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Cover Story

Prospects and Challenges

As the World Bank and the IMF hold their annual meetings in October, the former would be pressed to move into new activities. The most important change will be to provide funding to the developing world, including Pakistan.

By Shahid Javed Burki | October 2023


The members of the World Bank Group (WBG) and the International Monetary Finance (IMF) are meeting in Morocco in October 2023. The two institutions meet for their annual meetings two times in Washington; for the third year, they select a foreign site. This time, they had selected Morocco as the place to meet. However, Marrakech, the site for the meeting, was badly damaged by an earthquake. No new location had been chosen at the time of this writing. As discussed later in this short article, some significant initiatives are likely to be taken in the next annual meetings.

Initially, the international financial system was based on the agreement signed by 44 nations that gathered in 1944 at the Mount Washington Hotel in Bretton Woods, a resort in the northeastern American state of New Hampshire. The delegates discussed what they viewed as the most reasonable response to deal with the destruction that had resulted from the Second World War in which Germany and Italy in Europe and Japan in Asia had challenged the existing world order. Present at the meeting held in 1944 was the British economist John Maynard Keynes, who had studied the impact of the actions taken by the winning nations in the First World War to continue to punish those who had been defeated in what was then the most disastrous encounter among the world’s nations. Then, the approach was to continue with the punishment that had been inflicted on the nations that lost on the battlefield. They were required to pay reparations to those who had won to compensate them for the resources the latter had spent in conducting the war.

The result of this approach was to create extreme distress in the parts of Europe that had lost in the war. This distress led to the rise of extremism and nationalism in Germany and Italy, which eventually led to the Second World War. Keynes was anxious that this time, the victors would not continue to punish the losers but, instead, rebuild their economies. For that to be done, new institutions would be needed. The Bretton Woods agreement led to the establishment of two new institutions, the International Monetary Fund, the IMF, and the International Bank for Reconstruction and Development, the IBRD. The IBRD eventually became the WBG. These organizations became operational in 1945. There was to be a third institution to regulate international trade. However, it took half a century before the world nations could agree to the establishment of the World Trade Organization, the WTO. Regulation of trade remains a contentious issue even after the creation of the WTO.

The agreement establishing the IMF and the IBRD did not provide capital for their operations. Instead, a system was created that divided capital contributions by member nations into two parts. These were called the “paid-in capital” and “callable capital.” The first part was less than 10 per cent of the total. The second part was treated as a guarantee against possible default by the institutions of the amounts they had borrowed from the financial markets. This made it possible for international institutions to borrow at rates close to what the United States Treasury paid for raising funds. The amounts raised were then lent to the member countries at rates slightly higher than the institutions had paid to the markets. The addition was to cover the expenses for running the institutions. The United States committed the most.

While the IMF has changed relatively little since its creation, the IBRD was radically transformed into what is now called the WBG. The most significant change was the addition of three institutions to the original IBRD. The International Development Association, the IDA, was created to provide highly concessional development funds to low-income countries such as Pakistan. The International Finance Corporation, the IFC, was created to provide resources to the private sector. The Multilateral Guarantee Agency, the MIGA, was set up to provide guarantees to the private sector investing in developing countries.

Pakistan has been a member of the World Bank Group since 1950. Since it joined the cluster of institutions that go by the name of WBG, it has received $40 billion in total assistance.

Pakistan has been a member of the World Bank Group since 1950. Since it joined the cluster of institutions that go by the name of WBG, it has received $40 billion in total assistance. All the associated institutions that make up the WBG have been active in Pakistan, as was the case with the IMF. The World Bank’s initial focus was investing in large infrastructure projects. Indus Water Replacement Works, undertaken after the signing of the Indus Water Treaty in 1960, was the largest infrastructure building programme the Bank Group carried out not only in Pakistan but across the world. It involved the building of dams on the western rivers of the Indus Basin (the Indus, the Jhelum, and the Chenab) and moving the stored waters by large “link canals” into the eastern rivers (the Ravi, the Beas, and the Sutlej). The Bank undertook to raise the needed capital by putting its own into the Indus Basin Development Fund. The fund totaled $893.5 million – significantly less than Pakistan’s demand of $1.297 billion – but still representing a grant to Pakistan of $305.9 million. Part of the fund was a US loan of $235 million payable in Pakistani rupees and loans from the World Bank and the United States. The Bank’s effort saved South Asia from what could have been a destructive dispute.

In the 1980s, following a charged debate in the institution, the World Bank reduced its emphasis on the financing of large infrastructure projects. Instead, it turned its attention to policy reform in the countries with which it was engaged. The reforms advocated by the Bank were incorporated in what came to be called the “Washington Consensus.” One important element in this approach was to reduce the direct involvement of the state in development but to encourage the private sector to invest in activities that increased employment and thus helped people experiencing poverty. Pakistan is still a large recipient of financing from the International Development Association, the soft window of the WBG.

The WBG has added to its portfolio what it calls “program lending” to traditional project finance. The World Bank Group’s current programme in Pakistan is detailed in the Country Partnership Strategy for FY 2015-2020 with four priority areas of engagement: energy, private sector development, inclusion, and service development. The current WBG portfolio has 58 projects and a total commitment of $13.8 billion.

A good example of the comprehensive approach to the Bank’s involvement in Pakistan is the cluster of projects the institution’s board approved on March 10, 2022. For a total financing of $435 million, the Bank would undertake the implementation of three projects: the Pakistan Housing Finance Project, the Punjab Urban Land Systems Enhancement Project, and the Punjab Affordable Housing Program. Together, these projects will expand access to housing finance, particularly for low-income households, improve land tenure rights, and facilitate affordable housing developments in urban Punjab. Urban housing is in high demand in Pakistan; it is the most urbanized country in South Asia.

As the WBG and the IMF hold their annual meetings in October, the former would be pressed to move into new activities. The most important change will be to provide funding to the developing world – in particular those such as Pakistan, which are relatively poor and are facing the full negative impact of global warming. As Bono, the lead singer of the rock band U2, and Lawrence Summers, presently a professor at Harvard University who had served as U.S. treasury secretary from 1999 to 2001, suggested in an article published in the Washington Post, all international development banks should ramp up their resources. Loan guarantees that would cost the U.S. federal budget just $1 for every American would permit the World Bank to increase its lending by $15 billion. They would also like to see the contributions to IDA by rich donors to keep up with inflation. They also advocate IMF’s revamping its Resilience and Sustainability Trust, a new facility designed to help countries with constrained budgets tackle challenges like climate change.

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