Pakistan buying stake in BRICS-backed New Development Bank

ISLAMABAD — Pakistan is buying a stake in the BRICS-backed New Development Bank (NDB), a move that could help Islamabad diversify credit options and reduce its dependence on the World Bank and the International Monetary Fund (IMF).

The plan will see the country make a $582 million investment to acquire a 1.1% share in NDB, which aims to mobilize resources for infrastructure and sustainable development projects in emerging economies.

Brazil, Russia, India, China and South Africa — the five founders of the BRICS grouping — each hold a 19% share of NDB, which was established a decade ago. Egypt holds a 2.2% share, while Bangladesh and the UAE own 1.7% and 1.1%, respectively. Apart from its investment in NDB, Pakistan has also expressed a desire to join the BRICS grouping itself.

The Shanghai-based lender is seen as an alternative to the Western-led global economic order.

“Pakistan’s membership in the NDB could expand access to alternative sources of credit and facilitate the financing of key development and infrastructure projects,” Naafey Sardar, assistant professor of economics at U.S.-based St. Olaf College, told Nikkei Asia.

The new investment — approved in mid-February by the Economic Coordination Committee of Pakistan — will be spread over seven years to ease the burden on the cash-strapped country which tapped the IMF for a $7 billion bailout last year.

The South Asian nation needs to diversify its donor sources as future relations with the West, and especially the U.S. — historically a top donor — are fraught with uncertainty, said Michael Kugelman, Director of the South Asia Institute at Washington’s Wilson Center.

“Pakistan’s main motivation for joining [NDB] is to reduce reliance on the Bretton Woods-led economic system and that’s a bit puzzling, given just how dependent Pakistan is on that very system though it doesn’t like the conditionalities attached to much of the support that comes from it,” Kugelman said, referencing an international monetary framework established in 1944 to promote global economic stability and growth, which led to the creation of the World Bank and IMF.

Nikkei Asia previously reported that Pakistan could receive up to $40 billion in public-private sector financing over a decade under a first-of-its-kind deal with the World Bank.

“Pakistan can also use its position in NDB to reassert its deep partnership with China, which has faltered a bit in recent years, and signal its effort to strengthen ties with Russia, a newer partner,” Kugelman told Nikkei.

However, Pakistan’s pivot toward NDB could sour relations with Western-led financial institutions, such as the IMF, which could implement measures to curtail loans to Islamabad. Pakistan has sought IMF bailout loans dozens of times over the decades.

“Pakistan may be affected by greater monitoring and financial surveillance due to China and Russia’s role in NDB. Further, recent criticism on BRICS by Trump may indicate future challenges for NDB as well,” said Aadil Nakhoda, an assistant professor of economics at the Institute of Business Administration in Karachi.

Wilson Center’s Kugelman agreed that Pakistan can ill afford to damage existing creditor ties.

“Pakistan will need to be ready to signal its commitment to continuing to work with the Bretton Woods [financial institutions] to ensure financing continues to be an option [for Pakistan] over the near term,” he added.

Islamabad’s commitment to structural reforms required by the IMF could play in to future deals with the NDB, Nakhoda added.

“Policymakers need to reduce the possibility of getting into another vicious debt cycle by reducing balance-of-payment related challenges,” he said. “With Pakistan’s investment in NDB, policymakers in the future have to deal with another lender and consequently more debt related issues.”

The article appeared in the asia.nikkei