Thursday, March 29, 2012

Two pacts to strengthen Brics bond/BRICS today agreed to provide credit to each other in local currencies,will facilitate economic growth duringcrisis

Two pacts to strengthen Brics bond


New Delhi, March 29: The Brics group — Brazil, Russia, India, China and South Africa — today agreed to provide credit to each other in local currencies, which will facilitate economic growth during crisis.

The countries also agreed to examine the possibility of setting up a development bank on the lines of multi-lateral lending agencies.

The currency deal is aimed at promoting trade and investment in local currencies as well as cutting transaction costs. The move comes at a time weak global demand is hurting the export prospects of some Brics members.

“The agreements signed today by the development banks of Brics countries will boost trade by offering credit in our local currency,” Prime Minister Manmohan Singh said in a media statement after the meeting.

On the development bank, Singh said, “We have directed our finance ministers to examine the proposal and report back at the next summit.”

The Brics finance ministers will set up a joint working group to study the feasibility of the initiative.

The five nations today signed two pacts — a Master Agreement In Extending Credit Facility and a Multilateral Letter Of Credit Confirmation Facility Agreement. The pacts will help reduce the demand for fully-convertible currencies for trade among Brics nations and lower transaction costs.

The currency agreement highlights the efforts of emerging economies to insulate themselves from the Eurozone debt crisis and boost trade amid sluggish growth in developed markets such as the US and Europe.

N.R. Bhanumurthy of the National Institute of Public Finance and Policy said, “The move will boost bilateral trade and shift the dependence on the dollar and the euro. It will also boost trade among Brics nations.”

Analysts said the pact was a natural extension of the booming trade among these countries, which is growing at an annual rate of 28 per cent and now stands at $230 billion a year.

They said it was also an effort to alleviate some of the stress induced when the value of their currencies against the dollar fluctuated dramatically.

In a statement, the Brics countries blamed the developed economies for creating excessive liquidity that left emerging economies at the mercy of large and volatile cross-border capital flows.

Russia and India plan to switch to trading in domestic currencies in three years, Vladimir Dmitriev, the chairman of Russia’s largest state development bank VEB, said.

“With China it took us three years to (evolve) from initial conversations to trading in local currencies… I think we will meet similar terms with India… the swap requires a lot of technical work by each country such as the synchronisation of national banking legislation,” Dmitriev said.

A development bank will allow the member countries to pool resources for infrastructure development. The fund can also be used to lend during the difficult global environment.

Intra-Brics trade is about $230 billion and has the potential of more than doubling to $500 billion by 2015.

Expressing concerns over the current global situation and excessive volatility in capital flows and commodity prices, Brics leaders in the joint declaration said, “The immediate (need) is to restore market confidence and get global growth back on track.

“It is critical for advanced economies to adopt responsible macro-economic and financial policies, avoid creating excessive global liquidity and undertake structural reforms to lift growth that creates jobs,” it added.

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