World Bank, IMF cling to past, resist change of global power balance – BRICS bank chief
Political and business leaders are gathered in Russia for the annual St. Petersburg International Economic Forum. Among the players looking for investment opportunities is the New Development Bank. Created by the BRICS nations, the development bank is reckoned to become a game changer for the global financial order. Can emerging powerhouses create a viable alternative to the Western-backed financial institutions? We ask the president of the New Development Bank himself - K. V. Kamath is on SophieCo.
Sophie Shevardnadze: K. V. Kamath, president of the New Development Bank, it’s really great to have you with us Sir, welcome.
K. V. Kamath: Thank you very much.
SS: So, the New Development Bank’s duties, they actually overlap with the duties of the IMF, of the World Bank, of the Asian Development Bank. Do you feel like the other institutions are failing to do their respective jobs?
KVK: Not at all. I think that development challenges are so large, there is a need of more players to come in and help the process along. Just to put it in context: infrastructure needs around the globe are estimated at around a trillion dollars a year, and around 10% is met by the development banks. That’s a huge opportunity out there, and that’s what we’re seeking.
SS: So, let’s try to go through that in detail. For instance, the World Bank has a capital believed to be around $220 bn. Now, the New Development Bank has only $50 bn ready to go. Do you feel it’s enough to stay competitive? Do you feel it’s enough to spur development in the BRICS nations?
KVK: Not all of that capital is required at once, so we can always access capital as we go along and grow. It will take a few years to scale up and to lend, leveraging your capital base. I think in that time the shareholders could think in terms of either giving more money, inviting new shareholders to come in and base and means for expanding their own footprint. We must remember that the New Development Bank symbolizes something very interesting. It is what I call a South-South Initiative. It is countries which have emerged and which in a way are standing on their own feet and saying: “Look, we can also be part of this development process”.
SS: I know you’ve said in many other interviews that the purpose of the NDB is to show that South can do it on its own. Why do you think it’s so important for the global South to go it alone? Is it to sort of assert its independence from the Western world order?
KVK: It is not necessarily that the South will go alone. I think it’s a collaborative effort. They will do it in collaboration with countries that are North or West. I think what is important is to articulate that you have the means today to look at your own development agenda and execute that agenda. I think in that context it becomes important, so that countries of the South, in a way, can set their own path and then execute it.
SS: Can you elaborate a little bit on that please - why is it so important for the Southern countries to create their own institution?
KVK: I’ll put it in a very simple context. One complaint in a way has been around the world that the development banks dictate policy. We want to demonstrate that we can partner in policy, we can partner with countries around the world and work with them as partners in development and execute it. I think that is the subtle difference.
SS: I am also thinking how the role of the U.S.-led institutions will change or maybe diminish in the region after your institution goes ahead with loans and projects. Nobel laureate, former World Bank Chief Economist Joseph Stiglitz, he says, and I’m quoting: “New Development Bank marks a fundamental change in global economic and political power”. Do you also think that the bank will diminish the role of the U.S.-led institutions in the region?
KVK: I think that as long as the development banks put together meet less than 10% of the overall development agenda, or the need, that statement might not be fully right. But, in a way, [the NDB] signifies that there’s a contribution from the emerging world to this world process.
SS: But you don’t think that something will drastically change in that respect?
KVK: I don’t think it will drastically change. There’s a role for everyone.
SS: Now, from what I gather, one of the impulses behind the New Development bank was shareholdings at the existing financial institutions, like the World Bank, like the IMF, which are skewed towards the Western countries. For instance, China which is the second largest world economy has less say and less clout than the Benelux countries. Why do you think the IMF has ignored call for change?
KVK: I think, in a way, they still have not let go of the past, this history, in terms of what is called the Bretton Woods institutions. What they thought was their role, that role is evolving in today’s context, in today’s world. I think that’s one reason why the change in shareholding, the increase in shareholding that developing countries are asking for, has not happened.
SS: But, I mean, when you’re a serious financial institution like the IMF or the World Bank, you cannot not realize that things have changed in the world economy or geopolitics, not realize that China plays a major role as far as the world economy goes. How can you ignore the calls for change?
KVK: I think that’s the interplay of shareholders in these institutions, it is not the institution per se.
SS: So it’s more of the political thing.
KVK: It would be a political aspect to the whole issue of what has been broadly bracketed as the way these institutions are funded and the way they are operated.
SS: So, do you feel like, because they haven’t reformed it actually in its own terms sort of forced the BRICS countries to get together and go it alone?
KVK: I think, indeed. It’s probably making a statement that in the context that the change, that the countries that are emerging expect, has not happened, we will attempt to set up our own institutions, and you will see. The two institutions that we’ve set up, the New Development Bank and the AIIB - they are two large initiatives taken up by emerging countries.
SS: The New Development Bank at this point is not the only new venture. Now we have also the Chinese-led Asian Infrastructure and Investment Bank. You can’t really deny that the naissance of these institutions will actually break the Western monopoly, the existing monopoly of the Western institutions around the world. But why do you think that the borrowers will actually choose the new institutions over the already existing older ones?
KVK: First, as I said, the market is large enough, so clearly, the borrowers will look for funding from wherever the funding is coming from, this is point number one. Point number two, I think what the new institutions can bring to the table are some critical differences, and one critical difference is speed. For whatever reason, the existing lending institutions, they themselves admit, have a project appraisal cycle that will extend to up to two years, twenty four months. What we are attempting to do, is trying to see if we could do that in less than six months. There’s urgency in terms of need of funding and we want to bring that to the table. So, that’s one key difference.
SS: How can you ensure that the speed doesn’t happen at the expense of diligence?
KVK: I think, it is a wrong connotation that if you do things at speed, diligence will suffer. I’ve been a development banker right from my first job and you could do things at the pace where you're clearing appraisal of a proposal in less than two months. It is not necessary to have more than that in terms of appraisal cycle. When it gets complex is multiple committees, 20-25 people have to comment on the proposal, taking all those comments, giving time for each one to work... This adds up to what I call “eliminable delays” and if you eliminate this, you have a lean structure and you clearly could do things in well under six months.
SS: But can you tell a viewer who is not a banker - what kind of mechanisms do you have to control the loans or the funds that you give out for a project?
KVK: Initially, funds will be basically for government-led initiatives so we would believe that those are in sectors that are consistent with what we want to do in the infrastructure, so, it is very clear, whether there’s an infrastructure need, if there’s a gap and whether the approach that has been put up meets that goal. The second is, how well planned is the project? Are all elements of the project well founded, are they on a solid foundation? And then you move on to whether this is something that you would like to do or not. So, the boxes are, I think, discreet and the boxes are separate.
SS: You’ve also said that one other thing that distinguishes the New Development bank is the bank’s understanding of the problems of the borrowers in the BRICS region, compared to the existing Western financial institutions. But, usually, the difficulty with the borrower in developing countries is that they can’t always pay back the debt. So what’s the difference with you, are you going to be more lenient and if yes, then does it make any sense economically and financially for your institution?
KVK: Something very interesting I want to comment on: if you look at the large institutions, multilateral banks their default ratios from the sovereigns that they lend to is very-very low. It is negligible. The default ratio, if you lend to the private sector, could be higher, and that’s where you need to make sure that your loan is properly secured, and you get back what you give. I think we will look at private sector down the line, and most of the large institutions do not do significant amounts of private sector lendings - less than 10-15% of portfolio. I would think, the sovereign experience, in lending to sovereigns, has been extremely good at the NDB end and I think it won’t be any different for them. And this, even from the poorest countries, they have repaid what they have borrowed.
SS: But how would you comment on the way the Western institutions operate - do you feel like they’re too tough on borrowers? Do you think they should be less strict?
KVK: I think there are two issues that come up here - the developing world always talks of these. One is what they call it “conditionalities” and the second is trying to drive policy and policy changes. What can we achieve in a different way? If you and the borrowing country work as partners, the same can be achieved, in the sense that your borrowing partner puts out what it wants to do and you come to a common mindset and do business together. I think it achieves the same objective and that’s what we intend to do.
SS: So, I want to go back a little bit to the Chinese-led AIIB. It's actually, already, operational, and it's multilateral. It has 37 founding members. Do you feel like with only a few members, the NDB is going to lag behind a little bit?
KVK: You know the different model that the founding fathers here, the five BRICS nations thought of, if you go back, I think, they thought of it as a BRICS bank. But they realized very soon that it can embrace a much larger agenda and then they've called it the New Development Bank. So as long the space is large enough, I think we can each compliment and cooperate. Indeed they will have certain issues that they would want to do, because the name itself is Asia-specific, so I believe that they would be more active in that region, whereas we probably will take a much wider role. But, clearly, our agenda is to work with AIIB and indeed with other institutions in a cooperative way.
SS: So, I know that the NDB has just given out its first loans, and you mentioned that most of the loans were actually going to be for green infrastructure. Who decides what's sustainable and what's not?
KVK: I think that equation today is fairly clear-cut. Something which is non-fossil fuel oriented, something which is renewable energy, something which eliminates the waste, something which improves efficiency - it would all qualify as sustainable. I would think, in the context of the developing country, the whole issue of sustainability has to also to be looked at, as there’s also a catch-up time. You need to make sure that, for example, in a country which is power-starved, you get up to a base level and then you bring this. All of this needs to be kept in mind. You asked who will decide? By and large, we will decide but there are broad frameworks that have been set up in a collaborative way by countries around the world. We will understand those, we will work keeping those in mind, but finally, the decision has to be ours as to what is it we will look at that as green and good, which we would like to do.
SS: What are the mechanisms for control over the projects that you fund? Just one more time - are the governments who actually you lend money to?
KVK: Initially, all projects will be governments, and that's what most money lenders do - projects that you lend for are government projects.
SS: So it will be country’s governments who actually take control over the funds, and you trust...
KVK: Who will borrow and who will use it.
SS: And you don't have, like, a mediator controlling…
KVK: No. Nothing prevents us from doing a loan to a private entity, but I think the bulk of the loans will go the sovereigns directly.
SS: So, you are now at the St. Petersburg Economic Forum - do you feel like this is a good platform to find a project that you could, maybe, fund? Is this a good platform for finding an investment project?
KVK: See, first, I think what happens in St. Petersburg, is an exchange of thoughts, an exchange of ideas, an exchange of opportunities, and as far as being here is concerned - you get an opportunity to look at projects from the various provinces in Russia, you get to understand what leadership is thinking, and that factor that into what you want to do with your strategy and your way ahead in a particular country, in this case - Russia. Of course, St. Petersburg also has to be a clearing house to businesses around the world and you will use this occasion to take that forward too.
SS: Have you come here already looking for something particular, or you are just open to options and you're going to see what's going to happen?
KVK: We are open to options, but I can say this: we will engage with several leaders from provinces with proposals that they could have, which could be of interest to us.
SS: Alright, so the NDB, compared to, once again, IMF and the World Bank where America has the biggest say, is based on ‘all-states-are-equal’, because every founding member has put up $10 bn, and it has 20% of voting shares. But, if you look at BRICS countries, their economies aren't quite equal. They're not economic equals, in reality. Is it realistic to maintain disparity?
KVK: That by itself is an interesting aspect of this bank. Very consciously, we said that despite what I would call "proportionate GDP basis", there's a difference between the five members, we will all contribute equally and we will have an equal vote. I think that is the government's structure that this institution wants to encourage and build upon. I think it's a very interesting experience, where every member has an equal voice, be it large or small.
SS: That's a great beginning and it's a great idea - but do you feel like it will work? Because, once again, if you examine the members - South Africa or India or China, I mean, you can't really compare their economies. What happens, if, for instance, some of the states can't meet agreed capital commitment? What happens then?
KVK: I don't expect that to happen, because it could happen in context of a dire situation in a particular country. But when we are looking at countries going through cycles, in the development mode, there will be cycles that countries will go through, so a couple of our members could be facing pressure today, some others may be facing pressure tomorrow, but if we look at this in the long run, I think this evens out. What we have learned is once you set growth in motion it is irreversible and it will grow. There are cycles that happen, which could impact growth in particular timeframe, but it's only temporary.
SS: You're not a little afraid that China will actually dominate because it's nominal GDP is bigger than all BRICS countries taken together?
KVK: I will say, I am not a little afraid, I am not afraid at all, because I do not think these countries would have come to the table as partners if that fear was there.
SS: So, as of now, do you see the NDB to just have BRICS countries as its members, or do you feel like you're going to welcome other members? If you do, who do you think they could be?
KVK: Our articles clearly provide for new members, these new members could be any member of the UN. I would think towards the latter part of this year the board of governors will decide whether this is an appropriate time to take new members in. If they decide it is, I think sometime next year we could be getting new members. The first year was the time to lay down the foundation. I think we have done that. I think the second year is the time to look at our strategy of going forward and new members clearly will be a part of this strategy. The call is to be made by the board of governors. Since we have not determined that we are going through with it, it is premature to talk about who is going to be a new member.
SS: Sure, but you as a head of this great new institution, I'm sure you have an idea of who you would like to see as a new member?
KVK: I think I will need to discuss that first with the board and then share it publicly, but on a broad basis, there are two choices. Do you look at more borrowing countries or do you look at more developed countries, which could contribute as shareholders. Two distinct sets. The decision - I will need to discuss with board of governments, and then lay it out.
SS: Alright, so, let's say you've discussed it and you welcomed new members. Once the new members are welcomed in, do you feel like the founding members will actually maintain their exclusive rights?
KVK: No, I would think, theory clearly provides for what is going to be the structure. The founding members will dilute as new members come in, and that has been laid out in articles, so the process will be followed, everybody knows what the process is, before they join the membership.
SS: So, as of now, the NDB operates in member currencies. Why is it so important to you?
KVK: No, the NDP operates in dollar as a currency. That's what our accounting currency is. What I said is that we would like to lend using member currencies.
SS: While the capital is in dollars. How's that possible?
KVK: I can raise money in the market we operate in. So if I would lend to China, I raise money in renminbi. If I am operating in India, I raise rupees. If I am operating in Russia, I raise roubles, and so on. What it does is it eliminates exchange fluctuation. One of the challenges that developing countries are facing is this - when a multilateral development bank lends them money or they borrow from a multilateral development bank, it looks very attractive - 1% interest or 1.5% interest, but when you add the exchange depreciation that happens over the life of the loan, the effective cost could be in low teens - 13%, 14%. So it is not 1% or 2%, it is 14%. You would have borrowed in local currency, if somebody made it available to you, in a rate of 7% or 8%. Clearly, we want to find a solution to this challenge of this exchange depreciation which is costing developing countries dearly and to find ultimate solutions.
SS: So, basically you want to swap local currencies without tying them to the U.S. dollar - do you feel like, maybe, the bank could grow completely independent of the U.S. dollar?
KVK: In fact, I am not even going to say “swap”- I raise money in China, I give it to Chinese businesses in renminbi. I could also swap that currency if there's a market in other country currencies. I could swap renminbi into roubles, renminbi into rupee and lend it. It is attractive for the borrower, and there's no exchange risk for the borrower. Will it completely eliminate the need for...
SS: Being tied to the U.S. dollar as a reserve currency.
KVK: I wouldn’t think that it’s a question of being tied to, it's a question of where is it that you are going to access the lowest cost funding and we will follow that route. I think, there's a seriously, you know, good opportunity to look at local currencies and reduce the cost, so we will try to maximize that to the extent possible in our own program. So just to complete the thread - the very first loan that we will raise ourselves is in China, it's a renminbi loan, and it should be on the market - it’s a bond issue - sometime this month, and we believe that that could be a trendsetter.
SS: K. V. Kamath, head of the New Development Bank, thank you very much for this wonderful interview.