BRICS agree on $100 billion fund to steady market

The group of five major emerging economies, Brazil, Russia, India, China and South Africa (BRICS) on Thursday arrived at an agreement on individual contribution to the proposed $100-billion Currency Reserve Fund (CRF).

China, which has the highest foreign exchange reserves among the five countries, will contribute $41 billion, while Brazil, Russia and India will contribute $18 billion each and South Africa, the smallest economy, will chip in with $5 billion to the CRF.

Once established, the fund will allow the five nations to access it to deal with short-term capital flows that negatively impact their currencies.

''In light of the increase in financial market and capital flow volatility during recent months, the BRICS leaders reiterated their concerns over the unintended negative spillovers of unconventional monetary policies of certain developed economies.

They emphasised that the eventual normalisation of monetary policies needs to be effectively and carefully calibrated and clearly communicated,'' a joint statement issued by BRICS leaders after a meeting on the sidelines of the G-20 meeting on Thursday, said.

Prime Minister Manmohan Singh said the development was significant because of the extreme vulnerability of emerging market currencies in recent times on account of global factors like withdrawal of US monetary stimulus.

Addressing the G20 summit at St Petersburg, Manmohan Singh had pointed to the negative effects of unconventional policies by developed countries on the financial stability of developing economies.

''The conventional view that capital volatility should not be a source of concern as long as exchange rates were flexible is now being questioned. Sudden increases in cross border flows not only affect the exchange rate, they also affect credit volumes and asset prices. Such flows led to excess leverage in the industrial countries before the global financial crisis. They are leading to stock market and exchange rate volatility in emerging markets today,'' he said.

With the five countries in the BRICS bloc hard hit by slow economic growth, host Russia and China also echoed the position articulated by Manmohan Singh, warning that imminent withdrawal of monetary stimulus by the US could have an adverse impact on the global economy and cautioned the Obama administration against it. 

Ahead of the summit of the G20 industrialised and major emerging economies, Singh had emphasised the need for an "orderly exit" from unconventional monetary policies being pursued by the developed world to avoid "damaging" growth prospects of the developing world.

While it is not known how the US would respond to the concerns expressed by the BRICS economies, news reports had earlier cited US officials as suggesting that Russia and China may not be in full agreement with India's position that the US unconventional monetary policy needs to be calibrated in the future.

Faced with persistent demand deficiency, industrialised countries relied heavily on unconventional monetary expansion on an unprecedented scale. The decisions were contrary to the agreed policy coordination process and were part of internal decision making processes in the individual countries.

While the unconventional monetary expansion in advanced countries had some success, it had spillover effects on developing economies. When policy was being loosened, there was a surge in capital flows to emerging markets and markets are now anticipating a reversal, with the tapering of the loose money policy.

The idea of currency stabilisation fund found for emerging economies traction at the last BRICS summit in Durban, South Africa, earlier this year.

The currency fund, which could form the basis of the proposed BRICS development bank, may change in the future to include more countries, Russian deputy finance minister Sergei Storchak said.

"The bank is being created not as a closed institution. The countries that establish the bank will have privileges, but the philosophy of the institution says that others could also become its members," Storchak said.

Meanwhile, BRICS leaders have expressed concern at the stalling of the International Monetary Fund (IMF) reform process. They recalled the urgent need to complete the next IMF quota review by January next to ''ensure the Fund's credibility, legitimacy and effectiveness.''

The reform of the international financial institutions has been a key part of the global financial reforms agenda. The Fourteenth Quota Review produced an agreement which would improve the voting share of the developing countries and achieve a better representation on the IMF board.