The South Asian region has already secured its place in the global trade, technology and other areas and is phenomenal in shaping the world direction.
Massive projects are being kicked off in the region though the ongoing civil conflicts in many countries, lack of clarity and harmony among the neighbouring countries have stymied the progress of economic development in the region. Despite having several multilateral treaties, the region is regrettably dismal compared to the other regions like EU and North America.
International Monetary Fund (IMF), IBRD (Commonly referred as World Bank) and other Western multilateral donor agencies currently hold dominant positions when it comes to areas like international finance and grants and these institutions still play a pivotal role in advocating the economic policies that must be adopted by the developing countries and dictating harsh terms as conditions for providing finance. More than 90% of the international loans, grants to developing countries are provided by these institutions.
It’s a well-known fact that countries like Sri Lanka are heavily burdened with these kinds of debts negotiated on stringent terms amounting to billions of dollars. These problems would not arise for countries like the US and in Western Europe and Japan particularly because the IMF, World Bank and other Western-led financial entities are the creations of these countries and are supposed to enforce the writ of their masters over the other countries.
One of the strong and acceptable criticisms against these institutions is that they do not possess a comprehensive understanding about the local environments, cultural backgrounds and the economic policies of the developing countries which heavily seek their support.
Further the catastrophic events of the advises and support given by those institutions were clearly evident in some global scale economic collapses such as the East Asian Financial crisis which erupted in the mid 1990s and caused heavy financial and other losses to countries like Thailand and Vietnam.
South Asia, particularly India and Pakistan are currently the home of large scale multinational banks with strong balance amounting to billions of dollars and even in Sri Lanka there are many banks with strong balance sheets which have been consecutively adjudged and ranked as the country’s best banks by prestigious financial magazines.
This situation implies that the time is ripe for governments in South Asia to collaborate to set up a multilateral regional financial institution with the involvement of the regional private and state sector banks. Both state and private sector major banks in each South Asian country can play a pivotal role in creating this institution by participating as equity participants to provide the authorized capital.
In order to secure the viability of the organization and to ensure that the original intended objectives of the organization do not drift away in the wake of profitability motive alone, governments of each country should take the steering of the organization by acting as founders.
Establishment of an organization of this kind would facilitate to providing of debt to the member countries in their local currency or a currency of another member country in contrast to US dollar or Euro denominated debt. Further the interest rate could be increased by some level than that would otherwise be charged on a USD or Euro denominated loan. The rate hike would not cause any financial trouble that can be arisen due to the fluctuations of the exchange rate for the borrowing country since the debt is repayable in their local currency or the currency of the initial loan obtained.
As a means of popularizing the institution’s name and to enhance its portfolio base, possibility of providing loans to the countries in other regions of the world, notably Sub-Saharan Africa, could be examined.
Such measure would not only salvage the countries which are in persistent grappling with poverty from the iron hands of the Western dominant financial institutions but will also facilitate to build inter-regional relationship in trade and other areas beyond the mere lender-borrower relationship.
As an alternative financial institution to the World bank and IMF, BRICS countries (Brazil, Russia, India, China and South Africa) have already set up an entity called BRICS bank and with a host of other ambitious targets, it plans to lend 10 billion dollars in the next five years and South Asia being closer politically and economically to the BRICS block of countries is in a better position to collaborate with BRICS bank.
Gradual shift of the global economic and political power from West to East would be a blessing to form a dedicated multilateral lending bank for South Asia and as such an entity could be immensely benefited by collaborating with China and other emerging nations who are rapidly becoming wealthier over their Western rivals.