The Financial Express

How Bangladesh may benefit from new int'l development banks

How Bangladesh may benefit from new int'l development banks

Bangladesh has finally joined the so-called BRICS bank, The New Development Bank (NDB) to be precise. In 2015, the multilateral lending agency was established by BRICS countries -- Brazil, Russia, India, China and South Africa. It became fully operational in 2016.

Besides Bangladesh, United Arab Emirates (UAE) and Uruguay have also been admitted to the NBD. These are the first three countries to be members of the new multilateral lender apart from its five founders or BRICS. The membership is formally announced in the first week of this month after a year-long negotiation. Thus, another new avenue becomes open to Bangladesh for financing its growing needs of development and infrastructure. Bangladesh has earlier joined Asian Infrastructure Investment Bank (AIIB), another new multilateral lending agency initiated by China.  AIIB began operations in Beijing in January 2016 and Bangladesh joined the bank in the same year. By paying a subscription of $660.5 million, the country has retained around 0.78 per cent of the votes.

Both the new multilateral banks have emerged challenging the domination of the Bretton Woods institutions, the World Bank and International Monetary Fund (IMF) to be precise. It is interesting to note that the formal announcement of establishing these two banks came in 2014, the year that marked the 70th anniversary of the Bretton Woods conference. Developing countries have long been arguing that World Bank and IMF are not adequately responding to their growing needs and are imposing undue conditions to access their financial assistance.

Disappointments, even ambitions, of the advanced developing countries have driven them to establish an alternative multilateral bank to finance their needs.  The emergence of BRICS as a grand alliance to lead the developing countries in global economic and trade negotiations has created an opportunity to set up a new multilateral lending agency. Although BRICS countries are largely divergent in many aspects and the alliance is loose in nature, the effort to establish the NDB was laudable. When it was formally announced, many expressed doubt about the viability of a new global bank. For them, the announcement of establishing AIIB also came as a big surprise.  Some even thought that AIIB would sideline NDB.

Though, initially, there was some amount of  uneasiness due to China's presence, the fact remains that it is not only a sponsor,but also the prime initiator of AIIB. No doubt, four other sponsors of NDB were also slightly puzzled. Nevertheless, a balanced negotiation made the NDB a reality and other sponsors acknowledged the leading role of China.  The headquarters of both the banks are in China -- NDB is based in Shanghai and AIIB is in Beijing.  Though the total capital of both the banks is US$100 billion, AIIB got full subscriptions already while only 50 per cent of NDB capital is subscribed so far.

AIIB moves rapidly to enhance its outreach and has now 103 members across the world. China, obviously, retains the highest share of the bank. Having 30 per cent of the total share capital, the country enjoys 26 per cent of the voting rights. Clearly, AIIB is China-centric multilateral bank and linked with Belt and Road Initiative (BRI). To manage its overcapacity in production, China moves to generate regional and global demand for physical infrastructure. Packaged in the form of better connectivity and integration among the nations, the country wants to provide the capital, materials and technology.   AIIB is playing the role of capital injection in different developing countries. In the last five years, the bank approved $22.02 billion for investment although the actual disbursement stood at $9.13 billion at the end of 2020. As such, the amount is still low.

Against the AIIB's fast move to increase membership and thus mobilise capital, NDB adopts a comparatively slower path. Nevertheless, it has approved about 80 projects of around $30 billion in all five of its member countries with the cumulative disbursement reaching $10.69 billion. Like, AIIB, it also prioritises infrastructure.

As Bangladesh has been implementing a number of mega infrastructure projects and also plans to take more projects in near future, financing becomes a big challenge.  AIIB has already approved around $2.40 billion for 13 projects and programmes (including three Covid-19 emergency response programmes) in Bangladesh. Another four projects of $1.73 billion have been proposed. Most of the projects are, however, not very big and AIIB is a co-financer.

The external financing portfolio of Bangladesh is almost entirely debt. Multilateral debt contributes around 46 per cent of the total external debt. At the end of 2020, the stock of multilateral debt stood at $32.90 billion which was $28.98 billion at the end of 2019. Currently, international financial institutions (IFIs) like the World Bank and Asian Development Bank (ADB) are major sources of multilateral loans.

Islamic Development Bank is also there though financing from this multilateral agency is still small. AIIB becomes another source of multilateral lending for Bangladesh. By being a new member of NDB, the country will be able to approach the new multilateral lending for infrastructure and other development needs.

Having more external sources to get funds may also help to get credit on easier terms and conditions. Any multilateral lending agency knows that a borrower can now approach more than one lender easily and even simultaneously. It will increase competition among the Multilateral Development Banks (MDBs) and strengthen the negotiation position of recipients like Bangladesh. 

The founding of AIIB and NDB is based on the expectation that these MDBs will become alternative sources for The World Bank Group and other regional MDBs like ADB or AfDB (African Development Bank). Outperforming the old MDBs, however, is not an easy job and the rhetoric of doing so will not work. Some argue that instead of directly challenging the old MDBs, AIIB and NDB should focus on a complementary role in multilateral lending.

 A big challenge for the new MDBs is to avoid financing any disputed, less-viable and anti-environmental projects in developing countries. In some rapidly developing countries including Bangladesh, a number of development projects have been designed. Competition with old MDBs may drive the new MDBs to finance those projects. Already a number of power projects, financed by NDB, in South Africa have become a matter of criticisms. Meantime, the president of AIIB last year declared that the bank would not finance 'any projects that are functionally related to coal.' Nevertheless, time will say whether AIIB or NDB will be able to stop such financing and restrain Bangladesh or any other country to go ahead with environmentally harmful projects. 

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