Reserve fund is low lying fruit for Sixth BRICS Summit

There seems to be general consensus that the Sixth BRICS Summit to be held in Brazil between the 14th and 16th of July will make a significant advancement on one critical resolution, the establishment of a $100 billion Contingent Reserve Arrangement (CRA). However questions remain as to whether this arrangement will be effective if faced with a serious liquidity crisis.

Certainly South Africa is eager to establish the CRM as reflected in its latest update, which reflects its expectations, from the Sixth BRICS Summit. The idea of a CRA was given more meat during the the 2013 BRICS Summit in Durban, South Africa.

Essentially an initiative which will see Brazil, Russia, India China and South Africa (BRICS) create a pool of foreign currency reserves is largely seen to be low lying fruit for the bloc to concretise. And there is visible urgency for the CRM to happen given the prevailing volatility of the global markets. More vulnerable BRICS member states, mainly South Africa, Brazil and Russia, may be urgently needing the comfort of the CRA.

“Few can dispute the fact that such an alternative arrangement was badly needed as poor and developing countries had no option but to accept the misdiagnoses and harsh conditionalities of the IMF which provoked huge public outcry and bitter resentment in the 1980s and 90s,” says Kavaljit Singh from Madhyam, a policy research institute based in New Delhi.

“The establishment of a CRA of $100 billion looks very promising as we are living in a post-crisis world full of financial risks and shocks. It offers a rare opportunity to reshape the global financial architecture by providing concrete financial mechanism of $100 billion to BRICS (possibly to other poor and developing countries as well) which may suddenly face a balance of payments or liquidity crisis.”

Oliver Stuenkel, an Assistant Professor of International Relations at the Getúlio Vargas Foundation (FGV) in São Paulo, has said “Contrary to the (BRICS) Development Bank, the contingency fund requires far fewer political negotiations, and it can be expected to start operating quite soon.”

He said the establishment of a reserve pool is easier because it needs no physical structure to function. “Each country’s central bank will keep the fund’s reserves as part of its own reserves. Only in moments of crisis in one of the member countries’ economies will the contingency fund begin to operate, acting as a a cushion or back-up.”

“Considering the increasing frequency and magnitude of global financial crises over the past decades, the addition of another fund that major countries can rapidly mobilize in times of crisis is bound to provide investor confidence,” said Vargas.

Briefing the media on preparations for the route to Fortaleza, South African deputy minister of international relations and cooperation Luwellyn Landers said South Africa “has fully implemented the eThekwini (Durban) Action Plan and will present a Hand-over report on sectoral cooperation during its tenure as BRICS Chairperson.”

“Among other topics, the leaders will discuss issues regarding global governance and peace and security as well as the Contingent Reserve Arrangement (CRA) and the receive reports on progress towards the establishment of the BIRCS led New Development Bank (NDB),” said Lewellyn.

He said the CRA is an additional line of defence available to the BRICS countries in scenarios of Balance of Payments’ difficulties.

The jury is still out about how effective the BRICS CRA will become. It is not the first such arrangement to emerge from the developing world and the predecessors have left much to be desired.

Singh noted that “… one cannot ignore the fact that reserve arrangements similar to the BRICS CRA currently exist, are inoperative and have not challenged the hegemony of the IMF.”

He pointed out that “In the aftermath of Asian financial crisis of 1997-98, Asian countries (ASEAN plus China, Japan and South Korea) launched the Chiang Mai Initiative (CMI)… The CMI was the first regional currency swap arrangement launched with much fanfare in 2000.”

However, said Singh, it is surprising to note that not a single member-country facing an impending financial crisis of one sort or another has, so far, opted for this regional financial safety net. “This is despite the fact that the size of reserve pool of the CMI has been substantially expanded over the years (currently at $240 billion) and new facilities on crisis prevention and resolution have been added. Many of its member-countries (for example, Indonesia and Philippines) are more vulnerable to liquidity shocks at present than in the past.”

Vargas argued that while the BRICS CRA has been hailed as a major advancement its size may too small to make a significant impact and there was potential for the CRA to be much bigger than the $100 billion figure. “The BRICS countries control almost $5 trillion in international reserves, and if they were to contribute 16% of their reserves to a contingency fund the resulting CRA would total $800bn against $780bn in resources at the IMF.”

He however noted that the $100 billion figure could be a “stepping stone of something far larger, which could then truly undermine today’s global financial order.”

He added that “While the BRICS Contingency Reserve Arrangement seems to have little effect on geopolitics at first glance, it may help policy makers in Moscow diversify Russia’s institutional commitments and prepare for the possibility that the West’s sanctions may not only intensify, but also remain in place in the long term.”

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