IMF And world Bank

A brief note in IMF and world bank

1. Unit : 5: International Institution - By Prof. Rucha Thadeshwar Assistant Professor , SPKM Educational Campus, Jetpur

2. IMF

3. History of IMF The IMF has played a part in shaping the global economy since the end of World War II. Cooperation and reconstruction (1944–71) During the Great Depression of the 1930s, countries attempted to shore up their failing economies by sharply raising barriers to foreign trade, devaluing their currencies to compete against each other for export markets, and curtailing their citizens freedom to hold foreign exchange. These attempts proved to be self- defeating . World trade declined sharply, and employment and living standards plummeted in many countries.

4. The Bretton Woods agreement : The IMF was conceived in July 1944, when representatives of 45 countries meeting in the town of Bretton Woods, New Hampshire, U.S, agreed on a framework for international economic cooperation, to be established after the Second World War. They believed that such a framework was necessary to avoid a repetition of the disastrous economic policies that had contributed to the Great Depression. The IMF came into formal existence in December 1945, when its first 29 member countries signed its Articles of Agreement. It began operations on March 1, 1947. Later that year, France became the first country to borrow from the IMF.

5. Par value system – The countries that joined the IMF between 1945 and 1971 agreed to keep their exchange rates (the value of their currencies in terms of the U.S. dollar). This prevailed until 1971.

6. Membership The IMF currently has a near-global membership of 186 countries. To become a member, a country must apply and then be accepted by a majority of the existing members. Upon joining, each member of the IMF is assigned a quota, based broadly on its relative size in the world economy

7. Special Drawing Rights (SDR) SDR is an international reserve asset .It supplements members’ existing reserve assets – gold, forex . It is unit of account for IMF operations and transactions. The value of SDR is based on basket of major currencies used in IB Weights assigned show relative importance.

8. Subscriptions A member quota subscription determines the maximum amount of financial resources the member is obliged to provide to the IMF. A member must pay its subscription in full upon joining the IMF: up to 25 percent must be paid in the IMFs own currency, called Special Drawing Rights (SDRs) or widely accepted currencies (such as the dollar, the euro, the yen, or pound sterling), while the rest is paid in the members own currency.

9. Finances [Quotas]: The IMFs resources come mainly from the money that countries pay as their capital subscription when they become members . The larger a countrys economy -larger its quota tends to be. They also help determine how much countries can borrow from the IMF and their share in allocations of special drawing rights or SDRs Gold : The IMF holds a relatively large amount of gold among its assets, for reasons of financial soundness, also to meet unforeseen contingencies. The IMF holds 103.4 million ounces (3,217 metric tons) of gold, worth about $83 billion as of end-August 2009, making it the third-largest official holder of gold in the world .

10. Voting power The quota largely determines a members voting power in IMF decisions. Each IMF member has 250 basic votes plus one additional vote for each SDR 100,000 of quota . Access to financing: The amount of financing a member can obtain from the IMF (its access limit) is based on its quota.

11. Organization & Management Board of governance International monetary and financial committee Developmental committee The executive board Governor Usually FM or RBI govrenor Alternate governor

12. Functions of International Monetary Fund

13. 1. Exchange Stability: The first important function of IMF is to maintain exchange stability and thereby to discourage any fluctuations in the rate of exchange . The Fund ensures such stability by making necessary arrangements like enforcing declaration of par value of currency of all members in terms of gold or US dollar, enforcing devaluation criteria, up to 10 per cent or more by more information or by taking permission from IMF respectively , forbidding members to go in for multiple exchange rates and also to buy or sell gold at prices other than declared par value.

14. 2. Eliminating BOP Disequilibrium: The Fund is helping the member countries in eliminating or minimizing the short-period equilibrium of balance of payments either by selling or lending foreign currencies to the members. The Fund also helps its members towards removing the long period disequilibrium in their balance of payments . In case of fundamental changes in the economies of its members, the Fund can advise its members to change the par values of its currencies.

15. 3. Stabilize Economies: The IMF has an important function to advise the member countries on various economic and monetary matters and thereby to help stabilize their economies.

16. 4. Credit Facilities: IMF is maintaining various borrowing and credit facilities so as to help the member countries in correcting disequilibrium in their balance of payments. The Fund also charges interest from the borrowing countries on their credit.

17. These credit facilities include basic credit facility, extended fund facility for a period of 3 years, compensatory financing facility, buffer stock facility for helping the primary producing countries, supplementary financing facility, special oil facility, trust fund, structural adjustment facility etc

18. 5. Maintaining Balance Between Demand and Supply of Currencies : IMF is also entrusted with important function to maintain balance between demand and supply of various currencies . Accordingly the fund can declare a currency as scarce currency which is in great demand and can increase its supply by borrowing it from the country concerned or by purchasing the same currency in exchange of gold.

19. 6. Maintenance of Liquidity: T here is provision for the member countries to borrow from IMF by surrendering their own currencies in exchange. Again for according accumulation of less demand currencies with the Fund, the borrowing countries are directed to repurchase their own currencies by repaying its loans in convertible currencies.

20. 7. Technical Assistance: The IMF is also performing a useful function to provide technical assistance to the member countries. Such a technical assistance is given in two ways, firstly by granting the members countries the services of its specialists and experts and secondly by sending the outside experts . Moreover the Fund has also set up two specialized new departments: (a) Central Banking Services Department and (b) Fiscal affairs department for sending specialists to member countries so as to manage its central bank and also on fiscal management.

21. 8. Reducing Tariffs: The Fund also aims at reducing tariffs and other restrictions imposed on international trade by the member countries so as to cease restrictions of remittance of funds or to avoid discriminating practices.

22. 9. General Watch: The IMF is also keeping a general watch on the monetary and fiscal policies followed by the member countries to ensure no flouting of the provisions of the charter.

23. Failures Of International Monetary Fund

24. IMF has failed in respect of achieving the basic objectives of international exchange stability . Neither the Fund put any loan exchange fluctuations nor does it prevent competitive devaluation of currencies by its members. The Fund has followed discriminatory treatmen t in favour of certain members in its day to day functioning. It favours some Western countries and neglects the genuine interests of underdeveloped and backward countries. In respect of promoting international liquidity the Fund has found it difficult to meet the foreign exchange requirements of the members.   In respect of problems of long term disequilibrium in the balance of payments faced by different countries, the IMF can provide only short term credit facilities .

25. The IMF has also failed to tackle the problem of petro dollars . The Fund should have played an effective role in recycling the surpluses of OPEC countries towards the developmental purposes of developing countries. The IMF has also failed to remove the various restrictions of trade imposed by different countries. Accordingly, the most of the countries are making extensive use of the trade and exchange controls. In IMF affairs, the developing countries are having inadequate representation . Although developing countries of Asia, Africa and Latin America constitute about 90 per cent of the members of IMF but in reality these countries are having 38 per cent of the total voting power in various affairs of Fund.

26. As a result of following faulty and biased method of extending credit on the basis of quotas but not on the basis of need, the underdeveloped and developing countries are not getting adequate financial support from the IMF because of their small quotas. The rich member countries are maintaining larger quotas and thereby can influence the policies and decisions of the IMF easily. Therefore, the IMF has been branded as Rich Men’s Club because of their growing dominance. Finally, it has also been argued that IMF has been interfering or influencing the economic policies of poor and developing countries by putting various restrictions on them.

27. Introduction The World Bank was established in December 1945 at the United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire. It opened for business in June 1946 and helped in the reconstruction of nations devastated by World War II . Since 1960s the World Bank has shifted its focus from the advanced industrialized nations to developing third-world countries.

28. Capital Resources of World Bank: The initial authorized capital of the World Bank was $ 10,000 million, which was divided in 1 lakh shares of $ 1 lakh each. The authorized capital of the Bank has been increased from time to time with the approval of member countries. On June 30, 1996, the authorized capital of the Bank was $ 188 billion out of which $ 180.6 billion (96% of total authorized capital) was issued to member countries in the form of shares. Member countries repay the share amount to the World Bank in the following ways: 1. 2% of allotted share are repaid in gold, US dollar or Special Drawing Rights (SDR). 2. Every member country is free to repay 18% of its capital share in its own currency. 3. The remaining 80% share deposited by the member country only on demand by the World Bank.

29. Objectives: To provide long-run capital to member countries for economic reconstruction and development. To induce long-run capital investment for assuring Balance of Payments ( BoP ) equilibrium and balanced development of international trade. To provide guarantee for loans granted to small and large units and other projects of member countries. To ensure the implementation of development projects so as to bring about a smooth transference from a war-time to peace economy.

30. To promote capital investment in member countries by the following ways; (a) To provide guarantee on private loans or capital investment. (b) If private capital is not available even after providing guarantee, then IBRD provides loans for productive activities on considerate conditions.

31. Functions: 1 . World Bank provides various technical services to the member countries. For this purpose, the Bank has established “The Economic Development Institute” and a Staff College in Washington. 2. Bank can grant loans to a member country up to 20% of its share in the paid-up capital. 3. The quantities of loans, interest rate and terms and conditions are determined by the Bank itself .

32. 4. Generally, Bank grants loans for a particular project duly submitted to the Bank by the member country. 5. The debtor nation has to repay either in reserve currencies or in the currency in which the loan was sanctioned. 6. Bank also provides loan to private investors belonging to member countries on its own guarantee, but for this loan private investors have to seek prior permission from those counties where this amount will be collected.

33. Achievements of the World Bank

34. 1. General Progress : ( i)  The Bank’s membership has increased from the initial number of 30 countries to 68 countries in 1960 and to 151 countries in 1988. (ii)  The subscribed capital has increased from the initial amount of $ 10,000 million to $ 19,300 million in 1960 and further to $ 91,436 million in 1988. This increased capital has led to the expansion of the Bank’s lending capacity. (iii) In 1960, the Bank approved loans worth $ 659 million which went up to $ 14,762 million in 1988.

35. 2. Lending Operations: Till June, 1988, the IBRD has granted loans worth $155049 million . About 22% of the Banks aggregate lending is for energy, 21% for agriculture and rural development, 18% for transportation and communications and 10% for industry and small scale enterprises.

36. 3.   Loans for Reconstruction: In the initial years of its establishment, the World Bank’s loans were mainly directed to the European countries (whose economies were shattered during the World War II) for financing their programmes of reconstruction. The Bank provided loans worth about $ 5, 00 million for reconstruction purpose.

37. 4.   Traditional Development Loans Policy: The traditional development loan policy of the Bank has been to help the member nations to strengthen the foundations of their economies for rapid economic development. Therefore , the major portion of the Bank’s assistance has gone to finance infrastructure of the borrowing country.

38. 5.   New Loan Strategy: Recently the bank’s adoption of the new strategy of ‘development with justice’ has led to the following changes in the sectoral finance. The amount of agricultural loans has increased more rapidly than in any other sector. The bank now also takes interest in the activities of the development of rural areas such as ( a) spread of education among the rural people ; ( b) development of feeder roads in rural areas ; a (c) electrification of the villages.

39. The main features of the Bank’s assistance to the industrial sector are : (a) considerable increase in the direct lending to industries, particularly the public sector industries; ( b) more emphasis on the heavy industries like mining, steel, fertilisers , pulp and paper ; (c) greater attention to fertilisers projects for agricultural industrial development; ( d) greater emphasis on labour -intensive small scale industries and primary export-oriented industries ; and (e) support for development finance com­panies.