Title: 6' Global institutions: IMF and IBRD
16. Global institutions IMF and IBRD
- IMF and The World Bank different mandates
- IMF
- Proposes and evolution
- Activities
- Governance
- Financing the IMF
- The World Bank
- Composition
- Operations
- Governance
- Financing
- Conditionality
- Other parallel institutions the BIS, G10, G5/G7,
the EBRD. - Essay 13 Global Institutions IMF and the
World Bank Group
2 Institutions IMF and IBRD
- Readings
- www.IMF.org, and  http//www.worldbank.org/ ,
- Kahler, 1995, pp. 48-65
- Stiglitz, Joseph E. (2003), Globalisation and its
discontents, Norton, Chapter 8 and 9
31. IMF and The World Bank different mandates
- The IMF and the World Bank have different
mandates - Bretton Woods Conference established The World
Bank and the IMF. - The World Bank purpose was to help war-ravaged
countries rebuild. The earliest recipients of its
loans were the European countries and Japan. - By the early 1960s, these countries no longer
needed World Bank assistance, and its lending was
redirected to the newly independent and emerging
nations of Africa, Asia, Latin America, and the
Middle East - In the 1990s, assistance also went to transition
countries of Central and Eastern Europe.
41. IMF and The World Bank different mandates
- The IMF and the World Bank have different
mandates (Continuation) - IMF's focus is chiefly on macroeconomic issues
and the financial sector (it does not finance
projects), - The World Bank is concerned mainly with
longer-term development and poverty reduction. - Its loans finance infrastructure projects, the
reform of particular sectors of the economy, and
broader structural reforms. - Countries must join the IMF to be eligible for
World Bank membership.
52.i. IMF proposes
- The IMF's primary purpose is,
- to ensure the stability of the international
monetary systemthe system of exchange rates and
international payments that enables countries
(and their citizens) to buy goods and services
from each other. - IMFs What is the IMF, 2006, p.1
62.i. IMF rules
- Principal features and rules, distinguish
external and domestic policies as in GATT . - Mainly it constrain certain mutually harmful
external policies, in particular - Preventing competitive devaluation stable ERs,
- Preventing restrictions on current account
convertibility. - The idea of central policy coordination bargains
was NOT part of the Bretton Woods system. - Beginning of 1970s the IMF crumbled. IMF role in
subsequent episodes have been marginal.
72.i. IMF ER stability
- Between 1945 and 1971, countries agreed to keep
their exchange rates pegged to the US, at rates
that could be adjusted only to correct a
"fundamental disequilibrium" in the balance of
payments and only with the IMF's agreement. This
so called par value systemalso known as the
Bretton Woods systemprevailed until 1971, when
the U.S. government suspended the convertibility
of the U.S. dollar (and dollar reserves held by
other governments) into gold. - Since then, members are free to choose their own
ER regimes.
82.i. IMF evolution
- IMF had to adapt to global capital markets and
to, - Increased membership from initial 29 members to
the 184 members today, including LDCs (some
former colonies of European powers) and
transition economies (former communist countries
in Eastern Europe). - Many crisis (i) 1971, end of par value system to
present floating, (ii) 1970s, oil price shocks,
(iii) 1980s, Latin America debt crisis, (iv)
1990s, crises in the emerging financial markets
in Mexico and Asia, and (v) 2001, Argentina debt
default. - Prevailing poverty in the world.
92.i. IMF evolution to conditionality
- After 1971, as the IMF role on international
policy coordination waned, the IMF and the WB - have served as a means of integrating poorer
and newer members of the capitalist economy
rather than dealing with the coordination of
economic policies among industrialized
countries. Kahler, p 49
102.i. IMF evolution to conditionality
- After the 1970s, the IMF was able to mobilize
financial support for currencies in trouble and
adjustment programs. - Instrument of conditionality IMFs financial
assistance against specified domestic policy
changes. This involved negotiations and
monitoring of the stand-by arrangements. It deals
mainly with CA items, not items of capital
account. - By the 1990s the central role of the IMF was to
link financial support of the two institutions to
international oversight of LDCs domestic policy
regimes and the transition economies (K, p.49).
112.ii. IMF activities
- The IMF has essentially 3 activities, in order to
maintain stability and prevent crisis, - Surveillance monitoring national, global, and
regional economic and financial developments and
advising member countries on their economic
policies - Lending members hard currencies to support policy
programs designed to correct balance of payments
problems and - Offering technical assistance in its areas of
expertise, as well as training for government and
central bank officials.
122.ii. IMF surveillance
- Two forms (a) general surveillance of the world
economy published in the World Economic Outlook
and the International Capital Markets Report, (b)
surveillance of individual countries (Article
IV). - This is composed by
- Article IV consultations (IMF's Articles of
Agreement) regular comprehensive consultations
with individual member countries, with interim
discussions as needed. - IMF staff missions also often reach out beyond
their official interlocutors for discussions with
parliamentarians and representatives of business,
labour unions, and civil society. - A team visits the country and reports its
findings to IMF management and to IMF's member
countries, for discussion. A summary of the
Board's views is transmitted to the country's
government.
132.ii. IMF's surveillanceMain - macroeconomic and
financial sector policies
- In its oversight of member countries, the IMF
focuses on the following - macroeconomic policies relating to the
government's budget, the management of money and
credit, and the exchange rate - macroeconomic performancegovernment and consumer
spending, business investment, exports and
imports, output (GDP), employment, and inflation
142.ii. The IMF's surveillance Main
businessmacroeconomic and financial sector
policies
- Continuation
- balance of paymentsthat is, the balance of a
country's transactions with the rest of the
world - financial sector policies, including the
regulation and supervision of banks and other
financial institutions and - structural policies that affect macroeconomic
performance, such as those governing labour
markets, the energy sector, and trade.
152.ii. IMF Lending to countries in difficulty
- Any member country may turn to the IMF when it
looses creditworthiness in capital markets (or
loans become too expensive). - Technically, countries do not receive loans from
the IMFthey "purchase" foreign exchange from the
IMF's reserve assets, paying with their own
currency. The loan is considered repaid when the
borrower "repurchases" its currency from the IMF
in exchange for reserve assets.
162.ii. IMF Lending facilities
- Stand-By Arrangements are designed to deal mainly
with short-term balance of payments problems. The
IMF's largest loans fall into this category. In
1997, the IMF introduced the - Supplemental Reserve Facility, under which it can
quickly provide large loans with very short
maturities to countries going through a capital
account crisis.
172.ii. IMF Lending facilities
- The IMF introduced the Extended Fund Facility to
help countries address balance of payments
difficulties related partly to structural
problems that may take longer to correct than
macroeconomic imbalances. - Programs may then include measure to improve the
way markets and the supply side of the economy
function, such as tax and financial sector
reforms, privatisation of public enterprises, and
steps to make labour markets more flexible.
182.ii. IMF Lending facilities
- Under its Poverty Reduction and Growth Facility,
the IMF provides concessional loansloans with
low interest rate for 10 yearsto its poorest
member countries. The majority of the IMF's loans
now fall into this category. - In 2005, it approved the establishment of the
Exogenous Shocks Facility, under which it can
give LDCs (that are not receiving funds under the
Poverty Reduction and Growth Facility, and) that
are suffering a balance of payments problem
because of a shock beyond their control, quick
access to funds on a concessional basis.
192.ii. IMF Lending facilities
- The IMF also provides
- Emergency Assistance natural disasters, or
military conflicts causing B/P problems, - Trade Integration Mechanism B/P problems due to
trade liberalization
202.ii. IMF Lending instruments
- Two types of windows
- Most countries (except for the poorest) -
regular, non-concessional lending windows pay
market-related interest rates and service
charges, plus a refundable commitment fee. - Low-income countries borrowing under the Poverty
Reduction and Growth Facility pay a concessional
fixed interest rate of 0.5 percent a year. - The foreign exchange provided by the IMF is
subject to limits determined partly by a member's
quota in the IMF and is deposited with the
country's central bank to supplement its
international reserves.
212.ii. Technical assistance and training
- Objective to help improve the design and
implementation of members' economic policies,
including by strengthening skills in institutions
such as finance ministries and central banks. - It is provided for,
- central banking, monetary and exchange rate
policy, tax policy and administration, and
official statistics. - More than 75 percent of the IMF's technical
assistance goes to low-income and
lower-middle-income countries, particularly in
sub-Saharan Africa and Asia.
222.ii. IMF help for the very poor
- Most of the IMF's loans to low-income countries
are made on concessional terms, under the Poverty
Reduction and Growth Facility. - 2005 - Policy Support Instrument - the success of
a country's program is assessed by the IMF
against the goals set forth in the country's
poverty reduction strategy, - Debt relief efforts in 1996, the IMF and the WB
unveiled the Heavily Indebted Poor Countries
(HIPC) Initiative to faster debt relief. In
2005, the G-8 launched the Multilateral Debt
Relief Initiative (MDRI), which called for the
cancellation of the debts owed to several
organizations. - Poverty Reduction Strategy Paper (PRSP) process -
in 1999 the IMF and the World Bank introduced it.
232.ii. IMF help for the very poor
- Poverty Reduction Strategy Paper (PRSP) process -
in 1999 the IMF and the World Bank introduced it. - Aid for Trade - In 2005, the IMF and the World
Bank introduced the concept it includes
analysis, policy advice, and financial support.
The IMF provides advice to countries on such
issues as the modernization of customs
administration, tariff reform, and the
improvement of tax collection to compensate for
the loss of tariff revenues that may follow trade
liberalization. - The IMF also participates in the
- Integrated Framework for Trade-Related Technical
Assistance, a multi-agency, multi-donor program
that helps the least developed countries by
identifying impediments to their participation in
the global economy and coordinating technical
assistance from different sources.
242.iii. IMF governance
- The IMF is governed by, and is accountable to,
its member countries through its Board of
Governors. - There is one Governor from each member country,
typically the finance minister or central bank
governor. - The Governors usually meet once a year, in
September or October, at the Annual Meetings of
the IMF and the World Bank. - International Monetary and Financial Committee -
IMFC committee of Governors assessing key policy
issues related to the international monetary
system. - Development Committee - joint committee of the
Boards of Governors of the IMF and the World Bank
to advise and report to the Governors on
development policy and other matters of concern
to developing countries. - There are also the Executive Board see below.
252.iii. IMF governance executive board
- Composition 24 Executive Directors on the Board,
- 8 are appointed by single countriesthe IMF's 5
largest quota-holders (the United States, Japan,
Germany, France, and the United Kingdom) and
China, Russia, and Saudi Arabia. - 16 Executive Directors are elected for two-year
terms by groups of countries known as
"constituencies.
262.iii. IMF governance executive board
- Voting - weighted voting system - the larger a
country's quota in the IMFdetermined broadly by
its economic sizethe more votes the country has,
in addition to its "basic votes," of which each
member has an equal number. - Decisions are based on formal voting most
decisions are based on consensus. Shadow voting
is probably widespread so that the 8 countries
have more power than the others. - In the early 2000s, in response to changes in the
weight and role of countries in the world
economy, the IMF began to re-examine the
distribution of quotas and voting power to ensure
that all members are fairly represented.
272.iv. Financing the IMF
- Mostly financing come from quotas that countries
deposit when they join the IMF. Quotas depend on
size of each member's economy. For example, the
U.S. the world's largest economy, has the largest
quota in the IMF. - Countries deposit 25 of their quota
subscriptions in Special Drawing Rights or major
currencies, such as U.S. dollars or Japanese yen.
The IMF can call on the remainder, payable in the
member's own currency, to be made available for
lending as needed. - Quotas determine voting power, the amount of
financing members can borrow from the IMF and
share in SDR allocation.
282.iv. SDRs - Special Drawing Rights
- The SDR is the IMF's unit of account introduced
in 1969. - It is a supplementary international reserve asset
that member countries can add to their foreign
currency and gold reserves and use for payments
requiring foreign exchange. - It is a basket of four major currencies the
euro, Japanese yen, pound sterling, and U.S.
dollar. - It may be used between members, and with other
institutional organizations and with the IMF. - A number of other international and regional
organizations and international conventions use
it as a unit of account, or as the basis for a
unit of account.
292.iv. Financing the IMF
- Quotas finance most IMF loans.
- Exceptions,
- Loans under the Poverty Reduction and Growth
Facility, which are paid out of trust funds set
up by the IMF and some rich members. - The IMF may borrow from a number of its
financially strongest member countries to
supplement the resources available from its
quotas. - It also earns income from the interest charged
and fees levied on its loans as in any other
financial institution.
303.i. The World Bank
- Made up of two development institutions which are
owned by the 185 member countries - International Bank for Reconstruction and
Development (IBRD) (Hard window) - International Development Association (IDA) to
alleviate poverty. (Soft window) - The IBRD focuses on middle income and
creditworthy poor countries, while IDA focuses on
the poorest countries in the world. - They provide low-interest loans, interest-free
credit and grants to developing countries for
education, health, infrastructure, communications
and other purposes.
313.i. The World Bank Group the 5 institutions
- It is formed by the 2 development institutions of
The World Bank plus 3 affiliates, - The International Finance Corporation (IFC) - the
private sector arm of the Group. (Created in
1956) - Multilateral Investment Guarantee Agency (MIGA) -
's mission is to promote foreign direct
investment (FDI) into developing countries to
help support economic growth, reduce poverty, and
improve people's lives. (Created in 1988) - International Centre for Settlement of Investment
Disputes (ICSID) aim at facilitating the
settlement of investment disputes between
governments and foreign investors to promote
increased flows of international investment.
(Created in 1966)
323.ii. The World Bank Group operations
- Loans
- Through the IBRD and IDA, there are two basic
types of loans and credits investment loans and
development policy loans. Investment loans are
made to countries for goods, works and services
in support of economic and social development
projects in a broad range of economic and social
sectors. Development policy loans (formerly known
as adjustment loans) provide quick-disbursing
financing to support countries policy and
institutional reforms. These are based on
projects negotiated between the country and the
WB and involve some kind of conditionality. - Source web.worldbank.org
333.ii. The World Bank Group operations
- Grants
- Grants are designed to facilitate development
projects by encouraging innovation, co-operation
between organizations and local stakeholders
participation in projects. In recent years, IDA
grants have been used to - Relieve the debt burden of heavily indebted poor
countries - Improve sanitation and water supplies
- Support vaccination and immunization programs to
reduce the incidence of communicable diseases
like malaria - Combat the HIV/AIDS pandemic
- Support civil society organizations
- Create initiatives to cut the emission of
greenhouse gasses - Source web.worldbank.org
343.ii. The World Bank Group operations
- Analytic and Advisory Services
- Capacity Building
- Another core bank function is to increase the
capabilities of our own staff, our partners and
the people in developing countriesto help them
acquire the knowledge and skills they need to
provide technical assistance, improve government
performance and delivery of services, promote
economic growth and sustain poverty reduction
programs. - Source web.worldbank.org
353.iii. The World Bank Group governance
- Boards of Executive Directors are responsible for
conducting the day-to-day business of the World
Bank. - The Boards are composed of 24 Directors, who areÂ
appointed or elected by member countries or by
groups of countries, and the President, who
serves as its Chairman. - Regular meetings are usually held once or twice a
week. Other meetings are held at various other
times whenever required.
363.iv. The World Bank financing
- Primarily financed by selling AAA-rated bonds in
the world's financial markets. - (While IBRD earns a small margin on lending, the
greater proportion of its income comes from
lending out its own capital.) - Capital consists of reserves built up over the
years and money paid in from the bank's 184
member country shareholders. IBRDs income also
pays for World Bank operating expenses and has
contributed to IDA and debt relief. - IDA, the world's largest source of interest-free
loans and grant assistance to the poorest
countries, is replenished every three years by 40
donor countries. Additional funds are regenerated
through repayments of loan principal on
35-to-40-year, no-interest loans, which are then
available for re-lending. IDA accounts for nearly
40 of our lending.
374. Conditionality
- Reference
- The World Bank, 2005, Conditionality Revisited,
Overview, p.3-18. - IMFs financial assistance is conditional to
specified domestic policy changes. - This involved negotiations and monitoring of the
stand-by arrangements. - Criticisms to conditionality became widespread
after the debt crisis of the early 1980s.
384. Conditionality
- The initial approach was driven by a belief that
- Policy reforms could be made with aid money, and
- Freeing countries from restrictive barriers to
growth meant to implement economic liberalization
policies. - However, country specificity and country
ownership have been increasingly recognized as
key ingredients for successful policy-based
programs. - There is a broad consensus that domestic
ownership of a reform agenda is vital to its
success the legitimate way forward is for donors
to be actively involved in the policy dialogue
within the country.
395. Other institutions the BIS and the G10
- After the collapse of the BWs system (1970s)
there were 2 parallel organizations that gain an
increasing role on international monetary system
the Bank of International Settlements (BIS) and
the Group of 10. - The BIS, is a central bank club. It had an
important role in monetary integration in Europe. - G-10, collaboration of great powers in a system
of discretionary bargaining.
405. The BIS and the G10
- BIS 55 member countries (including the ECB)
- G-10 - composed of Benelux, Canada, France,
Germany, Italy, Japan, Sweden, Switzerland, the
U.K. and the USA. - The G-10 was replaced by the G-6 in 1975, later
G-7. Note that Benelux, Sweden and Switzerland do
not belong to G-7.
415. The BIS
- BIS is the oldest, surviving international
financial institution and it is still the
principal centre for international central bank
cooperation. - It was founded in 1930, to deal with
- Reparation payments imposed on Germany, after
WWI, - As a trustee for the international loans issued
to finance reparations, - Promote central bank cooperation in general.
425. The BIS
- Main activities meeting place for central banks
to foster monetary policy cooperation and
provider of banking services for central banks - Traditional" banking functions - for the central
bank community (eg gold and foreign exchange
transactions), and to trustee and agency
functions. - Agent for the European Payments Union (EPU,
1950-58), helping the European currencies restore
convertibility after the Second World War. - It has acted as the agent for various European
exchange rate arrangements, including the
European Monetary System (EMS, 1979-94) which
preceded the move to a single currency.
435. The BIS
- The BIS has also provided or organised emergency
financing to support the international monetary
system when needed. - 1931-33 financial crisis - it organised support
credits for both the Austrian and German central
banks. - 1960s - it arranged special support credits for
the French franc (1968), and two so-called Group
Arrangements (1966 and 1968) to support sterling.
- More recently, the BIS has provided finance in
the context of IMF-led stabilisation programmes
(eg for Mexico in 1982 and Brazil in 1998).
445. The BIS
- Global financial stability
- Growth and globalisation of financial markets
during the final decades of the 20th century
shaped the nature of central bank cooperation.
BIS has assisted the pursuit of global monetary
and financial stability in two main ways - By providing emergency financial assistance to
central banks in case of need and - By supporting experts from national central banks
and supervisory agencies in proposing measures
and developing standards aimed at strengthening
the international financial architecture, and in
particular international banking supervision.
455. Other institutions EBRD
- There are several development banks at regional
level, in most continents. Some hace
concessional loans available. - Examples Inter-American Development Banks or the
European Bank for Reconstruction and Development. - The EBRD was established in 1991 for helping
transition of former communist countries in
Europe and Central Asia for market economies.
465. Other institutions
- Two settings for discretionary bargaining emerged
in the 1970s and 1980s, - Initially the annual economic meetings of G-5
were essentially politicians-oriented, the
economic part was dealt by finance ministers. - In the 80s, a link was established between the
G-5/ G-7 summits and the surveillance system of
the IMF. This occurred already in the Plaza
Accord (1985) and afterwards. - The IMF became an informal secretariat to the
G-8 providing surveillance indicators but
excluded from foreign exchange market issues.
475. Other institutions
- Two settings for discretionary bargaining emerged
in the 1970s and 1980s, - Initially the annual economic meetings of G-5
were essentially politicians-oriented, the
economic part was dealt by finance ministers. - In the 80s, a link was established between the
G-5/ G-7 summits and the surveillance system of
the IMF. This occurred already in the Plaza
Accord (1985) and afterwards. - The IMF became an informal secretariat to the
G-8 providing surveillance indicators but
excluded from foreign exchange market issues.