Role of International Financial Institutions in Development of Pakistan

Development Agenda, South Asia, October 2019

Role of International Financial Institutions in Development of Pakistan

International financial institutions (IFIs), generally a consortium of more than one nation. Owners and shareholders are generally governments or other international institutions. Every IFI has an objective to assist other countries in need. Due to nature and scope pf each IFI, they have different objectives. Nevertheless, a common agenda is to help countries to reduce global poverty and improve people's living conditions and standards, support sustainable economic, social and institutional development and promote regional cooperation and integration.

IFIs play significant role in supporting large scale infrastructure projects in developing countries. They also provide technical and advisory assistance to their borrowers and conduct extensive research on development issues. Almost all IFIs generate funds from world's capital markets as well as from members' contributions, retained earnings from lending operations, and the repayment of loans. The most prominent IFIs are the European Investment Bank, the World Bank, IMF and Asian Development Bank. In this article we will discuss role of three major IFIs working in Pakistan, i.e., World Bank, Asian Development Bank and IMF.

The World Bank, an international organization, helps emerging market countries to reduce poverty. Interestingly, as name suggests, it is not a bank in the conventional sense. Instead, it consists of two development institutions; the International Bank for Reconstruction and Development which provides loans, credit, and grants and the International Development Association, which provides low- or no-interest loans to low-income countries.

The World Bank Group consists of three organization with three different portfolios; (1) The International Finance Corporation (IFC) that provides investment, advice, and asset management to companies and governments; (2) The Multilateral Investment Guarantee Agency (MIGA) that insures lenders and investors against political risk such as war and (3) The International Centre for the Settlement of Investment Disputes (ICSID) that settles investment disputes between investors and countries.

The World Bank focuses on improving education, health, and infrastructure, hence provides low-interest loans, interest-free credit, and grants. It also uses funds to modernize a country's financial sector, agriculture, and natural resources management. Its ultimate purpose is to "bridge the economic divide between poor and rich countries." Thus to achieve this goal, it focuses on six areas:

·       Overcome poverty by spurring growth.

·       Help reconstruct countries emerging from war, the biggest cause of extreme poverty.

·       Provide a customized solution to help middle-income countries remain out of poverty.

·       Spur governments to prevent climate change. It helps them control communicable diseases, especially HIV/AIDS, and malaria. It also manages international financial crises and promotes free trade.

·       Share its expertise with developing countries. Publicize its knowledge via reports and its interactive online database.

Since 1947, the World Bank has funded several projects in Pakistan in various sectors/areas. Currently, Bank is running 43 projects that cover a wide variety of sectors, including agriculture, governance, education, health, and energy.

Asian Development Bank is another significant IFI present in Pakistan which is composed of 68 members. Pakistan joined ADB as a founding member in 1966. Similar to World Bank, ADB focuses on 7 core areas through both public and private sector operations, advisory services, and knowledge support. These seven areas are;

1. addressing remaining poverty and reducing inequality 
2. accelerating progress in gender equality
3. tackling climate change, building climate and disaster resilience, and enhancing environmental sustainability
4. making cities more livable
5. promoting rural development and food security
6. strengthening governance and institutional capacity
7. fostering regional cooperation and integration\

Pakistan is working with ADB to strengthen its key infrastructure, social services, and economic growth since 1966. We have obtained $32.2 billion in project assistance since inception. In the next three years, ADB is supporting us on energy, natural resource management, urban development, transport infrastructure, and institutional reforms, as well as re-engagement in education and health.

Another important IFI working in Pakistan is International Monetary Fund. Unlike World Bank and ADB the objectives of IMF are (i) International Monetary Co-Operation, (ii) Ensure Exchange Stability, (iii) Balanced Growth of Trade, (iv) Eliminate Exchange Control, (v) Multilateral Trade and Payments, (vi) Balanced Growth, (vii) Correction of BOP Maladjustments, (viii) Promote Investment of Capital.

Pakistan has started taking loans from IMF in 1958, nonetheless, the magnitude of the loans was not substantial at that time. Even from 1980 to 2001 loans from IMF in each program was slightly above than $1 billion. However, in 2008, 2013 1nd 2018 we have taken substantial loans from IMF. Pakistan was engaged with IMF in 22 programs since 1958 out of which 12 were standby arrangements (bail outs program) and rest are non-bailouts programs that includes Poverty Reduction and Growth Facility, Structural adjustment programs etc.

Interestingly, all IFI-funded projects are implemented by the borrowing countries. However, all the borrowing countries need to follow the IFI's rules and procedures in implementing the funding they obtain. This is done to ensure the guaranteed efficiency and transparency in the use of IFI funds. Nonetheless, every country has its own structure and procedures to use that funds which create hurdles in the spending the money efficiently.

Rules and procedures involve specific targets which a country is asked to achieve; it could be fiscal austerity, revenue generation, taxation reforms, energy sector reforms, modernization of agriculture and reduction in the carbon foot print by adopting to clean and renewable energy. It is in general argued that conditionality related to procurement, financial bookkeeping, auditing, environmental issues, resettlement, and organizational change is needed if development projects are to be implemented effectively. In fact, such conditionality has always been a part of development assistance, and some conditionality is in response to advocacy by NGOs with respect to environmental issues and indigenous peoples’ rights.

Notwithstanding, the controversy about conditionality relates mostly to policy and institutional reforms such as fiscal austerity, decrease expenditures especially subsidies and development expenditures, Increase tax revenues, privatization etc. All of these often feature prominently in adjustment lending by IFIs. We can argue 24/7 that if these conditions have worked or totally failed. Meekal Aziz article on “IMF and Pakistan” argues that No country turns to the Fund when the sun is shining. Therefore, we need to take stringent measures if there is a problem and this is what IMF ask Pakistan to do. On the other hand, few also argue that some conditions are merely an attempt to impose Western free market policies on developing countries where they are neither appropriate nor desired.

IFIs interventions are most effective when it supports reforms on which the country is already taking the lead. It is ineffective when there is little or no political will to undertake the reforms. Concurrently, IFIs are equally ineffective if they want to address policy that is against the country’s direction of development or reforms. Especially when country’s proposed reforms are not addressing the key policy distortions hampering equitable (pro-poor) growth which is the main agenda of IFIS. In this scenario, when reforms proposed are inevitable and countries are not willing, the conditionality pinches alot. Similar scenario was built when in 2013 IMF asked to devalue the currency but former Finance Minister Ishaq Dar has different opinion on it. Though the IMF program of that time was successfully implemented and completed.

In nutshell we infer that IFIs have supportive role in the development of Pakistan. The support is very effective when it is in the line of development of Pakistan which also has a political will. In general, all IFIs want to assist in the upcoming important programs of the government, e.g., all were trying to assist in implementing Vision 2025 in the last five years. Divergent programs creates hurdles in the system.