Mains Daily Question
Nov. 20, 2020

  1. Explain how the New Development Bank (NDB) represents a shift in the paradigm of development financing. (10 marks)

Approach:

  • Introduce with the New Development Bank

  • Explain how NDB represents a paradigm shift - alternative financial architecture, friendly lending, focus on sustainable development etc.

  • Conclude appropriately

Model Answer

To better represent emerging-market and developing countries in global financial architecture, the BRICS nations decided to set up a development bank of their own. In 2015, the BRICS nations established the New Development Bank (NDB) with a capital of $50 billion to mobilize resources for infrastructure and sustainable development projects in BRICS and other emerging economies, as well as in developing countries.

How NDB Is Changing the Paradigm of Development Financing

  1. Alternative Financial Architecture: The bank augments the international financial architecture that is dominated by 20th century institutions of World Bank and IMF. Thus, it reduces the dependence on World Bank group and dilutes their hegemony in the financial system. The BRICS nations are also considering a credit rating agency of their own to counter the dominance of USA in this area.

  2. No Harsh Conditions Imposed: There is a growing concern among developing countries in South America, Africa and Asia that IMF and World Bank impose harsh conditions to be eligible for loans, like reforming their economies or governance structures even if they are unpopular with their own people. Hence, these countries are looking to NDB for financing.

  3. Democratic: The NDB's equal-share voting basis reflects greater democracy in NDB vis-à-vis World Bank group institutions which are dominated by the western powers

  4. Precedence for sustainable development: The projects of renewable energy, sustainable development and infrastructure development are given precedence. Green Bonds in local currency are being issued by NDB.

  5. Shift in global power center:The NDB indicates the rise in the collective financial power of developing nations.

In the past five years since it began actively investing, the NDB has recorded a number of successes and has cemented its place as a preeminent multilateral development bank focused on sustainable infrastructure. As of November 2020, it has approved 65 sustainable development and infrastructure projects across all BRICS economies worth $21 billion, spanning clean energy, transport infrastructure, water resource management, urban development, environmental efficiency and social infrastructure. NDB is playing a key role in changing the development financing paradigm, and its successful start can be seen by the fact that the International credit ratings agency Fitch Ratings has awarded a top investment-grade rating to it recently.

At the same time, the NDB must also learn from the omissions and lessons of the past five years. As of December 31, 2019, the NDB had committed capital of $15 billion in aggregate, but of this committed capital, only $1.5 billion (or 10%) had been disbursed as cash to projects by the end of 2019. Increasing the rate of utilization of its committed capital must remain a major focus of the Bank in the coming years.

Moreover, even though the NDB has stated its support for sustainable and green infrastructure, its funding for a Trans-Amazonian highway project (Para Sustainable Municipalities Project) in Brazil has come under scrutiny from environmentalists, who have highlighted the disproportionately negative effects of deforestation in the Amazon as a result of urban development projects in the region.

Finally, 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 in the borrowing countries, with 80% of approvals in 2019 concentrated on “sovereign and sovereign-guaranteed operations”. As the NDB diversifies towards making equity investments and attempts to crowd-in private investments to complement its efforts, it should begin to pivot towards investing in private sector firms and projects in its borrowing countries.

 

 

Subjects : Economy
Only Students can submit Answer.
Answers