COVID-19: How multilateral development banks can lead through a crisis

As the COVID-19 pandemic rapidly spread from Wuhan in Hubei province to surrounding regions, the Chinese Government turned to the newest multilateral development bank, the BRICS New Development Bank (NDB) for support. Within weeks of the loan approval, the NDB disbursed $1bn to Hubei, Henan and Guangdong, the three most affected provinces in China. This loan, the single largest of the Bank to date, was earmarked to provide financial support for unplanned emergency health expenditure related to the fight against COVID-19.

Like the rest of the world, BRICS countries are attempting to overcome the global health pandemic and it’s devastating economic effects. Of huge concern is the real fear that the present crisis has the potential to reverse the hard fought economic progress made in BRICS countries over the past two decades.

MDB’s are uniquely positioned to tackle global challenges

The COVID-19 pandemic has shown yet again, just how critical multilateral development banks (MDB’s) are in moments of crisis. MDB’s are uniquely structured to tackle challenges that cross national borders. Such challenges like climate change or global pandemics, by definition, demand cross border solutions. Furthermore, MDB’s play a crucial role to help counteract the pro-cyclical nature of financial markets as private banks tend to lend too much during boom times and then ration credit during economic downturns. In 2008 for example, when few financial institutions were lending during the global financial crisis, it was the multilateral development banks which significantly increased their lending.

The resulting health and economic crisis prompted by COVID-19 called for rapid, large scale and unprecedented responses. To this end, the New Development Bank (NDB) repurposed its lending program and responded swiftly with bold action to help BRICS bolster their defense against the pandemic. Shortly after the outbreak, the NDB announced a $10bn Emergency Assistance Program with a more flexible and streamlined process for processing and disbursing loans. Under usual circumstances, it can take several months for loans to be disbursed for an infrastructure project. Disbursements for COVID-19 related assistance were made as bullet payments within three to four weeks after the loans were approved.

Given the fiscal constraints faced by most BRICS countries, the NDB, alongside other MDB’s has become a key instrument to complement the governments limited resources to fight the pandemic. To date, the Bank approved and largely disbursed $4bn, which comprised of a $1bn COVID-19 response loan each to China, Brazil, India and South Africa. The full $10bn to be allocated during 2020 represents additional development assistance which would not have been available if the NDB was not created five years ago.

NDB marks five years

In the midst of the present crisis, the bank is marking its fifth anniversary. It was exactly five summers ago when the BRICS countries launched an ambitious project to create a new multilateral development Bank headquartered in Shanghai, China. The core purpose of the NDB is to mobilize resources for infrastructure and sustainable development. Sustainable infrastructure in this sense refers to investments in sectors such as energy generation, water and sanitation, transport and communication. Endowed with a subscribed capital base of $50bn, the NDB has played an indispensable role in providing additional pools of capital to BRICS countries, to fund their sustainable infrastructure and economic development agenda.

The journey began in temporary offices on a single floor, in Lujiazui, the financial heartland of Shanghai, with a team of five executives, each representing a BRICS nation. A complete start-up in every respect, NDB at the time, had no other full time staff, no technology systems or infrastructure of any kind.

What has since been achieved?

These core achievements strongly validate the original rationale and dream of the BRICS nations to create a new emerging market focused multilateral development bank.

Rattling off these milestones may seem that it was all smooth sailing. Far from it, from day one, the Bank faced considerable headwinds and obstacles. Several BRICS member countries faced spiraling fiscal deficits, weak economic growth, political upheaval culminating in sovereign downgrades, which in two instances, namely Brazil and South Africa, led to sub-investment grade status.

The Bank’s fifth anniversary marks the end of the single five-year term of the inaugural President of the NDB, KV Kamath. He played an indispensable role in leading NDB from complete start-up, through a growth phase, and now into a fully-fledged, respected new multilateral development bank.

In the turmoil of COVID-19, the NDB has cemented its place as one of the most important sources of external financing to BRICS countries. It’s most immediate and urgent challenge is to support the economic recovery and chart a new course for growth as the pandemic continues to wreak havoc in BRICS economies.

Leslie Maasdorp is Vice President and CFO of the New Development Bank and a Young Global Leader alumnus.