IMF & WB: Int’l law & geopolitics?

(May 29, 2019)

Needless to say, the creation of the Bretton Woods institutions

under the UN’s system in the Post War II order seems to have
espoused the very notion of power politics through which the
so-called financial or economic umbrella– of the IMF and the
World Bank-has been largely meant to serve the political agenda of
the powerful nations via synergies of economic loans and other
packages of assistance for both the devolving and underdeveloped
world. On being founded in 1944, both the IMF and the World Bank,
in 2019, will become 75 years old. The critical view holds that both
the institutions are dominated by the US and a few allied major
powers who have been working to generalize policies that run
counter the interests of the world’s nations. Since their creation,
both the IMF and the WB have been criticized of promoting
geopolitics.

The 1944 Bretton Woods’ agreement was established under the

canopy of a new global monetary system. It replaced the gold
standard with the U.S. dollar as the global currency. By so doing, it
established America as the most dominant power in the world
economy. After the agreement was signed, the US was the only
country with the ability to print dollars. The agreement created the
World Bank and the International Monetary Fund. These
U.S.-backed organizations would monitor the new system. Though
the Bretton Woods countries decided against giving the IMF the
power of a global central bank to print the money, they agreed to
contribute to a fixed pool of national currencies and gold to be held
by the IMF. Each member of the Bretton Woods system was then
entitled to borrow what it needed, within the limits of its
contributions. The IMF was also responsible for enforcing the
Bretton Woods agreement.

All the same, the international agreements in the monetary and

financial field are basically hard to reach since they lie at the very
bottom of matters— affecting the whole complex system of
economic relations among nations. It is a well-known fact that in all
countries sectional interests are often in conflict with the broader
national interests and that these narrow interests are sometimes
sufficiently strong to shape international economic policy.
Subsequently, in the years that followed the events of 1971,
international monetary cooperation again changed its nature.
Keynes’ vision of an international monetary system capable of 1
disciplining both deficit and surplus nations, thereby bringing
equilibrium to the economies of the world, faded. Instead, states
tried looking towards fora like the G-7 and the G-5 to coordinate
international monetary policy. Anyway, cooperation was
resurrected or reconnected with some success with the Plaza Accord
of 1985: an agreement to let the value of the dollar decline and the
Louvre Accord of 1987, an agreement to stabilize the value of the
dollar.

Significantly, the dollar’s flows became the International Financial

System’s lifeblood, engendering structural power for the United
States, which has been held in place through reserve currency status,
institutional stickiness through banking and currency trading, and
ideational influence. While introduction of the Euro and attempts
in Asia to dismantle the Asian Bloc have already shaken, American
structural power– money’s foundations– have always rested on
trust, trading, and risk-taking, emergence of extensive credit and
virtual money, and related security concerns, bring forth new topics
resting on these old foundations.

There is no exaggeration to say that the US has been able to

irresistibly influence all the other players on the geopolitical
chessboard because it directed the global economy, and historically
it could have had done so: therefore greatly reward or severely
punish in ways and to an extent no one else could” (Stroupe, 2006),
attaining both political and diplomatic power, as well as formidable
power projection capabilities. Therefore, the trends that rule the
behaviour of currencies are strikingly similar to those that govern
the conduct of national states. They both seek dominance in highly
hierarchical and dynamic systems where competition, conflict and
confrontation are commonplace. They both gain and lose power
and prestige at the expense of one another in zero-sum games
(Cohen, 2003). Therefore, “the realpolitik balancing instinct would
apply to current politics as well as geopolitics” (Drezner, 2010).

True but justifiably, critics of the World Bank and the IMF are
concerned about the conditionalities-cum-acute stipulations
imposed on borrower countries. The World Bank and the IMF often
attach loan conditionalities based on what is generally termed the
Washington Consensus, focusing on liberalisation-of trade,
investment and the financial sector- deregulation and privatisation
of nationalised industries. Commonly these stipulated
conditionalities are orchestrated without due regard for the
borrower countries’ respective circumstances and therefore the
prescriptive recommendations by the World Bank and IMF
normally fail to resolve the economic problems within the countries.
Whatever the justification for the developing nations’ borrowing 2
loans from the IMF and the World Bank, the truth remains
irrefutable: by agreeing to the terms dictated by these Bretton
Woods institutions, we do agree to compromise our economic
independence focusing on our basic needs that cater our people’s
demands of accommodation and survival. Or in other words, the
IMF-imposed conditionalities largely obscure a state’s authority to
govern its own economy as national economic policies are
predetermined under IMF packages.

And yet conceptually, the understanding of the World Bank and the
IMF of the term ‘development’ – both in doctrine and practice – has
meant a focus on GDP growth, increased trade and greater
consumption. This is reflected in the UN’s adoption of the Human
Development Index as a counter to GDP per capita as a measure of
‘development’. Inequalities among states and within states,
however, have been growing, in many countries, unemployment has
increased, particularly affecting youth, and standards of living have
drastically dropped.

Nonetheless, the WB and the IMF have systematically imparted

loans to states as a means of influencing their policies whereby
foreign debt has been and continues to be used as an instrument to
subordinate the respective borrowers. IMF packages have also been
associated with negative social outcomes such as reduced
investment in public health and education. Accordingly, the issues
of representation are raised as a consequence of the shift in the
regulation of national economies from state governments to a
Washington-based financial institution in which most developing
countries hold little voting power.

Pakistan’s dependence on the IMF (June 2, 2019)

Our policy irony is that despite our wilful denial of not depending
on the IMF support, we are again, and again, and again trapped in
this negative western capitalist trajectory support system. Very
shortly after the historic failure of Bretton Woods System of Fixed
Exchange Rates in August 1971, Pakistan de-linked PKR from GBP
and pegged it de jure with USD at the same parity of PKR
4.7697/USD to keep its fixed exchange rate regime intact, despite
its international demise. In May 1972, parity was devalued to PKR
11.0078, but re-valued again to PKR 9.9078 in February 1973. This
so called parity with USD continued till December 1981. Thereafter,
Pakistan adopted a system of managed floating regime since
January 1982. And consequently, it became impossible for us to
keep flowing the fixed regime. And our readjustment synergy
resulted in causing exchange rate rising so crucially that we have
reached from PKR 9.9078 in December 1981 to PKR 150.09 in May 3
2019.
Our historic misfortune is that in order to get rid of poverty and for
accelerating the economic growth, Pakistan avails funding
opportunity from the world’s largest financial institution IMF
(International Monetary Fund) since decades. However, here a
question arises that whether IMF financial support gives the
positive growth to the economy of Pakistan or it just playing a vital
role in enhancing poverty level instead of prosperity. The purpose
of taking loans from the IMF is that Pakistan’s Government wants
to stabilize its deteriorating economy, exchange rates and balance
of payments. No doubt, IMF helps us in these type of circumstances
and helps us by providing a huge amount of loans. At the very first
sight, it seems a very attractive offer but only for a short-term
perspective. The reality is quite different. When we get a loan from
the IMF, in exchange of that, it imposes so many demands and
conditions on us. This way or that way, we are bound to fulfill the
demands and conditions.

This story of our misfortune is not ended yet. For the 13th time in
three decades, Pakistan formally requested an IMF loan in October
2018, triggering on-going discussions between PM Khan’s
government and the Fund. Pakistan’s economic challenges persist,
as Islamabad battles mammoth twin deficits, deteriorating foreign
currency reserves, low exports, diminishing tax revenues, a weak
currency, onerous external debt payments, and soaring sovereign
debt. Despite interventions to stave off a balance of payments crisis
that would force Pakistan to submit to the Fund – such as currency
devaluations by Pakistan’s Central Bank, a $1 billion loan from
Saudi Arabia, a reported $2 billion pledge from China, and the
issuance by Pakistan of $1 billion worth of bonds to its citizens
living overseas – dialogue between the IMF and Pakistan seems to
have been recently concluded.

Apparently, the loan injected by the IMF to the economy of

Pakistan helps in easing the BOP problems by stabilizing the
foreign exchange reserves and settles its international import bills;
trade liberalization encourages specialization; and improve living
standards. Privatization of public sector enterprises played a
notable improvement in resource allocation and economic
efficiency as well as its also assisted to achieve macroeconomic
stabilization through reduction of government budget deficit.

Cosmetically, the IMF programmes in Pakistan has also been 4

helping for enhancing the government revenue by increasing the
new tax culture, reducing the unnecessary expenditures of the
government and mitigating the energy crisis by encouraging to
initiate targeted income support programme. And yet conversely to
the perceived fruitions, the IMF borrowing facility causes some
serious economic effects such as: introduction of the central excise
duty on service and agriculture sector; expenditure under the
defence budget; non provision of supplementary grants to
government departments reduction in expenditures on public
sector development program; devaluation of Pak Rupee and
freezing of non-development and ending subsidy on gas and
electricity which adding more suffering of a lay man; increase in
mark-up rate of banks and on inter-bank transitions; uniformity in
the inter-bank and open market dollar exchange rate; stoppage of
government financial intervention in stock market; decline in GDP
growth rate and other economic indicators right after infusion of
IMF funds in the economy; while policy rate include increased costs
for the banks, increase in unemployment, and increase in poverty
rate.

“Pakistan is facing a challenging economic environment, with

lacklustre growth, elevated inflation, high indebtedness, and a weak
external position,” said Ernesto Ramirez Rigo, the head of the IMF’s
mission to Pakistan, said in the statement. “This reflects the legacy
of uneven and pro-cyclical economic policies in recent years aiming
to boost growth, but at the expense of rising vulnerabilities and
lingering structural and institutional weaknesses.”

The International Monetary Fund (IMF) reached a staff-level

agreement on economic policies with Pakistan for a 39-month
Extended Fund Arrangement (EFF) for about US$6 billion on May
12. The interplay of relationship between Pakistan and the IMF loan
facility is that as a developing country or economic is not
self-reliant and therefore in order to heal the immediate economic
sufferings, we are bound to take loans from the IMF to stabilize our
economy and exchange rates. The IMF provides loans for purposes,
which appear to be attractive. We must use the loans properly and
have appropriate checks and balances.

Amid international pressures and national exigencies entailed by

our impending urges to revitalize our economic indicators, we are
simultaneously confronted with the twin challenge to halt the flow
of money laundering and to curtail the flow of terror financing
respectively. Accordingly, Pakistan has been facing the challenge to
adopt the eleven points recommendations imposed and stipulated
upon us by the International Finance Action Task Force (FATF). As 5
for the FATF role, while in response to mounting concern over
money laundering, the Financial Action Task Force on Money
Laundering (FATF) was formally established by the G-7 Summit
that was held in Paris in 1989. Consequent upon recognising the
threat posed to the banking system and to financial institutions, the
G-7 Heads of State or Government and President of the European
Commission convened the Task Force from the G-7 member States
of the Industrialized Economy.

FATF, Int’l law & Pakistan? (June 4, 2019)

The prime objectives of the FATF are: to set standards and promote
effective implementation of legal, regulatory and operational
measures for combating money laundering, terrorist financing and
other related threats to the integrity of the international financial
system. Hence, the FATF is a policy-making body which works to
generate the necessary political will to bring about national
legislative and regulatory reforms in these areas. Once an oddity,
FATF now holds a reputation of global governance in a landscape
characterized by the glaring features of contested multilateralism,
plurilateralism, regime complexes, and good enough global
governance. And for the last three decades, the most influential
international organizations have integrated FATF’s standards as
their own. The G22 body of The Asia Pacific Economic Forum
leaders in 2009 identified FATF as a keystone institution in a
promised new global financial regulatory architecture.

While soliciting the lawfare argument with regard to the FATF, we

may argue that the application of international law can also be
horizontal in the sense that two or more than two countries may
enter into a treaty with one another. Similarly, a group of countries
may agree on a set of laws to govern their common objectives. Such
laws are horizontal in the sense that they apply between those
countries as opposed to the deriving from a supranational
organization such as the UN. Since the objectives of regional
organizations and inter-governmental organizations can be merged
with the broader objectives of supranational organizations. The
result is a web of international laws that are both horizontal and
vertical regarding the application. Though the FATF 40+9
Recommendations do not enjoy the same status as international
law instruments with regard to the UN conventions and the UN
Security Council resolutions, and are therefore legally unbinding,
yet there are organic linkages in the themes and underlying policies
of the UN instruments and the FATF 40+9 Recommendations.
Generally, a globalized financial system allows money, whether licit 6
or illicit, to move around increasingly freely. Those seeking to
regulate it, however, are bound by traditional conceptualizations of
sovereignty and held back by the legal boundaries of their
jurisdictions. The reach of existing governance institutions does not
match the scale of the problems that each nation faces. The
Economic pragmatists are of the view that the costs and benefits of
FATF and AML, must, accordingly, be measured against the costs of
the illicit activity it targets. The international fight against money
laundering, then, is a microcosm of the fundamental challenge of
global governance today, particularly as it pertains to illicit markets.

In recent years, the AML regime has come to encompass the

standardisation of the activities of certain professions that are
presumed to be particularly relevant to financial flows. The AML
standards adopted by the Financial Action Task Force (FATF), the
pre-eminent global standard-setting body on the matter, require
states to apply to the legal profession certain rules of conduct that
have long been applicable in the financial industry. This
requirement specifically covers sole or firm-based legal
practitioners, excluding in-house counsel in organisations or legal
personnel working for government institutions.

By all means, Pakistan remains an honourable member of the

global law community. It unconditionally believes to honour the
norms established by international law. Pakistan belongs to the
constructivist school of international law believing that nations
must comply with international law in order to follow norms and
behave appropriately. Notably, the FATF has put Pakistan’s name
on a money laundering grey list early in 2018 thereby giving it time
to take action against further downgrade. Being on the grey list
means that accessing funds from international markets would
become tougher for Islamabad. Yet, Pakistan has raised its
warranted concerns against the politicisation of the United Nations’
counter-terrorism machinery, saying such a course would only
compromise the integrity of the system. “It is important that
current structures like FATF (Financial Action Task Force) and the
UN resolution 1267 Sanctions regimes are not used as political tools
by some to advance their geopolitical goals,” Ambassador Dr
Maleeha Lodhi told the UN Security Council.

Pakistan has diplomatically started to launch its efforts amid fears

of being blacklisted by the global anti-terror watchdog Financial
Action Task Force (FATF) at its next plenary and working group
meet in Orlando on June 16-21. In its recently held May meeting in
China. Islamabad has forcefully represented its case regarding the
objective measures that Islamabad has taken with regard to its
commitments. In June 2018, Pakistan principally agreed to tighten 7
its compliance with anti-money laundering laws and counter-terror
funding after being placed on the FATF greylist.
In September 2018, the SECP issued Guidelines on Implementation
of AML/CFT Framework under the Securities and Exchange
Commission of Pakistan (Anti Money Laundering and Countering
Financing of Terrorism) Regulations, 2018 [“Guidelines”] designed
to assist RPs in complying with the Regulations. It clarifies and
explains the general requirements of the legislation to help RPs in
applying AML/CFT measures, developing an effective AML/CFT
risk assessment and compliance framework suitable to their
business, and in detecting and reporting suspicious activities.
Because of the limited progress on action plan items due in January
2019, the FATF urged Pakistan to swiftly complete its action plan,
particularly those with timelines of May 2019.

Currently, during the Asia Pacific-Joint Group face-to-face meeting

in Guangzhou, China, on May 15-16, Pakistan has presented its case
resourcefully and presented all the actions that it had taken in
compliance with FATF’s regulations. Based on this the APG group
will prepare a report which will be presented at the Plenary and
Working Group meeting at Orlando, Florida. “Pakistan has taken
enough steps with regard to money laundering and Combating
Financing of Terrorism (AML/CFT) in compliance with the FATA
requirements to be removed from the grey list,” an official said.

Technically, Pakistan needs about 15-16 votes- amongst 36

members of the FATF forum- to move out of the grey list and a
minimum of three votes to avoid falling into the blacklist. The FATF
currently has 36 members with voting powers and two regional
organizations – EU and GCC. Truly speaking, the core mission or
the underlying objectivity of FATF to examine the economic
accountability of nations should not be hibernated by the notorious
power play of geopolitics. In this backdrop, the rationalists’ view-
beyond the sceptics’ desire to stay Pakistan name on the greylist –
holds that the FATF executive board in its June meeting to be held
in Orlando (US), by judiciously and impartially reviewing Pakistan’s
case, should remove Pakistan from its grey list, keeping in view the
reformative and progressive steps that Islamabad is gradually
taking in this regard.

--------- Written by: Syed Qamar Afzal Rizvi. The writer is an

independent ‘IR’ researcher and international law analyst based in
Pakistan. Published in Daily Times on the mentioned dates. 8