Tuesday, July 8, 2014

In order to overcome a funding crisis arising from widening current account deficit (CAD) the BRICS have thought of a novel idea. These nations are proposing setting up a US$ 100 bn fund which will provide financial help its member countries facing CAD crisis. All member countries will contribute to this fund and financial support will be extended to any country which faces a liquidity issue. Creation of such a fund would reduce reliance on IMF and other funding institutions. Apart from setting up of this crisis fund, BRICS nations are also toying with the idea of establishing a common development bank. This bank would meet the funding needs of the member nations.

We believe that steps such as these would enable BRICS to better cushion themselves against any external crisis. In the past, BRICS had been subject to huge currency volatility and funding crisis whenever the external environment changed. Take the case when the US decided to curb its bond buying program for instance. This led to a sharp outflow of money resulting in currency depreciation. Having a support mechanism like a pool fund as the one being proposed can go a long way in reducing excessive currency and CAD volatility amongst BRICS.