The International Monetary Fund (IMF) & The World Bank Group

slide. 1IMF & World Bank | Abdul Basit Adeel | Political Science/Chair of International Relations
International Monetary Fund
& The World Bank Group
ABDUL BASIT ADEEL

Contents:
• Introduction
 Establishment
 IMF vs. World Bank – Fundamental difference
• IMF
 Basic structure, goals, mechanism etc.
• World Bank
 Basic structure, goals, mechanism etc.
• Case Study
 Argentina
• Conclusion
• Discussion

INTRODUCTION

Establishment:
• Established after WW II to rehabilitate global economy
• Bretton Wood Conference - 1944
• New instructional infrastructure for intl. economics
• Intern-state treaties
• New institutions
 IMF
 World Bank

IMF vs. World Bank:
• Common origin and similar structural features
• Different purposes, functioning and outcome

IMF vs. World Bank:
• International Monetary Fund
• Help states in dealing with balance of payment problems
• Short term loans of foreign currencies
 Generally followed dictation/change in policies to enable
monetary stability
• World Bank
• Long term loans for poverty/development related projects

IMF/WB and Member States:
• Member states have two level relationship that develops
• Whey they sign treaties
 Particular rights like participation in plenary bodies
 Obligations: financial contribution, compliance with terms
• When they borrow money
 Shaped by standard legal terms but more significance is of the
negotiation terms between that states and IMF/WB
 Virtually no authority of IMF/WB over non-borrowing members

IMF – Basics:
• Members:
• 186 member – 29 founding members as of 1945
• Main goal:
• To maintain stability of global monetary system
 By offering technical assistance
 By lending money to maintain balance of payments
• Key structure:
• A pool of $325 billons to borrow from

IMF - Functioning:
• At the time of establishment, two functions were defined:
1. Central coordinating mechanism for exchange rates
 Before this was relative to each other or gold
 Became obsolete after a shift of intl. economy to market
driven exchange rates since 1970s
+ Relevant article was amended to work
2. Create a fund based on forex reserves of member states
 Given as loans to states facing balance of payments deficits
 Still functioning

IMF – Membership Obligations:
• Collaborate with the fund for stable exchange rates
• Avoid manipulating exchange rates
• To accept periodic surveillance of domestic monetary
position and provide correct information about it
• States can refuse it if it is overwhelming – Argentina 2006
• To accept the conditions attached with the loan agreement

IMF – Organizational Structure:
1. Board of Governors:
• Decides on highest level policy questions
• Finance ministers or Central bankers of 186 states
• Power is delegated to the Executive Board
2. Directors of Executive Board:
• Reviews load request and deals with operational matters
• 24 members
 5 biggest contributor states – 19 states to represent others
+ Bigger economies / contributor’s vote have more weightage
• 85% majority is required to ratify decisions

IMF – How it works:
Repayment
Loan earns profit as well as brings economic stability
Surveillance
If country implementing the agreed policies then installments continue
Negotiations & Agreement
Country has to agree to conditions to improve her monetary stability
Balance of Payment Problem
Loan is given out on defined installments and conditions

IMF – Enforcement:
• No legal authority of IMF over states policies
• No legal power to punish the deviant states
• In the case of ineligibility:
 New installments may be stopped
• In the case non-compliance:
 States may not be able to use fund’s resources
 States may not be able to vote and asked to withdraw
 IMF may put political pressure – Argentina’s default, 2006
 However, this has never be practiced

IMF – In case of failed Enforcement:
 Sates use non-compliance/default as a tool of leverage
• Such behavior depends on the effective political power
• Almost half of IMF loan cases don’t meet the conditions
• What IMF does when a state defaults:
• Tries to pressurize the states via institutions & other states
• Threatens to denounce reputation and credit rating
• Tells that future loans will be based on current behaviors
 States are given waivers in criteria (sometimes repayment)
 Sometime conditions are renegotiated

World Bank – Basics:
• Members:
• 186 member – 1945
• Main goal:
• Assistance in development & reconstruction
 Aimed at European and Asian reconstruction after WWII
 After 1960s, development as a strategy against poverty
• Key structure:
• A pool of contributions worth $275b to borrow from
• $59b in loans and credits + self issued bonds to raise money

World Bank – Membership Obligations:
• Bank is a corporate partnership with shareholders
• Shares are proportionate to the investment made
• Members on joining purchase shares to for a lending fund
• Cannot be traded or used as collateral for sovereign borrowing
• 20% upfront paid in gold or USD, rest in various currencies
• Shares can fluctuate when currencies fluctuate
• USA, Japan, Germany, France, UK have highest shares
• Borrowers agree to the loan terms
• May include policy changes

World Bank – Organizational Structure:
• Similar to that of IMF
• Board of Governors
• Board of Executive Directors
 8 largest share holders – 16 region based representatives
• President
• Several Institutions under World Bank Group
• The original Intl. Bank for Development & Reconstruction
• International Finance Corporation (IFC)
 To finance private (non-governmental)development projects
• International Development Agency (IDA)
 Raises money from rich states to lend to poorest sates

World Bank – How it works:
Repayment
Takes profits on loans and returns the original money to the lenders
Lending & Agreement
Lends raised money for long terms, asks for multiple partners to diversify the risk
Capital
Raises money on collateral (fund) – borrows from private and state lenders
• Banks borrowing costs are much lower than states
• Has a good capital raising and payment history

World Bank – Enforcement:
• No legal authority like IMF over states policies
• No legal power to punish the deviant states
• Almost 50% projects continue for public good
• In the case of ineligibility & non-compliance:
 States may not be able to take further loans (it depends)
• A huge amount of money (30%) goes to corruption
• $100b out of $400b since 1946 has been stolen
 Violation of terms – Criminal Debt

• Never defaulted on a World Bank loan
• Gave the lenders a satisfaction
• Borrowed money from IMF and World Bank
• For infrastructure and economic development projects
• In 2001, they defaulted to foreign creditors
• Though they continued to pay back loans to IMF and
World Bank, it still made both institutions cautious
Case Study – Argentina:

• Since 1990s, Argentina has fixed exchange rate w.r.t. $
• Change in dollar brings change in local currency
• After increase in dollar, Argentinian currency increased
• Exports reduced and imports increased being cheap
 Caused trade and payments balance to collapse
• Foreign debts increased and country was not able to pay
• Financial Panic started
 Investors pulled their money, people ran to banks
 Dollar reserves wiped out
 Government had to put regulate money withdrawal

• New government came and halted foreign debt payments
• They negotiated new terms with IMF
 Only option with IMF as credit rating and reputation had
already declined
 IMF tarried to avoid an awkward situation that lender can be
controlled by the borrower in case of default
• Argentina regained stability
• Cost was massive devalued currency, 25% unemployment
and 50% population under poverty line
• Paid last repayment on January 2006

CONCLUSION

• Pros
• Both institution help fight economic destabilization
• Have strong intellectual base and well defined goals
• Make a global social system of immediate rescue
• Help in development and fighting poverty
• Cons:
• Loose legal framework – easily leveraged
• Undermine sovereignty of the borrowers
• Represent the inequality among states – financial & political
• Possibility of corruption, financial pressure on public
Conclusion:

The International Monetary Fund (IMF) & The World Bank Group

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