The Asian Development Bank will need to find additional
sources of funds if it is to maintain recent annual lending
levels of around $10 billion from its Ordinary Capital
Resources despite a tripling of the banks capital
base to $165 billion agreed five years ago, ADB president
Takehiko Nakao told Emerging Markets.
The Manila-based ADB recognizes, however, that it
cannot be too ambitious about doing everything by
itself, and that it must maximize its efforts to tap
public- and private-sector sources of co-financing, the newly
installed head of the institution said.
In a wide-ranging discussion conducted at the Ministry of
Finance in Tokyo after he was confirmed as new president by the
ADBs executive board, the former vice finance minister
for international affairs of Japan talked about how he sees the
future role of the ADB in infrastructure and other areas, and
about the banks relations with China among other
Under former president Haruhiko Kuroda (now governor of the
Bank of Japan) the ADB achieved a record tripling of its
Ordinary Capital Resources in order to help cope with the
aftermath of the global financial crisis and to confront the
huge developmental challenges facing one of the worlds
fastest-growing and dynamic regions.
But because the investment income of the ADB is
smaller than expected at the time of the capital
increase, largely because of low interest rates, the bank
needs to find ways of meeting the challenge of sustaining
lending of around $10 billion a year to finance
infrastructure and other projects, says Nakao.
It is unrealistic to expect the ADBs 48
shareholder countries in and beyond Asia to agree to a further
capital increase after such a short interval, but
possible funding shortages must be examined very closely, he
says, adding that he cannot preempt any solution at this
moment. The topic is expected to loom large in
discussions at the annual meeting.
Co-financing between the ADB and public-sector institutions
such as the Japan Bank for International Cooperation and
similar institutions in Korea and elsewhere, along with
stepped-up efforts to tap sources of private co-financing, are
among possible options, says Nakao, who has specialized in
monetary and financial affairs during a 35-year career at the
Japanese Ministry of Finance.
Public-private partnerships are very important, and many
Japanese banks and trading companies are starting to invest in
infrastructure projects, Nakao notes.
Infrastructure bonds are one possibility because it
provides an opportunity for long-term investors like pension
funds and life assurance companies. But we need a stronger
legal and institutional framework for mobilizing money to
The ADB has estimated that Asia faces a resources
gap of some $50 billion a year overall in order to
maintain development that would enable the region to meet its
Millennium Development Goals. The ADB approved $21.57 billion
in financing operations including co-financing last year,
according to its 2012 Annual Report, released ahead of the
Delhi annual meeting.
I think this is a really important job, the
57-year-old Nakao told Emerging Markets a few days
before taking up his presidential duties on April 28.
Asia is becoming a bigger player in the global economy,
and the dynamics of Asia have been [driving] the growth of the
world as a whole, especially after the Lehman crisis. There are
many things we need to do, including building good
infrastructure, poverty reduction, disaster management, climate
change, promoting gender issues, post-conflict development and
so on. But of course the ADB cannot be too ambitious about
trying to do everything by itself.
The emergence of China as the worlds second-largest
economy behind the US (ahead of Japan, which is now third), and
as a dominant economic power in Asia, has provoked speculation
that Beijing might push for the presidency of the ADB in
recognition of its growing regional and global status.
Had Kuroda served out his full term as president, those
pressures might have grown stronger, but his early resignation
to take over the helm of the Bank of Japan meant that China was
unprepared to field a candidate at short notice. This has
helped catapult Nakao into a position that has often gone in
the past to Japanese vice finance ministers.
Even so, Nakao went out of his way to make a presentation to
executive directors of the ADB as though competing with others
for the presidency, although he was the sole candidate.
The Japanese government did not want to give the
impression that [selection of a Japanese national] is taken for
granted, he told Emerging Markets. But at
the same time, in the process of selection, I noticed that many
members of the ADB understand the important contribution that
Japan has been making.
Japan has provided 35% of cumulative donations to the
ADBs soft-loans agency, the Asian Development Fund (ADF),
and 15% of the banks Ordinary Capital Resources, and this
fact has been noted, he says.
Nakao had the advantage, in his presidential confirmation
process, of being well regarded by China in the light of
cooperation between the two countries while he was with
Japans finance ministry. I have tried to promote
Japanese financial relations with China, he says, noting
in particular that this has now extended to include direct
transactions between renminbi and the yen and also the mutual
buying of government bonds.
China approved direct trading of its yuan currency against
the yen last year at the end of May, making Japan the first
country apart from the US to benefit from direct transactions
of its currency with the Chinese currency. Yen-yuan trading,
however, was hit by a drop in Chinese imports of Japanese goods
after a dispute over territory.
I think we achieved a certain amount [in boosting
financial relations with China], says Nakao, but because
of certain difficult issues between our two
countries, progress has not been as fast as it might have
been. His reference was to recent, and ongoing, tensions
between China and Japan over territorial and other issues.
Asked whether China might assume the ADB presidency at some
point, Nakao says: I cannot predict the future.
But a senior ADB source told Emerging Markets that
if China makes a major financial contribution to the ADF
and if its candidates are good, and China is at that moment
well received as an objective and fair player in the
international economy, then there could be a chance of a
Chinese president being elected.
A further speculation has been that China might opt to
promote the launch of an Asian regional infrastructure bank as
a conduit for deploying part of its huge foreign exchange
reserves in long-term investments beyond US Treasury securities
and other foreign government bonds. Chinas foreign
exchange reserves are $3.44 trillion, an amount almost as big
as the total German gross domestic product.
There are many ideas about how to strengthen
infrastructure financing in Asia, Nakao says. The
[ADBs] Asian Infrastructure Fund is one which has already
started, and there is the idea of a Brics [Brazil, Russia,
India, China and South Africa] bank. There can be other banks
to increase infrastructure funding, but the ADB should play an
important role because it includes many shareholders from
advanced economies like the US. These are countries with a lot
of resources and lending capacity. Of course, a country like
China which has its own savings can promote its own channel to
direct more money to infrastructure in Asia.
The idea of a separate North-east Asian Development Bank
(NEADB) has also been considered from time to time and was the
subject of a feasibility study at one time by a UN agency.
Again, Nakao declines to comment on this idea, but ADB sources
suggest that as and when North Korea launches political reforms
and democratization, a deal of money will be needed to support
it. But this is not the time for that, one senior
Before moving into the presidents seat at the ADB,
Nakao was at pains to cement good relations between the bank
and other multilateral financial institutions. He had meetings
in Washington with the heads of the World Bank, Inter-American
Development Bank and IMF.
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