CRA and NDB Are Integral Components of the IMF Supra-Sovereign Multilateral
By JC Collins
The BRICS Contingent Reserve Arrangement is a self-managed fund established between Brazil, Russia, India, China, and South Africa, for the purpose of addressing “short-term” balance of payments pressures, provide mutual support, and strengthen financial stability amongst the member countries.
The initial funding is in the amount of $100 billion USD (provided in each countries domestic currency), contributed as follows:
- China – $41B
- Brazil – $18B
- Russia – $18B
- India – $18B
- South Africa – $5B
These amounts are not anywhere near enough to address “long-term” liquidity challenges and balance of payments pressures, which is not the overall intention of the CRA, as it is stated that funds will be used for “short-term” requirements only.
When one considers the vast amounts which Russia and Brazil have borrowed from the International Monetary Fund over the last few decades, the small amounts allocated for the CRA make clear that the institution is not meant to unleash BRICS countries from the larger international monetary framework, but compliment it, and provide BRICS a means of leveraging their collective monetary bargaining power against the USD within that existing monetary order.
In the wording of the CRA treaty itself we find that the institution is designed to “contribute to strengthening the global financial safety net and complement existing international monetary and financial arrangements.”
This wording strongly suggests that the arrangement was not established to compete or override the IMF and other monetary institutions, but to expand the “safety net” and share the burden of another financial downturn which will drain international liquidity from the system.
The transition from a USD dominated framework to a multilateral framework which more fairly represents the macroeconomic realities of all countries is problematic. Maintaining the systemic status quo will only continue the balance of payments pressures which have grown since the original Bretton Woods arrangement. And yet, making the transition too abrupt with fundamental changes would create a level of volatility and instability which needs to be avoided.
The BRICS New Development Bank has been established under the same mandate as the CRA. The NDB, along with the AIIB, will be methods used to further expand Chinese renminbi liquidity. This is additional liquidity which will be required to manage the transition from unipolar to multilateral, and allow for a level of deflation to be maintained without collapsing the whole system.
It is important to recognize that this RMB liquidity is in addition to USD liquidity, and is not meant as an alternative to the USD. The purpose is to reduce the amount of pressure placed on the USD as a global reserve currency, which in turn will reduce the balance of payments pressures which caused the financial crisis of 2008 from repeating.
Further evidence which confirms the conclusion that the CRA and other BRICS institutions are not operating from an oppositional position to the existing monetary framework can be found in the actual treaty wording itself.
Articles 4 and 5 of the Treaty for the Establishment of a BRICS Contingent Reserve Arrangement details the following:
Article 4 – Instruments
The CRA shall include the following instruments:
- A liquidity instrument to provide support in response to short-term balance of payments pressures.
- A precautionary instrument committing to provide support in light of potential short-term balance of payments pressures.
Article 5 – Access Limits and Multipliers
- The Parties shall be able to access resources subject to maximum access limits equal to a multiple of each Party’s individual commitment set forth as follows:
- China shall have a multiplier of 0.5
ii. Brazil shall have a multiplier of 1
iii. Russia shall have a multiplier of 1
iv. India shall have a multiplier of 1
v. South Africa shall have a multiplier of 2
- The total amount available under both the precautionary and the liquidity instruments shall not exceed the maximum access for each Party.
- A portion (the “De-linked portion”), equal to 30 percent of the maximum access for each Party, shall be available subject only to the agreement of the Providing Parties, which shall be granted whenever the Requesting Party meets the conditions stipulated in Article 14 of this Treaty.
- A portion (the “IMF-linked portion”), consisting of the remaining 70 percent of the maximum access, shall be available to the Requesting Party, subject to both:
- The agreement of the Providing Parties, which shall be granted whenever the Requesting Party meets the conditions stipulated in Article 14, and;
- Evidence of the existence of an on-track arrangement between the IMF and the Requesting Party that involves a commitment of the IMF to provide financing to the Requesting Party based on conditionality, and the compliance of the Requesting Party with the terms and conditions of the arrangement.
- Both instruments defined in Article 4 shall have IMF-linked and De-linked portions.
- If a Requesting Party has an on-track arrangement with the IMF, it shall be able to access up to 100 percent of its maximum access limit, subject to the provisions under paragraph (d) above.
The above terminology makes it very clear that the BRICS CRA has not been established as an alternative to the IMF but as an integral component of a larger mandate from which the IMF emerges as the primary and superseding entity.
The CRA is one element of a larger multilateral framework and contains both “linked” and “de-linked” portions from that multilateral framework. The “short-term” requirements previously defined can be provided by the CRA de-linked portions, while the “long-term” requirements can be provided by the “linked” portions of the CRA and IMF working in unison on macro multilateral mandates and solutions.
The lack of official information, along with the huge amount of misleading information, in regards to the BRICS institutions and their purpose, has created a vacuum of sorts where false narratives and unsubstantiated claims are spread and promoted. It is important that we understand thoroughly the purpose and intentions of all multilateral institutions and the macroprudential policies which integrate them for the common purpose of monetary reform and stability.
The BRICS institutions (along with further RMB internationalization) will facilitate a reduction of USD in the foreign reserves accounts around the world and allow for the dollar to depreciate, which will facilitate the next arm of economic domestic development for the United States, being the expansion of production and increase in exporting, which will in turn reduce Americas trade deficit and lower the debt-to-GDP ratio.
All of which will be required to reduce the amount of pressure placed on the dollar as the global reserve currency. These are the fundamentals, and the trend is clear. – JC
CRA Treaty wording can be viewed here.