• Thu. Aug 24th, 2023

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Why should Malawi flirt with BRICS New Development Bank

On Saturday this week Malawi Leader president Dr Lazarus Chakwera left Malawi for South Africa via Angola where he attended the Southern African Development Community (SADC) Summit.

Since his departure, a lot has been said regarding the need for Malawi to lean with Brazil, Russia, India, China and South Africa (BRICS) economic block.

Malawi remains the biggest winner in all this circle because from the word go this country has relied on Western handouts but nothing tangible is being registered because of its stringent measures that go with western aid.

Currently there is a call to abandon the US dollar as a global trading currency and BRICS bank’ throws weight behind use of local currencies for trade and financing.

New Development Bank (NDC) has stated its intention to increase its local currency fundraising and lending, this is good news for countries like Malawi whose resource envelope in as far as generating US Dollar is leaner.

It is targeting bond issuances in local currencies of India, the United Arab Emirates and Brazil.

The use of local currency for international trade and finance and to rely less on the US Dollar is not new on the agenda of the NDB, the Shanghai-based lender also better known as the “BRICS bank”.

But at the 15th BRICS Summit in Johannesburg, which begins on Tuesday, 22 August, South Africa it is expected that members would come up with mechanisms to unseat the US Dollar as the world’s de facto global currency.

The NDB has also embraced the plan to deepen the use of local currencies of its founding BRICS members when it executes funding transactions on infrastructure and sustainable development projects.

Vladimir Kazbekov, the vice president and chief operating officer of NDB, said the bank plans to develop local/national currency transactions between BRICS member countries.

This would allow one BRICS member to use its currency to finance projects with a fellow member in its country.

“For example, a project in South Africa can be financed in the renminbi [another name for China’s currency], not with US dollars. This would be done especially with projects that require the importing of parts, which would be cheaper to use local BRICS currencies than using US Dollars,” Kazbekov said during a press briefing on Monday that unveiled the NDB’s funding of the second phase of the Lesotho Highlands Water Project.

He hastened to add that the NDB does not plan to immediately phase out the use of the US Dollar, underscoring that the currency remains dominant even though the BRICS bloc wants to amass global influence through the use of their currencies.

The BRICS members argued that the US Dollar is volatile, as seen in its wild swings every time the US central bank makes interest rate decisions, or whenever there are signs that the US economy is slowing down. The volatility of the currency creates a financial headache for the BRICS members, which have dollar-denominated debt that becomes expensive to service. Affordability and amassing global influence are the main rationale for using local currencies.

How to build local currency trades.

Although the ‘BRICS bank’ has always stated its intention to increase its local currency fundraising and lending, it has rarely provided details on the mechanisms of doing so. How the NDB’s funding and lending works is that it borrows money on the Chinese market, funding projects from the proceeds of its bond issuances that are traditionally denominated in the renminbi/yuan.

To deepen the use of local BRICS currencies, the NDB closed the auction for its first rand-denominated bonds on 15 August, increasing its presence on the local capital markets. The first South African bond auction, recently concluded by the NDB, raised R1.5-billion — a R1-billion five-year note and a R500-million three-year note. These proceeds will be used to fund infrastructure and sustainable development projects in South Africa.

For now, the NDB’s lending exposure will remain mainly in South Africa, where its loan disbursements in the country make up more than 18% of its total approved loans worth $33-billion.

So with these resource windows Malawi easily benefit and have its projects get funded.

This has already started working for example in South Africa, the NDB plans to fund state-owned enterprises and private companies, transport group Transnet with a loan facility of $1-billion before the end of 2023.

Another example within days, the NDB plans to sign a loan agreement with the Development Bank of Southern Africa to allocate $75-million for the development of Telkom’s telecommunications infrastructure and network.

The NDB is also going big with infrastructure investments in Lesotho, a country that is not an adopted member of the bank. The NDB and South Africa’s state-owned Trans-Caledon Tunnel Authority (TCTA) have signed a R3.2-billion loan agreement for the implementation of Phase Two of the Lesotho Highlands Water Project.

That is why President Chakwera is being commended for leaning with BRICS because of enormous resource and economic benefits going with it.

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