Multilateral Financial Cooperation Department of Economic Affairs, Ministry of Finance G20 BRICS...

Multilateral Financial Cooperation

Department of Economic Affairs, Ministry of Finance

• G20• BRICS Economic and Financial Cooperation• Asian Infrastructure Investment Bank

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For love of domination we must substitute equality; for love of victory we must substitute justice; for brutality we must substitute intelligence; for competition we must substitute cooperation. We must learn to think of the human race as one family. The only thing that will redeem mankind is cooperation.

- Bertrand Russell

Asian Financial Crisis • After the mid-1990s a series of external shocks adversely affected a number of South East Asian economies. • Collapse of the Thai baht in July 1997.• Investors panicked . The result was redirection of financial flows towards the mature markets • A wave of currency depreciations and stock market declines, first affecting Southeast Asia, then spreading to the

rest of the region• Economic activity was good in US, UK and other European economies but global growth impacted• Crisis in Asia and Latin America - convinced G7 Finance Ministers that key emerging economies were

insufficiently represented in global economic management efforts

G20• Meeting of Finance ministers and Central Bank Governors in parallel to the G7 summits since 1986• After four initial meetings in 1998 and 1999 involving larger groups of countries (the G22 and G33), in December

1999 a set grouping of 20 was established, consisting of G8 along with key regional powers plus the European Union

Global Developments of 1997-98


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1999- 2008

• G20 at Finance Ministers level created – “a new mechanism for informal dialogue in the framework of the Bretton Woods institutional system, to broaden the dialogue on key economic and financial policy issues among systemically significant economies and to promote cooperation to achieve stable and sustainable world growth that benefits all"

• Years of great moderation and low interest rates• Excessive risk taking, faulty risk management practices and poor financial regulation• Slump in housing markets triggered chain leading to global financial crisis

Washington November 2008: 1st G20 Summit

• G20 Heads of Government took decisive steps• Premier forum for international economic cooperation among members : Pittsburgh September 2009

G20 Summit


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G20


Formed in 1999•Canada, USA, Mexico, Brazil,Argentina•UK, France, Germany, Italy, EUTurkey•Japan, South Korea, Indonesia,China, India• Saudi Arabia, South Africa, Australia, Russia

Invited countriesMalaysia (Chair ASEAN),Chair of A.U, Chair of NEPADAzerbaijan, Spain and Singapore

International OrganizationsIMF, OECD, WB, WTO, UN, ILO,FSB

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• Constitutes 85% of the world GDP; 76% of the world trade and 64% of the world’s population (2012)

• Turkey current chair, China in 2016 and India’s turn in 2019

• Working Arrangements:– Finance and Sherpa Tracks– Outreach: Business 20 (B20); Think 20 (T20); Civil 20 (C20); Youth 20 (Y20); Labour 20 (L20)– Ministerials: Trade, Labour, Tourism (2012), Agriculture (2011), Development (2011)

• Focus: Cooperation for strong, sustainable and balanced growth, Regulation, Accountability, Reforming International Financial Institutions, Strengthening trade, Fighting Corruption, Development Agenda

• First G20 Summit: November 2008 in Washington DC. 10 Summits so far

G20 Process


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Thematic areas for 2015 – Global Economy– Framework on Strong, Sustainable and Balanced Growth (Working Group) – Investment and Infrastructure (Working Group) – International Financial Architecture – Financial Regulation– International Tax Issues: Base Erosion and Profit Shifting, Automatic Exchange of

Tax Information

G20 Finance Meetings Held at 3 levels:

– Ministers and Governors– Finance Deputies – Working Groups

Finance Track


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• Averted the 2nd Great Depression

• Financial Sector Reforms through Financial Stability Board

• Automatic exchange of Tax Information and addressing Base Erosion and Profit Shifting • IMF reforms, Resourcing of IMF by over $ 450 billion

• Developed Political traction: Bali Ministerial and UNCAC (UN Convention on Anti-Corruption)

• Reduced cost of sending remittances from G20 countries from 10% to 7.9%

• Others: Agricultural Market Information System and Rapid Response Forum, decisions to strengthen JODI-Oil, launch JODI Gas, Global Marine Environment Protection Best Practices Sharing Website

Impact of G20 on Global Economy


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Growth projections for 2015• Global growth projections for 2015-16 revised downwards • The Euro Area and Japan – Expansionary monetary policies and persistence of deflationary conditions • China registered lowest annual growth in 2014

Uptick in activity in • United States

Downside risks to the global economy exist• Asynchronous changes in Monetary Policy • Fears persist-increase in interest rates + financial volatility• Declining oil prices – oil behaving like a financial asset-most significant development in 2014• Deflationary conditions

Global Economy Update


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The Oil Price Phenomenon


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Growth Strategies•Ambition of raising collective GDP by 2.1 per cent till 2018 •Implementation of growth strategies to improve GDP output of counties

Data Initiatives for Addressing Systemic Risks•Framework for sharing and strengthening the quality of financial data repositories

IMF Reforms •Implementation of IMF 2010 Quota and Governance Reforms•Out of the four options suggested recently by the IMF – support de-linking option

Safety Nets to Tide Over Negative Spillovers•Countries to be mindful of negative spillovers of domestic policies on other members•Currency swaps

What is India Pitching for in G20?


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International Taxation• Automatic Exchange of Information (AEOI)• Base Erosion and Profit Shifting (BEPS)• Addressing the concerns of developing economies

Investment and Infrastructure• Financing of infrastructure –gap- USD 70 trillion estimated by OECD• Collective efforts at G 20 required• Global Infrastructure Hub-early operationalization • Global Infrastructure Facility –not adequate – USD 80 million• PPP –learning by sharing best practices + project preparation + capacity building –

recapitalization of Multilateral Development Banks

Labour Mobility• G20 to take measures to encourage transnational labor mobility (high-skilled

professionals)

What is India Pitching for in G20?


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BRICS


Formed in 2009•Acronym for five major emerging national economies: Brazil, Russia, India, China and South Africa• Originally known as BRIC before inclusion of South Africa in 2010•The term BRIC was coined by Jim O’ Neill in 2001 but the first formal summit commenced on 16th June 2009 in Yekaterinburg, Russia.

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BRICS New Development Bank (NDB): Mobilize resources for infrastructure and sustainable development projects in BRICS and other emerging economies and developing countries.

BRICS Contingent Reserve Arrangement (CRA): Framework of swap agreements to provide support in the event of actual or potential short-term balance of payments pressures.

BRICS Reinsurance Project: Pooling mechanism to bring together the combined insurance and reinsurance capacities of the BRICS insurance markets, in a commercially viable manner.

BRICS Tax and Customs Cooperation: Cooperative approach on issues relating to international taxation, transfer pricing, exchange of information, and tax evasion and avoidance.

BRICS Economic and Financial Cooperation: Issues


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Benefits of NDB


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BRICS New Development Bank: Financing from MDBs is bottoming out.OECD: Global infrastructure requirement – ~ USD 2 trillion per yearADB: Asia needs ~ USD 750 billion per year for the next 10 years.Current infrastructure spending by developing countries: USD 0.8-0.9 trillion per year ($500-600 billion

by domestic government budgets, 20-30 per cent by the private sector, and an estimated 5-8 per cent through developed country ODA and MDB financing) [Lowy Institute, 2013]

Savings: Global savings – USD 17 trillion annually. Asian savings – USD 4 trillion annually.NDB with an initial capitalization of USD 100 billion will augment funds from MDBs and work to

counter the savings/investment imbalance.

MDB Non-Concessional Financial Assistance, 2000-Present

MDB Concessional Financial Assistance, 2000-Present

Founding Members: BRICS countries; subsequently opened to sovereign members of UN

Capital Subscriptions– Initial authorized capital – USD100 billion. Initial subscribed capital – USD50 billion. – Paid-in: Callable – 20:80. Initial subscriptions to paid-in capital stock (USD2 billion each) made in 7

instalments.

Shareholding & Voting Founding members will have equal shareholding and equal voting power. They will maintain 55% of

voting shares.

Governance and management structure– Board of Governors, a Board of Directors, a President and Vice-Presidents, and other officers and staff. – Governors shall be at ministerial level. Initially the Board of Directors shall be a non-resident body. – India will hold the first Presidency of the Bank. Presidency will rotate every five years in the sequence of

Brazil-Russia-South Africa-China-India. At least one Vice President from each founding member except the country represented by the President.

Headquarters: Shanghai. First regional office – Johannesburg

Broad Features of the BRICS New Development Bank


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Asian Infrastructure Investment Bank


• Initiative is led by China.

• An Inter-Governmental MoU was signed in Beijing in October, 2014

• Signatories and subsequent endorsees of the MoU have become Prospective Founding Members (PFMs) of the AIIB. The 27 PFMs inter alia include China, India, ASEAN countries, 5 SAARC countries, 5 Middle-Eastern countries, 4 Central-Asian countries and New Zealand.

• A Multilateral Interim Secretariat has been formed to prepare draft Articles of Agreement and other documents for this Bank which are being negotiated by the PFMs.

• Additional Secretary (Economic Affairs - Chief Negotiator from India and Joint Secretary (Multilateral Relations) is the Alternate Chief Negotiator.

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• Functions: Financing infrastructure and other productive sectors in Asia. Collaborate with other multilateral and bilateral development institutions

• Capital Subscriptions: Authorized capital – USD100 billion. Initial subscribed capital – USD50 billion. Paid-in: Callable – 20:80.

• Shareholding & Voting: Share holding to be based on a formula with GDP is a fundamental component. Voting power : Basic votes + Founding member votes, proportion of shares held.

• Governance and management structure:

– Board of Governors, a Board of Directors, and the Management

– Board of Directors shall be a non-resident body initially.

– Oversight mechanism; (still under discussion)

• Headquarters: Beijing

• Fund Deployment: Loans, Equity investment, Guarantee and other modalities. Private sector involvement in operations will be promoted

Broad Features of the AIIB


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Strategic Interests of India: AIIB


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• Need for greater infrastructure financing

Between 2010 to 2020, Asia needs to invest ~ USD 8 trillion in overall national infrastructure and an additional USD 287 billion in specific regional infrastructure projects (ADB/ADBI 2009). Lending from MDBs is flattening.

• India will potentially be the largest borrower

• Lower cost of borrowing

• India would be the 2nd largest shareholder after China. Opportunity for India to leverage her position as the AIIB: Shares to be allocated based upon proportional GDP (still under consideration).

Country Shareholding Based on Nominal GDP

Shareholding Based on GDP PPP

Shareholding Based on 50:50 Blend

China 58.66 52.83 55.05

India 11.95 19.99 16.92

Strategic Interests of India: AIIB (contd.)


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• Strategic Interest: Among SAARC countries, Nepal, Pakistan, Bangladesh, Sri Lanka, and Maldives are Prospective Founding Members. India will have little say in investment decisions made by a China-led MDB in infrastructure projects all around our geographic vicinity.

• China Silk Route Initiative: The Bank may be used for financing strategic projects in territories in and around India for its silk route initiative.

AIIB: Current Status and Way Forward

• The AoA is currently being negotiated. Two meetings have been held, the first in Kunming, China and the 2nd in Mumbai, India. The 3rd will be held in Almaty, Kazakhstan on March 30-31, 2015.

• Negotiations are expected to conclude by May / June this year and final AoA will be signed by June 2015.

• The Bank will begin operations by end of this year.

Thank You


Multilateral Financial Cooperation Department of Economic Affairs, Ministry of Finance G20 BRICS...

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