 2019, the NDB approved loans denominated in Euros, Renminbi, South African Rand and Swiss Franc and issued an RMB 3 billion bond in the China Interbank Bond Market.

The NDB responded to Covid-19 through a $10 billion Emergency Response Program to finance health, social relief, and economic recovery, especially through the creation of jobs that come from infrastructure investment and support for small and medium-sized enterprises. India received $1 billion within weeks of the outbreak of the pandemic.

NDB's achievements so far have been rather limited. Of the $15 billion committed as of December 31, 2019, only 10% had been disbursed. Continuing to advance the interests of the developing world in a turbulent political climate proved to be harder than anticipated. Relations between China and India soured and sanctions against Russia made it difficult to lend to Russian companies. Political instability and economic crisis plagued South Africa, Brazil, and India even before the pandemic.

What can Bangladesh gain?

Bangladesh has a huge financing gap for meeting the Sustainable Development Goals. It was estimated to need over $928 billion at 2015-16 prices between 2017-2030, equivalent to nearly 20% of GDP.  This estimate, made before the pandemic, covered 80% of the 169 SDG targets. With low and notoriously rigid tax to GDP ratio and setbacks caused by Covid-19, the financing gap has most likely widened.

NDB, working in partnership with the government and the private sector, can play a key role in underpinning commercially viable, sustainable, and scalable developmental interventions. They can use their funds strategically to provide, for instance, de-risking instruments to incentivize private finance for investments with strong social and development benefits that would otherwise not materialize in Bangladesh due to higher actual or perceived risk. For multi-stakeholder partnerships to have the desired development impact, NDB's public institutional expertise and emerging market knowledge could be handy.

In the aftermath of the pandemic, NDB is prioritizing building healthcare capacities and national health preparedness for its member nations in the immediate future, with special support towards containment of the spread of Covid-19 and assistance for recoveries of incomes and jobs. Their medium-term focus is on investments for reinforcing resilience in densely populated urban agglomerations for mitigation of adverse impacts of air pollution and adaptation to climate change through renewable energy technologies.

To say Bangladesh desperately needs such financing is not an overstatement.

Win-win but not without challenges

The reality of global finance is never as straightforward and rational as the intent laid out in the institutional mandates appear.

Terms and conditions for new membership in the NDB have been ready for years but there is vague agreement on procedure. Each of the current members of the Bank are scheduled to nominate two countries into the Bank. A nominated member is required to submit an instrument of accession in conformity with its domestic law to the Brazilian government. The process of expansion is slated to be gradual and balanced in terms of geographic representation as well as supportive of the NDB's goals of attaining the highest possible credit rating and institutional development. Formal negotiations with potential candidates are supposed to be based on these principles, according to a joint statement issued following the summit in November 2020 under the BRICS Presidency.

BRICS will not dilute their shareholding below 55% and developed countries' share cannot go beyond 20%. This leaves 25% for other emerging economies and developing countries. The voting right of a new member will not exceed 7%. These raise a few eyebrows as the BRICS were criticizing the IMF for not implementing reform that would give developing nations more decision-making power. The creation of the NDB was strictly linked to the lack of a strong acknowledgment of the rising importance of emerging economies in the Bretton Woods Institutions (BWI). Ironically, the NDB governance framework seems to replicate some of the shortcomings in the BWIs.

Whether or not the founding member countries still value the BRICS and its banks as much as they did earlier is uncertain. Brazil has a government led by climate sceptics and harsh critics of globalisation and multilateralism. China now promotes these. A stand-off between India and China has turned the two into estranged Board fellows.

Having settled a prolonged border dispute in the Far East, Russia and China have established a strategic relationship nourished additionally by the emergence of the US as an avowed adversary of both. However, if US-China tensions ease in the post-Trump era, China would think twice before deepening its ties with Russia faced with Western sanctions. 

Only time will tell if the NDB can assert itself as an improvement over the BWIs by correcting the transparency, meaningful broad-based participation, and sustainability deficits and managing to ringfence the institution from geopolitics.