The Asian Infrastructure Investment Bank (AIIB) recently launched a $10-billion financing facility to support its 111 member countries and clients affected by the economic fallout of the West Asia conflict.
Notably AIIB’s latest move comes at a time when India and other energy-importing economies are trying to diversify sourcing of key energy products like oil, gas, LPG away from Hormuz due to the ongoing war.
The Beijing-headquartered multilateral lender said that financial support of $10-billion will be provided via its Energy, Food Security and Economic Resilience Facility over 24 months to countries facing pressure on the fronts of energy security, food security and maintaining economic resilience.
For India, the announcement is significant because the country is the second-largest shareholder in AIIB after China and, is among one of the largest Asian economies that’s been exposed to energy supply disruptions from the region.
As per the bank’s website, AIIB has 111 approved members, is capitalised at $100 billion and is rated AAA by major international credit rating agencies.
What will the AIIB facility do?
According to AIIB, the facility will supplement its regular financing instruments and provide fast support to affected members and clients. The bank said the money can be used for three broad purposes.
First, it can provide policy-based financing, which means loans linked to government programmes or policy measures. In simple terms, this is money given to a government to help it manage a crisis while continuing planned reforms or public spending.
Second, it can finance critical imports and expenditures. This could include essential purchases or government spending related to energy, food or other urgent requirements.
Third, it can provide liquidity support to infrastructure companies or financial intermediaries. Liquidity support means short-term funding to help companies meet immediate cash needs.
AIIB said this may include support for working capital and refinancing, an option member countries can exercise to potentially replace or roll over an existing loan to reduce repayment pressure.
AIIB President Zou Jiayi said the facility would help members deal with external shocks while strengthening long-term resilience. The bank also said it would work with other multilateral development banks, the IMF and development partners.
Who funds AIIB ?
AIIB is funded by its member governments, with China contributing the largest share and India the second-largest. The bank uses this shareholder capital as a financial base to borrow more money from global bond markets. It then lends these funds to member countries for infrastructure, energy, transport, climate and crisis-response projects.
The AIIB, which began functioning in 2016, has more than 100 approved members worldwide, which include China, India, Bangladesh, Pakistan, Iran, Iraq, Australia, Israel, Kuwait, Nepal, Oman, Russia, Singapore, Sri Lanka and the UAE.
According to the bank’s website, China remains the company’s largest shareholder with 26.54 per cent voting shares, followed by India (7.58 per cent), Russia (5.9 per cent) and Germany (4.1 per cent)
Why does the AIIB announcement matter ?
As per global commentators interviewed by Reuters, AIIB’s latest announcement reflects how the West Asia conflict has moved from being a regional security crisis to a global economic and development challenge.
Economic challenges triggered by the conflict can also be understood via the example of India. India presents itself as one of the larger Asian economies with visible exposure to oil shocks.
The Ministry of Petroleum and Natural Gas said in March that India’s crude oil supply remained secure, but also said the country had shifted more crude imports to routes outside the Strait of Hormuz.
According to the government, around 70% of India’s crude imports were being routed outside Hormuz, compared with about 55% earlier. The pressure is sharper in LPG. The government said India imports about 60% of its LPG consumption, and about 90% of those LPG imports used to previously come through the Strait of Hormuz.
The Strait of Hormuz is one of the world’s most important energy chokepoints. Reuters reported that the route typically handles roughly one-fifth of global oil supply.
In India’s case, Reuters reported that crude oil imports fell 13% in March from pre-war February levels after Middle East shipments through Hormuz were halted, while Russia’s share in India’s crude imports rose to 50%.
This is why the AIIB facility has an India angle even if the bank’s announcement is not India-specific. Higher oil, LNG or LPG costs can widen India’s import bill, affect the rupee, raise pressure on fuel subsidies, and increase costs for fertiliser, transport and industry as has been seen in the recent days leading up to AIIB’s announcement
AIIB’s move follows a broader response from global development lenders. On May 18, seven multilateral development banks, including the Asian Development Bank and the World Bank Group.
As per the joint press statements issued by these multilateral institutions, their recent announcements have come in response to requests from countries and corporations across the globe that have been affected by disruptions in energy and fertiliser markets, trade routes, jobs, fiscal positions and external balances.