Pakistan and the politics of global financial architecture

Haroon Sharif

The ongoing transition in the global power structure and emergence of multiple regional centers of economic influence are leading to an alarmingly high level of politicization of global financial and governance institutions. The already deteriorating confidence in the multilateral system is rapidly shifting toward a high trust deficit situation between the western countries and China-led Asia economies. If the integrity, competence and confidence in global financial architecture continues to deteriorate further, many developing countries will be left with no choice but to look toward regional financial institutions rather than the traditional global multilateral system.

The financing needs of developing countries are huge. According to recent assessments, Pakistan needs to double its investment to GDP ratio to ensure job creation for its young labor force and the country will require $16 billion per annum till 2030 to finance Social Development Goals (SDGs). One wonders if the tensions between the US and China and recent developments in Afghanistan facilitate or hinder global financing for development to meet such challenges. Unfortunately, the evidence so far does not suggest a favorable answer to this fundamental policy question.

Political influence is increasingly becoming more visible in the policies and decisions of international financial institutions. For example, the recent damaging statement of India’s Minister for External Affairs about the direct role of Modi-led BJP government in ensuring Pakistan’s grey-list status by the Financial Action Task Force (FATF) created quite a political stir in the already charged geo-political scene in South Asia. Pakistan strongly responded to the ‘Indian admission’ of politically influencing the FATF decision process. Even the White House had to issue a statement acknowledging Pakistan’s substantial efforts to comply with FATF recommendations. Several global commentators have repeatedly reported on the political nature of FATF deliberations. For instance, the Royal United Services Institute (RUSI), had acknowledged last year that although the FATF was created to set standards for dealing with financial crimes that threaten the integrity of the international financial system, this was only true in theory. The decisions at the FATF are heavily biased and support only certain political motives.

Similar allegations have been levelled against the World Bank Group and the IMF. Critics of the World Bank continue to argue that structural adjustment loans are a mechanism of coercing free market economics on countries through unrealistic conditions. Countries with a debt crisis, regardless of their other characteristics, agree to the bank’s package of legal and economic reforms, and the bank agrees to lend them money. The World Bank had to stop publication of its Doing Business report last year after serious questions were raised on data irregularities and methodology biases in technical evaluations. This, once again, brought into question the integrity and impartiality of the World Bank. Serious questions have been raised about the competency and conflict of interest issues in engaging with the multilateral banks in various lending and technical assistance programs. In a recent webinar organized by Pakistan Institute of Development Economics, renowned economist Jeffery Sachs argued that multilateral financial institutions were more politically influenced today and used lending as a tool to increase the leverage of their powerful shareholders. There was hardly any development aspect left in dealings of multilateral development banks, he stated. Sachs had published a hard hitting article in 2019 titled “how World Bank arbitrators mugged Pakistan”. He argued that due to flawed and corrupt arbitration practices of the World Bank, the rich are making a fortune at the expense of poor countries. He quoted the case of $5.9 billion award against the government of Pakistan in favor of two global mining companies for an illegal project.

The fundamental point is the availability of adequate financial resources for developing economies without having politically motivated strings attached which have been used as the main tool of influencing by the Bretton Woods system. A major flaw in tackling the question of raising adequate financing for developing countries, is the weak capability of poor countries to come up with home grown policies and projects to shop around in the private and multilateral financial market. The good point is that most developing countries have realized the urgency to work on innovative ways to resolve their issues and policies through regional collaborations, which manifests depleting trust in global governance institutions. The choices for developing countries are expanding and it is time for China and sovereign wealth funds of rich Asian countries to come up with an alternate to the old school of the global financial system.

If Pakistan needs to move toward the much needed path of sustainable growth, it will have to invest in strengthening its own financial market to have the capability of reaching out to new partners in the region. For example, Asian Infrastructure Investment Bank in China, Public Investment Fund in Saudi Arabia and Qatar Investment Authority have been looking for investment opportunities in Pakistan. It is up to the economic managers to come up with a strategic vision to reach out to over $1 trillion liquidity in the region.

For SDG Financing, a UN-led Global Investors for Sustainable Development (GISD) alliance is also looking for projects in areas of climate change, infrastructure development, technology ventures and social sectors. The current mindset and weak institutional capacity have put limits to the country’s financing choices to traditional multilateral borrowing and a few debt instruments. Both the policy makers and private sector leaders need to work together to reach out to regional capital markets and development financing institutions for diversifying the financial resources basket. This will lead to real economic diplomacy and risk mitigation against the political influence of traditional players. Pakistan’s desire to become an emerging Asian economy depends on its ability to attract foreign direct investment, developing a competitive economy, well-functioning financial system that could attract multiple sources of financing.