The state of global financial architecture

Hasnat Abdul Hye | Published: October 29, 2024 20:26:29

War and conflicts involving countries have always affected the way they trade among themselves and pay for the same, using reserve currencies. The trading and financial order prevailing before the second world war having become dysfunctional, some would say functious officio, there arose a need for reshaping the prevailing arrangements for trade and finance. While International Trade Centre and UNCTAD were established under the aegis of the United Nations (UN) to take care of international trade, the World Bank and International Monetary Fund (IMF) were set up to cover the financial side of the new global order. The world having been divided into two rival blocs, American-led West and the Soviet bloc under Russia, the new trade and financial architecture remained confined to capitalist countries in the West and the countries who remained neutral. The socialist bloc had their own arrangements under COMECON for trade and payment among member countries. The world order after the second world war entered the cold war era, lasting up to 1991, with this bifurcated institutional arrangements. For all practical purposes, it was a bi-polar world.
The end of cold war in 1991 saw the abolition of the trading and financing arrangements in the Soviet bloc and the resultant vacuum was filled up by ITC/UNCTAD for trading regime and the World Bank and IMF for the promotion of investment and financial transactions. As tensions arose out of geo-political conflicts between the West, particularly America on the one hand and Russia and China on the other, the dominance of institutions like the World Bank and IMF began to be resented. Both Russia and China began to smart under the impression that America was 'weaponising' these institutions on the basis of its voting rights as majority shareholder to promote its policy of dominating the existing world order. Before long, in 2009, they came up with the idea of BRIC(S) along with Brazil and India, as an intergovernmental body like G-7 to counter the dominance of the American-led West. The acronym BRIC became BRICS in 2010, with the admission of South Africa. In their desire to attenuate the influence of the West through the financial infrastructure of the World Bank and the IMF, the leaders of BRICS established a new bank, called New Development Bank (NDA) and a fund to eventually become a rival to the World Bank and the IMF, the Bretton Woods sisters.
Coincidentally ,the annual joint meeting of the World Bank and IMF and the annual summit of BRICS this year was held on the same dates this month, the former in Washington DC and the latter in the Russian city of Kazan .For the joint meeting of the Bretton Woods sisters, it was business as usual, there being nothing extraordinary in the agenda for the finance ministers, central bankers and representatives of private sector ,civil society and media who attended. Perhaps the board of governors of the World Bank gave a nod to the decision taken last month by the board of directors to raise the lending capacity of the Bank, changing the equity to lending ratio from 19 to 18. The last time the ratio was lowered by one percentage point was three years back. The decision to take risk through lowering of equity-lending ratio bit by bit has been recommended in an independent report on reforms for promoting the effectiveness of the Bank's lending operations. The move, coupled with changes in the Bank's pricing policies, means the Bank will be increasing its lending capacity by a total of $ 150 billion over the next five to seven years through adjustments in its balance sheet. Experts estimate developing countries and emerging econonomies will need US$3 trillion annually to cope with future pandemics, climate change and other challenges .Asked by media if further adjustments were possible ,the World Bank President Ajoy Banga said the Bank would keep looking at new instruments like hybrid capital and ways to optimise its balance sheet. He said the Bank was able to lower the ratio while safeguarding the 'triple A' rating by strengthening its credit rating monitoring system and adding contingency measures if a stress event should occur. The board of directors also approved changes in the fee structure to make it easier for borrowing countries to get loans and then make them cheaper to repay, including discounted pricing for short maturity, seven year loans, the Bank President informed. More momentous news was about the Bank's efforts to push for replenishment of funds for lending to the world's poorest countries through the window of International Development Association (IDA).
While the World Bank can take credit for carrying out some reforms and keeping others on the anvil, the IMF seems to be stuck in a time-warp, repeating the same prescription to countries facing fiscal crisis in these extraordinary times. In this connection, the application for additional $3 billion as budgetary support by the present Bangladesh government may be mentioned. According to available reports, the conditions mentioned by IMF are so onerous that they can hardly be fulfilled. So, the report card on the two Bretton Woods sisters gives a mixed picture of moderate dynamism on the one hand and policy paralysis on the other.
In contrast to the joint-meeting of the World Bank and IMF, the summit of BRICS at Kazan had spectacular results to show its confident journey so far. Not only the membership has increased from 5 to 33, more countries are waiting with applications to become members. This is because BRICS is not a talking forum like G-7. It makes bold political statements reflected in foreign policies of member countries, particularly the major ones. For instance, South Africa's indictment and condemnation of Israel for its genocide in Gaza has been followed up by filing a case in the International Court of Justice (ICJ) accusing Israel of having committed genocide. In the just concluded summit, the communiqué has condemned Israel in the most scathing language. This is a moral stand, there is nothing opportunistic or expedient about this gesture. Palestine after all is the victim of aggression and the proverbial underdog.
But the most significant outcome of the Kazan summit has been the progress on the alternative payment system to settle accounts among member countries for cross-border transactions using national currencies. If successful this will reduce the dependence on dollar by many countries. Practical demonstration was made at the summit about what has been called the 'BRICS Pay' system using a card and fixed code that would replace the Belgian SWIFT system of financial settlements among BRICS member countries. Russia is anxious to develop this system to overcome the strain on its economy imposed by a slew of sanctions by Western countries following its invasion of Ukraine. China not yet handicapped by sanctions would be keen to have an alternative system for settling international payments to feel free to pursue its geo-political interests without incurring any risk of being cut off from the Western- backed Swift payment system. Iran, admitted as a member last year along with Egypt, UAE and Ethiopia, would feel relieved if the BRICS Pay system becomes operational as its economy, too, is greatly handicapped by sanctions slapped by America and EU.
There has been talk among BRICS members and other countries about introduction and use of a new reserve currency as a substitute of US dollar to do away with the dependence on it which gives America the power to exercise control over global economy. The possibility of using Chinese yuan has been mooted at some length both within BRICs and outside of it. But so far nothing much has happened in this regard. However, some countries, including Russia have been settling payments with China using yuan and their national currencies on bilateral basis.
The New Development Bank set up by BRICS in 2015 with an authorised capital of $100 billion has got off with flying colours. Out of $100 billion authorised capital, $ 50 billion were initially paid up by the founding members of BRICS, the shares for equivalent amount divided equally among them. The bank has approved 80 projects and disbursed $30 billion as loans to the applicant countries. Among the recipient is Bangladesh which is implementing two projects with the loan received. The sectors given priority for investment with NDB loan are: transport; water and sanitation; clean energy; urban development; digital technology and social infrastructures. The bank enjoys triple-A rating.
Russia had called on fellow BRICS members to create an alternative to the IMF to counter political pressure from Western nations ahead of the Kazan summit. But apart from some discussion on the subject not much was achieved in this regard. But the goal of having a financial institution parallel to IMF with a similar role is very much on the cards as it was one of the objectives for setting up BRICS. Accounting for 37 per cent of global economy, the organisation can be expected to push ahead with the idea more seriously in future. Deterioration of relations between America and its Western allies and Russia and China will act as a spur to compete with all Western dominated institutions, particularly economic ones.
The foregoing review shows the international financial architecture changing, slowly but steadily. The Western-dominated part of the post- war financial architecture has been operating with circumspection, moving slowly, with reforms undertaken cautiously and after long intervals. More significantly, this part of the present global financial architecture continues to tilt more towards the Western interests of political economy, invoking criticism of having a political agenda. The emerging part of the global financial architecture initiated by Russia and China shows greater dynamism, whether in admitting new members or in respect of innovating new mechanisms for cross-border payment system. With geo-political conflicts becoming permanent and well entrenched, a bifurcated financial architecture looks set to be the norm. This will be of great advantage to developing and emerging countries as they will be able to navigate between both parts of the world order.
The obituary on the old global financial architecture may read: Here lies one cut off in the prime of life by hubris and domineering attitude of a partner drunk on power.
hasnat.hye5@gmail.com