Finance

Abstract (Pakistan’s financial services sector has undergone over two decades of radical reforms and liberalization supported by diverse international financial institutions. The result is a sophisticated regulatory framework comprising a modern suite of legal instruments and well-resourced institutions for rulemaking and supervision. Remarkably, the new instruments seek to address both modern Western and Islamic concerns, thus expanding the reach not only of the framework but also of the sector itself to those wishing to closely honour religious requirements. One of the key elements of reform over the past twenty-five years has been the opening of the Pakistani financial services sector to foreign services providers. Pakistan encourages eligible foreign banks and banking services to enter the Pakistani market; there is no indication that the Ministry of Commerce or the SECP have, formally or otherwise, limited the access of insurance or other financial services providers to Pakistan. Financial services trade is about the integration of the domestic economy into the global marketplace. With new modes of financial services delivery, many distinctions between domestic service provision and financial services trade are breaking down, making the modernization of the financial services trade framework both timely and essential. Pakistan’s WTO Schedule of Specific Commitments (SoC) reflected a set of circumstances that no longer represent what appears to be a vibrant private sector-driven financial services sector in today’s Pakistan. In the light of the complex, ambitious, and wide-ranging reforms already undertaken in Pakistan, this might well be an opportune moment for Pakistan to crystallize the momentum through additional commitments. Recommendation One: inscribe the full range of financial services and service providers in the SoC. Recommendation two: reduce “unbound” commitments to those necessary for protective reasons. Recommendation three: ensure that any terms and limitations are narrowly constructed to reflect real necessary derogations essential to achieve defined objectives. Recommendation four: indicate a comprehensive review of the SoC in the course of Pakistan’s Trade Policy Review. – Author)   Introduction The financial services sector is the backbone of a modern trading economy.1 As multiple crises in the past quarter century have demonstrated, it is also the most sensitive conduit for the transmission of systemic shocks, both domestically and internationally. By some estimates, financial services comprise the most heavily regulated sector in most economies; at any rate, the sector is subject to complex and sophisticated regulation and ongoing supervision that at once protect it and its participants and render it difficult to navigate even by the most adept. Financial services trade is about the integration of the domestic economy into the global marketplace. It enables banks to diversify their portfolios.2 It helps domestic insurance companies gain added resilience by purchasing reinsurance from abroad. It allows domestic investors to hedge against wild movements in currency and the domestic economy. It helps the banking sector to reduce its risk exposure.3 It opens up new investment avenues for much needed infrastructure spending.4 It enhances the capacity of domestic industry to raise funds or credit.5 Liberalized financial services trade empowers domestic pension plans to benefit from external expert advice and management services. It helps ease international payments and transfers, for both consumers and trading enterprises; in this way, it also encourages tourism, education, health services, and other sectors of the economy that depend on international transactions and engagements. It could serve as a competitive catalyst for the flow of credit to underserved sectors, such as SMEs.6 By freeing up credit pressure elsewhere in the economy it could help ease housing finance,7 especially to lower income Pakistanis.8 Full integration with the global economy and enhancing competitive pressures could reduce both transaction costs and risks of settlement and fraud,9 and encourage more engagement by retailers and consumers alike in a cashless digital economy. With new modes of financial services delivery – as indeed recognized by the State Bank of Pakistan in its most recent communication on digital bank licensing10 – many of the distinctions between domestic service provision and financial services trade may well be breaking down, making the modernization of the financial services trade framework even more timely – and essential. For Members of the WTO, trade in services, including in financial services, is governed by the General Agreement on Trade in Services (GATS). The GATS gives considerable latitude to Members in liberalizing trade in services.11 And a Member may liberalize its services sector unilaterally, even if it has not made any commitments under the GATS.12 Making commitments serves three strategic objectives: In liberalized sectors, foreign actors will have a secure framework within which to make services offerings and investments in the domestic market. Domestic actors will have a concrete competitive framework within which to function. Political decision-makers will have an outside limit on future trade-restrictive measures, thus enhancing regulatory stability and reducing the public choice risks. In this way, treaty-based engagements in the multilateral context of the WTO have the potential to limit the frequency – or, at least, the amplitude – of what the IMF has recently described in the context of Pakistan as “a long history of stop-and-go economic policies”13 and “lackluster progress in structural reforms.”14 This paper sets out Pakistan’s financial services commitments under the World Trade Organization, examines Pakistan’s financial services regulatory framework, and analyses reform options in the context of Pakistan’s existing and potential future international trade commitments.   PAKISTAN’S SERVICES COMMITMENTS UNDER THE WTO The structure of the General Agreement on Trade in Services The General Agreement on Trade in Services (GATS) comprises the set of rights and obligations under the WTO Agreement applicable to “measures by Members affecting trade in services.”15 The GATS defines trade in services as the supply of a service in four “modes.”16 As set out on the website of the WTO. These are: “[Mode 1] Cross-border supply is defined to cover services flows from the territory of one member into the territory of another member (e.g. banking or architectural services transmitted via telecommunications or mail); [Mode 2] Consumption abroad refers to situations where a service consumer (e.g. tourist or patient) moves into