Egypt set to join BRICS New Development Bank

Egypt is set to join the New Development Bank (NDB) after the country’s parliament ratified the accession agreement last month. The bank’s founding members: Brazil, Russia, India, China, and South Africa, have already been joined by Bangladesh and the UAE. Uruguay, and now Egypt, are provisional members. This may serve as a precursor to Egypt joining BRICS and the development of a new global financial system.    

High levels of pandemic stimulus induced inflation have been exacerbated by the War in Ukraine, and countries like Egypt have been hit particularly hard. Prior to the conflict, 85% of Egypt’s grain imports were from either Russia or Ukraine. Forced to adopt a floating exchange rate in order to secure a $3 billion bailout from the IMF, the Egyptian Pound has come under severe pressure. The declining currency is increasing import costs and eroding the country’s foreign exchange reserves.

The Egyptians are not alone. Many nations are suffering from inflation induced economic instability made worse by having to service debts and pay for imports with foreign currency. As such, currency localisation is a primary objective for BRICS, and alternative sources of development finance, such as the New Development Bank, could play a crucial role in helping the BRICS and other emerging market economies achieve increased financial stability.

The New Development Bank

While the BRICS grouping has enjoyed moderate success with academic exchanges and improved intergovernmental co-operation between the world’s biggest emerging market economies, the formation of the New Development Bank is undoubtably the group’s greatest achievement. India proposed the formation of the bank in 2012 and a $100 billion reserve currency pool was approved by the BRICS nations. Headquartered in Shanghai, the bank has disbursed tens of billions of dollars towards infrastructure development projects and emergency relief since 2017.

The bank has an impeccable track record with multiple AAA ratings (better than any individual BRICS country). Following Russia’s intervention in Ukraine, Fitch downgraded the NDB’s credit rating from AA+ to AA with a negative outlook due to uncertainty as to how this geopolitical event might impact a new lender with major ties to Russia. But the bank’s governors have made credible arguments that the downgrade was unjustified. The NDB immediately suspended financing for any new projects in Russia following the invasion and its balance sheet remains totally unaffected by events in Ukraine.

While the World Bank and IMF are still the world’s predominant creditors to governments, the New Development Bank is both expanding and innovating. For example, the lender is steadily increasing the volume of credit it provides in debtor country currencies. A profound departure from the mostly dollar-denominated debt that dominates development finance.    

Governments often become entangled in the strings attached to IMF loans. While the NDB does not attach budgetary and public policy conditions to its loans, the IMF often demands austerity and privatisation in exchange for its bailouts. Perhaps well intentioned, austerity can precipitate deeper recessions and make it even more difficult for debtor nations to repay their loans. As debt servicing costs take up a greater share of the budget there is less funding available for the spending that alleviates poverty, such as on food and fuel subsidies, healthcare, and education.

Benefits of Local Currency Loans

Issuing loans in local currencies benefits both debtor and creditor by reducing the risk of default on the basis of currency depreciation. A major issue for many governments struggling to pay back loans taken out during the pandemic as the US dollar appreciates in response to rising US interest rates.

As more loans are issued in domestic currencies, and trade settlements follow, it will ease pressure on emerging market currencies. Stronger currencies mean lower inflation and lower debt servicing costs. It could also reduce the risk of a country depleting its foreign exchange reserves. As we have seen recently with Sri Lanka, running out of foreign currency can precipitate an economic crisis as the country can no longer pay for its imports.

Egypt risks facing a similar crisis. The country’s import costs are increasing due to global inflation. This has led to a decline in Egypt’s foreign exchange reserves, necessitating a bailout from the IMF which has seen the Egyptian pound plunge to an all-time low. As the currency declines, this pushes up the cost of imports even further. A vicious cycle. According to estimates from the World Bank and IMF, 55%-60% of the world’s poorest countries are close to or already in debt distress with emerging market debt-to-GDP having risen from 65% in 1980 to over 250% today.

The need for de-dollarized trade and development finance is becoming obvious. If Egypt and other emerging market economies could finance debts and imports in their own currencies, this would undoubtably help increase global financial stability. Currency localisation in trade and credit would reduce the risk of sovereign defaults and allow countries to better preserve their foreign exchange reserves to defend their currencies. While there is a long way to go before this becomes the norm, the expansion of the New Development Bank and its local currency loans offer a promising start.