BRICS To Set Up $100 Billion Foreign Reserve Fund

September 6, 2013Emerging Marketsby EW News Desk Team

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The BRICS (Brazil, Russia, India, China and South Africa) group of emerging economies have agreed to contribute $100 billion to a currency reserve pool that will guard against future financial shocks, such as the recent mass exodus of cash from emerging markets caused by the U.S. Federal Reserve’s most recent quantitative easing program.

The five countries on Thursday all agreed to the formation of a Contingency Reserve Arrangement (CRA), which will see China contribute $41 billion towards the pool, while Russia, India and Brazil add $18 billion each, with South Africa agreeing to provide $5 billion.

A joint statement by the BRICS said that they had decided to combine resources in order to shield against “unintended negative spillovers” from unconventional monetary policies in developed economies.

“New risks have emerged in recent months,” added Russian President Vladimir Putin in his opening remarks for the G-20 summit in St. Petersburg, Russia. “Our partners have started to exit unconventional financial and economic policies. That can take a toll on key global risks and impact economies of other countries,”” he warned.

Speaking through a translator later, Chinese Vice Finance Minister Zhu Guangyao also directed criticism towards the U.S.’s June tapering of quantitative easing, which has indirectly caused the South African rand and the Indian rupee to depreciate by 16.9 percent and 16.8 percent respectively this year.

Related: Will 2013 Mark The Start Of A New, More Dangerous Currency War?: Mohamed El-Erian

Related: Can Emerging Markets Avoid A “Hot-Money Meltdown”?

 

“Capital is flowing out of emerging markets and their currencies are under pressure of depreciation, and the major direct cause of such a phenomenon is the Fed’s announcement that it may exit its unconventional monetary policy. However, on the other hand, there are some structural problems with these emerging market economies as well.”

Nevertheless, the U.S. should still be mindful of a possible “very significant spillover effect,” said Zhu, urging for greater coordination between nations.

“We see the temporary difficulties of some BRICS countries (at present) mainly as difficulties in terms of international balance of payments,” he added. “The policy options in response to such typical balance-of-payments difficulties include increasing interest rates or devaluing currencies.”

In a written statement, the BRICS group said that they had reached a "consensus on key aspects and operational details" for establishment of the CRA. Russia’s Putin speculated that the fund could be become a reality by next year as talks were already in their “final stages.”

The CRA will be a separate entity from the much-touted BRICS Development Bank, which is still in development as well. India’s Foreign Secretary Sujata Singh told the Hindustan Times that while “good progress” had already been made towards the formation of the BRICS bank, "I don't think you can put a timeline on this.”

 

"In the list of the progress achieved in the negotiations of the new development bank and the CRA, the BRICS leaders expect tangible results by the time of the next Summit," said a joint statement.

Related: Why The World Needs A BRICS Bank: Nicholas Stern, Joseph Stiglitz et al.

Related: What The BRICS Development Bank Means For Africa

Related: Rumours Of The Death Of The BRICS Are Greatly Exaggerated: Dan Steinbock