AMITY GLOBAL

BUSINESS SCHOOL Bangalore

WORLD BANK & IMF

POOJA GUPTA
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International Monetary System

• Pre 1875 Bimetalism
• 1875-1914: Classical Gold Standard
• 1915-1944: Interwar Period
• 1945-1972: Bretton Woods System
• 1973-Present: Flexible (Hybrid) System
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Historical Background
• UN Bretton Woods Agreement – 1944
Created both the World Bank and IMF
• The World Bank arranges long term loans to
help developing countries
• The IMF was created to support orderly
international currency exchanges and to help
nations having balance of payment problems
through short term loans of cash
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Mission of IMF
• Achieve International Financial Stability and
Cooperation
 Keep sufficient cash reserves for each member nation
to avoid financial crises due to currency instability
• Promote Economic Growth
 Loan reserve assets to member nations that have
financial or balance of payments problems
 Advise member nations on Macroeconomic policy
issues such as interest rates and investment levels
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Scope of IMF
• Work with United Nations/World Bank
Members States
• Lend Money to Member Nations
• Set Currency Reserve Amounts (dues) for
Member Nations
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Membership of IMF
• United Nations Chartered
• 184 Member States
• Board of Governors (1 from Each State)
• Managing Director
• Executive Board (24 Members)
• Weighted Voting System
 US Representative holds 17% of total Voting Power
 27 Countries together hold 1.4% of total Voting Power
 Decisions are most often made by consensus, rather than
fractious parliamentary fights.
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Overview of IMF
• Historical Finances
 Began Operating with US$ 9 Billion Equivalent
 By the Early 1980’s the IMF had ~ US$50 Billion
 The IMF Today has US$265 Billion Equivalent
• Some Example Lending
 Belgium took first loan of US$50 Million in 1952 to bolster
currency reserves for their central bank
 Loaned US$36 Billion to Indonesia, Korea, and Thailand during
the Asian financial crises of 1997-1998
 Most recently, the IMF saved Argentina from defaulting on a
World Bank payment of US$1 Billion by arranging credit of an
additional US$2.98 Billion for transitional financial support to
prevent complete economic collapse.
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Overview of IMF
• Members pay IMF quota in Tradable Currencies
(Japanese Yen, U.K. Pounds, or U.S.
Dollars)
• National quotas are determined by size and
strength of member nations economy
• IMF Acct. Unit is SDR (Special Drawing Rights)
1 SDR roughly equivalent to US$1.37
• The IMF can also borrow funds to supplement
Reserves
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Role of IMF
The goals of the IMF are defined in Article 1 of the Articles
of Agreement in relatively broad terms, which over time
has allowed the IMF to adjust and readjust its role in the
constantly evolving economic world. The 5 primary goals
of the IMF are listed below:
• Facilitating the expansion and balanced growth of
International trade
• Promote exchange stability
• Assisting in the establishment of multilateral system of
payments
• Making its resources available to members experiencing
balance of payment difficulties
• Promoting international monetary cooperation
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Functions of IMF
• 1) Surveillance
• 2) Conditional Financial Support
• 3) Technical Assistance
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Surveillance
• “The appraisal of a country’s economic
and structural policies and performance
from an international standpoint. It is a
regulatory or jurisdictional function, which
historically has been focused on the
assessment of the exchange
arrangements, the exchange rates and
balance of payments.”
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Surveillance
• The Surveillance process is very complex
because of the:
– Interconnectedness of foreign and domestic economic
policy
– Economic Interdependence among countries
– Political and social consequences of some of the
sensitive economic decisions
• Why is IMF Surveillance important?
– Globalized economy; economic and financial policies
of one country may affect many others
– It is important to have an “external” overseer to advert
financial crises, which often spread from one
originating country.
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Conditional Financial Support

• “Provide short term loans (1 to 5 years)
to countries experiencing balance of
payments problems so that they can
restore conditions for sustainable
economic growth conditional upon
policies and procedures developed by
the fund to govern the access to and
the use of its resource by member
countries.”
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Conditional Financial Support

• Which Countries Qualify for Financial Assistance?
• IMF lending aims to provide breathing room for countries experiencing some
type of short-term economic crisis, so that it can restore conditions which
promote strong economic growth. These economic crisis's may be onset by
one or a number of the following:
– Inflation or Hyperinflation - Drought - Political Unrest
• The IMF is also working to reduce poverty in poor countries around the
world, both by themselves and in cooperation with the World Bank. The IMF
provides financial support through its conditional lending facility.
• -The Poverty Reduction and Growth Facility (PRGF)
• -The Heavily Indebted Poor Countries (HIPC) Initiative.
• A series of adjustment policies and reforms are implemented which is
intended to solve their balance of payments crisis. (country is spending
more then it is taking in or running a deficit)
• The policies and reforms implemented will vary; based upon the specific
countries needs and requirements.
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Technical Assistance
• “The IMF’s goal for its technical
support “...is to contribute to the
development of the productive
resources of member countries by
enhancing the effectiveness of
economic policy and financial policy.”
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Technical Assistance
• The IMF provides technical assistance in its areas of
expertise, which include fiscal policy, monetary policy,
and macroeconomic and financial statistics
• Assistance is normally provided free of charge for its
member countries.
• About three-quarters of IMF technical assistance goes to
low and lower-middle income countries. The Sub-
Saharan African countries were the largest beneficiary of
technical assistance in 2003, and one must assume will
continue to be.
• The IMF attaches great importance to country
ownership. The recipient country is fully involved in the
entire process of technical assistance, from identification
of need, to implementation, monitoring, and evaluation.
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Special Drawing Rights

• International reserve asset created by IMF in
1969
• Includes official holdings of gold, foreign
exchange and reserve position
• Serves as unit of account for IMF operations
• Value of SDR is determined on daily basis
based on basket of major international
currencies
• Used in voluntary transfers and discharging
financial obligations
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WORLD BANK
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Introduction
• In 1944 at Bretton Woods in New Hampshire it
was agreed to organise the world economy
around three cornerstones and the WORLD
BANK came into existence.
• It is also known as the International Bank for
Reconstruction and Development (IBRD)
• Currently 182 countries are members of the IMF
and the World Bank.
• It was developed to aid the task of
reconstruction of the war ravaged economies of
Europe and the development of the
underdeveloped countries.
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• The World Bank decided to shift its focus towards the
poorer countries – The International Development
Association (IDA) was formed.

• While IBRD provides loans on commercial terms to

borrowing governments or to private enterprises that have
obtained government guarantee, IDA provides loans on
concessional terms to countries.

• These favorable terms involve repayment periods several

times longer than those of IBRD and are interest free.
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•
Functions of WB
To assist in the reconstruction and development of the
territories of its members by facilitating the investment of
capital for productive purposes.

• To promote the long ranged balanced growth of international

trade and the maintenance of equilibrium in the balance of
payments by encouraging international investments.

• To encourage loans made or guaranteed so that more useful

and urgent projects, large or small alike, will be dealt with
first.

• To Conduct its operations so as to bring about a smooth

transition from a war-time economy to a peace-time
economy.
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Activities
• The World Bank policies remained microeconomic in
nature till 1970’s.

• For two decades a major part of the World Bank

activities was limited to the reconstruction related to
energy and transportation.

• The returns on infrastructural investment was very low

so the investment activities were shifted towards
agricultural and industrial sectors.
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• A change in its activities was brought about by its then

President Robert Mcnamara as he pledged the Bank to
make a concerted attack on rural poverty

• The successive Presidents have also reiterated the

Bank’s commitment to helping the poor.

• The other range of services provided by the World Bank

include technical support, research, public provision of
information and statistics and co-operative ventures with
other non-profit institutions.
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Comparison
IMF WORLD BANK
 Oversees the  Seeks to promote the
international monetary economic development
system and promotes and structural reform in
international monetary developing countries.
cooperation.
 Promotes exchange Assists developing
stability and orderly countries through long
exchange relations term financing of
among its members. development projects.
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 Supplements the reserves  Stimulates private

of its members by allocating enterprise in developing
SDRs if there is a long term countries through its affiliate,
global need. the International Finance
Corporation (IFC)

 Draws its finance  Acquires most of its

resources principally from finance resources by
the quota subscriptions of its borrowing on the
members. international bond market.
 CRITICAL
AMITY GLOBAL EVALUATION OF IMF
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AND WORLD BANK
 Conditionalities laid down by the IMF for its structural
adjustments loans, has caused debate and bitterness
among the recipient developing countries.

 Conditionalities are imposed without taking into account the

country specificities and country differences.

 IMF has been criticised for serving the needs of global

finance, rather than the needs of global stability, by financial
liberalisation.
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 Many of the policies adopted by the IMF has caused

global instability.

 The World Bank’s approach is “one-size-fits-all” approach,

i.e., it does not take into account the difference in the
economic situation of different countries.

 Many infrastructural projects finance by the World Bank

have social and environmental implications for the
population in the affected areas and ethical issues of
funding such projects.