Chapter three

International monetary fund and financial institutions

The IMF: Origin and development
 As trade and the level of international financial transactions have
increased, the need to cooperate internationally to facilitate and
stabilize the flow of dollar, makes yen, pounds and other
currencies has become vital.
 The formations of the IMF stemmed in the part for the belief of
many analyses that the great depression of the 1930’s and WWII
were both partly caused by the near chaotic international
monetary fund scene that characterized the years b/n 1919-1930.
 The International Monetary Fund (IMF) is an international
organization headquartered in Washington, D.C., of "189
countries working to foster global monetary cooperation, secure
financial stability, facilitate international trade, promote high
employment and sustainable economic growth, and reduce
 Formed in 1944 at the Bretton Woods Conference primarily by
the ideas of Harry Dexter White and John Maynard Keynes, it
came into formal existence in 1945 with 29 member countries
and the goal of reconstructing the international payment system.
 It now plays a central role in the management of
balance of payments difficulties and international financial
crises.
 Countries contribute funds to a pool through a quota system from
which countries experiencing balance of payments problems can
borrow money.
 As part of post war planning the allies met in 1944 at Bretton
woods, New Hampshire to establish a new monetary order. The
Bretton woods system operated on the basis of fixed
convertibility in to gold. The system relied on the strength of the
U.S. dollar which was set at ret of $35per ounce of gold.
 The delegate at Bretton woods also established the IMF and
others several institutions to help promote and regulate the world
economy. Thus like GATT the IMF was created by the west with
the united states in the lead as part of the liberalization of
international economic exchange.
 The Bretton woods system worked reasonably well as long as
American economy was strong international confidence in its
remained high and countries accepted and held dollars on a basis
of their being as good as gold.
 History of the IMF
 The IMF has completely reshaped the global economy and
redefined the ways in which countries trade with and take loans
from other countries.
 The IMF was first conceived at a UN conference in 1944, among
the 44 attending countries, before it was officially created in
1945.
 These countries wanted to globally stabilize exchange rates and
financial communication between countries, especially following
the disastrous Great Depression and World War II.
 Goals included international cooperation and trade, the reduction
of poverty and financial crises, and economic growth.
 Although the Fund has evolved over the years to become what it
is today and adapt to changing times, it still operates around the
same guiding principles.
 IMF was established in 1944 under the Bretton woods system &
was created formally in the 1945 by 29 member countries, just
after the WWII which was due to the reconstructions of the
international payment system.
 there was contribution through a quota system from which
countries with payment imbalance deficit can borrow money or
funds temporarily to pay countries, they owe as well as stabilize
their economy or funds and through this means they were able to
achieve financial stability of member countries, faster global
monetary operations, facilitate international trade and reduce
poverty there by improving sustainable economic growth of
other countries, which was the initial goals as to why there were
created and formed in the first place.
 Furthermore, over the years IMF grew strong due the fall of
Berlin in 1989 the Soviet Union also collapsed in the 1991, IMF
become a universal institutions and member countries grow from
 it was understood before that the role of the IMF was to oversea
the fixed exchange rates of arrangement between countries thus
helping countries to facilitates and national government can
manage exchange rates and economic crisis in their Owen
countries, then it grow more active and policies were made
which were guideline as to ensuring an economic recovery in
both countries and member countries.
 The IMF played a large role in the economic re-
structuralization of the post-World War II world.
 After the war, some countries were in economic distress, and
others were reluctant to trade with certain countries after the
fighting.
 The Fund helped smooth over the economic post-war transition
period and re-stabilize the global economy so it could move
toward prosperity, using systems such as fixed exchange rates.
 Generally, IMF can be expressed international organization
that promote global monetary stability and promote exchange.
 It also facilitates the balance, growth and expansion of
international trade and assistance in the establishment of
multilateral system payment and lends funds to countries with
balance of payments.
 IMF was created to support orderly international currency
exchanges and to help nations having balance of payment
through short term loans of cash.
The IMF was created
 to promote international monetary cooperation;
 to facilitate the expansion and balanced growth of international
trade;
 to promote exchange stability;
 to assist in the establishment of a multilateral system of payments;
 to make its general resources temporarily available to its members
experiencing balance of payments difficulties under adequate
safeguards; and
 to shorten the duration and lessen the degree of disequilibrium in
the international balances of payments of members.
 to maintain currency stability and develop world trade. It does this
largely through the provision of support and advice to countries in
difficulty.
 For example, the IMF has been a key institution in the attempts to
achieve economic stability after the debt crises of the 1980s and
1990s.
In short IMF has the objectives of:-
 To promote international economic cooperation
 To reinstate and promote international trade
 Reduce unemployment
 Exchange rate stability;- including making financial resources
were available to members countries so that their reading to meet
balance payments was considered and attend to and its
headquartered presently in Washington dc U.S.
 To facilitate the expansion and balance of growth of international
trade
 To promote exchange rate stability
 To make its resources available to its members who are
experiencing in Bop problem
 To establish a multilateral system of payments
 Membership to IMF
 The IMF currently has near global membership of 186 countries.
To become a member must apply and then be accepted by a
majority of the existing members.
 Upon joining each members of the IMF is assigned a quota based
broadly on its relative size in the world economy.
Conditionality of IMF
 Most loans granted by the IMF to LDCs are subjected to
conditionality.
 Foreign banks and other sources of external funding also bases
their decision on the degree to which an applicant country has
met the IMF terms.
 Since the Second World War, the International Monetary Fund
has provided loans to governments facing economic crises.
 The loans have come to be known as structural adjustment
loans because they aim to help borrowing governments adjust the
structure of economic activity.
 The presence of the IMF as an international lending institution
continues to evolve with the changing conditions of
globalization. Most recently the IMF has begun to focus its
policy-making strategies to incorporate poverty reduction
policies in addition to creating economic stability.
 The IMF conditions press the LDCs to move towards a capitalist
economy by such steps as;-
 Privatizing state –run enterprise
 Reducing barriers to trade and to the flow of capital thus
promoting foreign ownership of domestic business)
 Reducing domestic program in order to cut government budget
deficit
 Ending domestic subsidies or law that artificially suppress prices
 Devaluating currencies( which increases exports and make
imports more expensive)
 IMF lends to its member countries ensuring that members are
pursuing policies that will improves external payment problems
 Commitment to implement corrective measures
 To reply in a timely manner
 Polices of IMF
 The IMF monitors the country’s economic policies to identify
weaknesses that could cause financial or economic instability.
 This process is known as surveillance.
 That were created initially by the IMF to guide and see to the
success of each members states countries economic growth yet to
benefits up member ships and world trade were;-
1. To encourage monetary cooperation which then provide
countries to be equipped and give access to consultations to
both domestic and international monetary crisis.
2. To promote economic growth, stability and increase in their
financial in flows and market output in the international market
giving rise to stable exchange rates and arrangement so as to
avoid depression in competitive exchange with member
countries.
3. To promote multilateral agreement and systems of payments
between member countries so as to eliminate foreign exchange
restrictions thereby increasing world trade, increasing
employments and the productivity of such member countries
are resource full to themselves and their economic policy are as
such able to with stand crises that might arise in the future
events.
4. To make available temporary funds and loans to member
5. To give rights as to how and what quota are assigned to each
membership and subscriptions of such quotas will be determined
by broad of governors which will not be more than five years of
general reviews as to appropriate adjustment of such quotas of
each members concerned.
6. To ensure a sustainable economic growth exchange of goods
and services on the international market are favorable and
acceptable so as to encourage continuity in the development of
each member country.
7. Each member countries have rights to borrow or lends and
payments charge obligate to them provided they give sufficient
reason as to what such fund will be used for and to what benefits
their economic status change will be after such fund or loans
specified was give and to the purposed, it was used which must
fall under such guide line.
 Roles of IMF
 The IMF began operations in1944 with 44 member countries.
Since then the IMF has grown steadily and in 2004 member ships
stood at 184.
 Indeed, about the only country not in the IMF are those few that
don’t have their Owen currency and have adopted the currency of
large members.
 The IMF headquarters in Washington DC.
 The managing director of the IMF since 2000 is Horst Kohler a
Germen and former president of the European bank for
reconstruction and developments.
 In short IMF has the role of;-
1. Promote researches in various areas of the international
economic and monetary economics.
2. Provides a forum for discussion and consultations among
member countries. Being in the centers of competence
3. Focusing on its core macro-economic and financial areas of
responsibility
4. Working in a complementary fashion with other institutions
established
The problem IMF
 There are three problem of IMF
1. Economic order and peace
2. Reconstruction of economic
3. Stable world piece
 Failure of the IMF
 As we know that IMF is an institutions that helps in giving loans
to countries to foster and help in building their economic status.
 the conditions of loans of the IMF to both countries and members
countries have made it impossible for countries in a way to
upgrade their financial status low, Because loans conditions
implemented are based on some economic policies which are;-
1. Structural adjustments like privatizations of governments or
public sector, to become privet sectors deregulations and
bureaucracy
2. Allowing faille firms to get bankrupt
3. Higher interest rates to stabilize the currency
4. Reducing the governments from borrowing thereby increasing
taxations and reducing spending
 Collaborating with other institutions
 The IMF collaborations with
1. The world bank
2. The regional developments bank
3. The world trade organizations
4. UN agencies
5. Other international bodies
 Quotas and Voting
 On joining the IMF, each member country contributes a
certain sum of money called a quota subscription, as a sort
of credit union deposit.
 SDR(Special Drawing Rights)- IMF’s special assets
allocated periodically by IMF
 The quota of SDR is determined by the voting power of the
members States which in turn based on wealth and economic
performance.
 The Board of Governors, the highest decision-making body of the
IMF, consists of one governor and one alternate governor for each
member country.
 The governor is appointed by the member country and is usually the
minister of finance or the governor of the central bank.
 All powers of the IMF are vested in the Board of Governors.
 The Board of Governors may delegate to the Executive Board all
except certain reserved powers.
 The Board of Governors normally meets once a year.
 Managing Director
 The IMF is led by a managing director, who is head of the staff
and serves as Chairman of the Executive Board.
 The managing director is assisted by a First Deputy managing
director and three other Deputy Managing Directors.
 Historically the IMF's managing director has been European and
the president of the World Bank has been from the United States.
 However, this standard is increasingly being questioned and
competition for these two posts may soon open up to include
other qualified candidates from any part of the world.
 In 2011 the world's largest developing countries, the
BRICS nations, issued a statement declaring that the tradition of
appointing a European as managing director undermined the
legitimacy of the IMF and called for the appointment to be merit-
based.
 Assistances provided by IMF
 Technical Assistances : experts and technical support to
member states in d/t areas include
o The design and implementation of fiscal and monetary policy
o Institution-building
o The handling and accounting of transactions with IMF
o The collection and refinement of statistical data
o Training of officials and experts
 Financial Assistance
o Includes credits and loans extended by the IMF to member
countries which are temporary problems of balance of
payments, loss of market confidence, crisis, etc..
 IMF uses balance of payment of a country to evaluate country’s
stability of economy.
 Balance of Payments, relationship between the amount of
money a nation spends abroad and the income it receives from
other nations.
 nation's debits and credits: the difference between the amount
paid by a national government to other countries and the amount
it receives from them
 The balance of payments is officially known as the Statement of
International Transactions and includes two main accounts.
Current account and capital account.
 the balance of payments is one reflection of a nation's financial
stability in the world market, the International Monetary Fund
(IMF) uses these accounts to make decisions such as qualifying a
country for a loan.
 The IMF also provides the information to its members so that
 The World Bank
 Originally created primarily to finance the reconstruction of war-
torn Europe, the World Bank has become the primary financier of
development projects in the Third World.
 It has also become the Third World's largest creditor.
 Together the countries of the Third World owe the World Bank
more than US$160 billion.
 The World Bank is currently the largest multi-national lending
and technical agency dealing with Third World development.
 As the world's leading development agency, the World Bank has
a wide-ranging mandate, from consolidating loans for large-scale
development projects to providing structural adjustment loans
and sectorial adjustment loans to developing countries
experiencing balance of payments problems.
 The World Bank was created at the Bretton woods in the 1944 to
lend to European countries to help them rebuilding after World
War II.
 It was the world’s first multilateral development bank, and was
funded through the sale of world bonds. Its first loans were to
French and to other European countries, but soon lent money to
Chile, Mexico and Indian to build power plants and rail way.
 By 1975, the bank also lent money to countries to help with
family planning, pollution control and environmentalism.
 After great depression in the 1930’s there was a need for an
organization to create a system for exchange rate stability
because there was uncertainty of the value of the paper money
and countries began cheating other countries in trade.
 The president of the World Bank is, traditionally, an American.
 The World Bank and the IMF are both based in Washington,
D.C., and work closely with each other.
 The Gold Room at the Mount Washington Hotel where the
International Monetary Fund and World Bank were established.
 Although many countries were represented at the Bretton Woods
Conference, the United States and United Kingdom were the
most powerful in attendance and dominated the negotiations.
 an international financial institution that provides leveraged loans
to developing countries for capital programs.
 The World Bank has a stated goal of reducing poverty.
 The World Bank differs from the World Bank Group, in that the
World Bank comprises only two institutions:
 the International Bank for Reconstruction and Development (IBRD)
and
 the International Development Association (IDA),
 whereas the latter incorporates these two in addition to three more:
 International Finance Corporation (IFC),
 Multilateral Investment Guarantee Agency (MIGA), and
 International Centre for Settlement of Investment Disputes
(ICSID).
Structure of the World Bank
 The World Bank is like a cooperative, made up of 188 member countries.
 These member countries, or shareholders, are represented by a
Board of Governors, who is the ultimate policymakers at the World Bank.
 Generally, the governors are member countries' ministers of finance or
ministers of development.
 They meet once a year at the Annual Meetings of the Boards of
Governors of the World Bank Group and the Fund.
 The governors delegate specific duties to 25 Executive Directors, who
work on-site at the Bank. The five largest shareholders, France,
Germany,Japan, the United Kingdom and the United States appoint an
executive director, while other member countries are represented by 20
elected executive directors.
 World Bank Group President Jim Yong Kim chairs meetings of the
Boards of Directors and is responsible for overall management of the
Bank.
 The President is selected by the Board of Executive Directors for a five-
 The Executive Directors make up the Boards of Directors of the
World Bank.
 They normally meet at least twice a week to oversee the Bank's
business, including approval of loans and guarantees, new
policies, the administrative budget, country assistance strategies
and borrowing and financial decisions.
 The World Bank operates day-to-day under the leadership and
direction of the president, management and senior staff, and the
vice presidents in charge of regions, sectors, networks and
functions.
 Major Role of World Banks
1. Poverty reduction
 For the poorest developing countries in the world, the bank's
assistance plans are based on poverty reduction strategies; by
combining a cross-section of local groups with an extensive
analysis of the country's financial and economic situation the
World Bank develops a strategy pertaining uniquely to the
country in question.
2. Global Partnerships and Initiatives
 The World Bank has been assigned temporary management
responsibility of the Clean Technology Fund (CTF), focused on
making renewable energy cost-competitive with coal-fired power
as quickly as possible. Together with the WHO, the World Bank
administers the International Health Partnership (IHP+).
 3. Climate change
 World Bank Group President Jim Yong Kim (2012 said: "Climate
change is one of the single biggest challenges facing
development, and we need to assume the moral responsibility to
take action on behalf of future generations, especially the
poorest.
4. Training Role
 The World Bank Institute (WBI) creates learning opportunities
for countries, World Bank staff and clients, and people
committed to poverty reduction and sustainable development.
WBI's work program includes training, policy consultations, and
the creation and support of knowledge networks related to
international economic and social development.
 5. Global Development Learning Network
 The Global Development Learning Network (GDLN) is a
partnership of over 120 learning centers (GDLN Affiliates) in
nearly 80 countries around the world. GDLN Affiliates
collaborate in holding events that connect people across countries
and regions for learning and dialogue on development issues.
6. Country assistance strategies
 As a guideline to the World Bank's operations in any particular
country, a Country Assistance Strategy is produced, in
cooperation with the local government and any interested
stakeholders and may rely on analytical work performed by the
Bank or other parties.
 Membership of World Banks Institutions
 The International Bank for Reconstruction and Development
(IBRD) has 188 member countries, while the
International Development Association (IDA) has 172 members.
 Each member state of IBRD should be also a member of the
International Monetary Fund (IMF) and only members of IBRD
are allowed to join other institutions within the Bank (such as
IDA).
World banks made up of five different organizations:-
1, InternationalBank for Reconstruction and Development (IBRD)
2, International Development Association (IDA)
3, International financial cooperation (IFC)
4, Multilateral Investments Guarantee Agency (MIGA)
5, International Center for the settlements of Investment
Disputes(ICSID)
 International Bank for Reconstruction and Development (IBRD)
 This an institution with World Bank that aims reduce poverty in
middle incomeand credit worthy poor countries by promoting
sustainable development through loans, guarantees, risk management
products, and analytical and adviser services.
 IBRD raises most of its fund on the world’s financial markets.
 It has one of the most established borrowers since issuing its first
bond in 1947 financial the reconstruction of Europe.
 Lends to countries with relatively high per capita incomes.
 IBRD’s earns an income every year from the return on its equity and
from the small margin its make on lending.
 The IBRD gets its money through the sales of its bonds in
international capital markets and members subscriptions to its capital
stocks.
 International Development Association (IDA)
 The IDA is the second World Bank institutions and its main focus
is helping the poorest countries in the world by providing loans
and grants to boost economic growth, reduce inequality and
improving living conditions.
 IDA is funding immunized nearly half billion children, provided
access to better water sources for 123 million and helped 65
people received health service.
 IDA lends money on concessional terms. This means IDA charge
little or no interest and payments are stretched over 20 to 25
years including a 5-10 years grace period.
 Lends to countries with annual per capital income of about $800
or less.
 International financial cooperation (IFC)
 Established in 1956 to reduce poverty and improve people’s lives
in an environmentally and socially responsible manners.
 Finance privet sector investments mobilize capital in
international capital market and provide technical assistance and
advice to governments and business.
 Provide both loan and equity finance for business venture in
developing countries.
Multilateral Investments Guarantee Agency (MIGA)
 The multilateral investment grantee agency (MIGA) was created
in 1988as members of the World Bank group to promote foreign
direct investment into developing countries to support economic
growth, reduce poverty and improve people lives.
 It fulfills this mandates by foreign political risks insurance to
investors and lenders.
 International Center for the settlements of Investment
Disputes (ICSID)
 ICSID international provide facilities conciliation and arbitration
investment disputes.
 Established in 1966 to promote increased flow of international
investments.
 Provide facilities for the reconciliation of the disputes between
governments and foreign investors.
 Moreover, The World Bank sees the five key factors necessary
for economic growth and the creation of an enabling business
environment as;­
 Build capacity: Strengthening governments and educating
government officials.
 Infrastructure creation: implementation of legal and judicial
systems for the encouragement of business, the protection of
individual and property rights and the honoring of contracts.
 Development of Financial Systems: the establishment of strong
systems capable of supporting endeavors from micro credit to the
financing of larger corporate ventures.
 Combating corruption: Support for countries' efforts at eradicating
corruption.
 Research, Consultancy and Training: the World Bank provides
platform for research on development issues, consultancy and
conduct training programs
 The role of World Bank in developing countries
 World Bank is an international financial institutions that provide
financial and technical assistance to developing countries for
development programs( e.g. bridges, roads schools….etc.) With
the state goal of reducing poverty
 The major institutions created as a result of the Bretton woods
conference in 27th December 1944.
 The two main countries which shaped the negotiations where
united states and British.
 The objectives of the World Bank
 Provide assistance to developing countries and transition
countries.
 Promote the economic developments of the world’s poorer
countries.
 Finance the poorest developing countries whose per- capita GNP
is less than $865 a year special financial assistance through the
international development assistance (IDA).
The World Bank offers two types of loans:-
1. Investment loans- support of economic and social development
projects
2. Development policy loans:- quick disbursing finance to support
countries.
 Key difference between the IMF and the World Bank
IMF:
 Exchange rate stability
 Monetary policy
 Mission creep development
 Loans are large for macro-targets ($100s millions-billions)
World Bank
 Development
 Smaller loans ($10s millions-$100 millions)
 Specific projects (dam, schools, oil pipeline)
 Multiple projects in one country (big countries may have several
project loans, e.g., India >10).
 Some reasons the two institutions often get confused
 Like the IMF, World Bank uses conditionality with many (but not
all) loans
 Often, the World Bank requires an IMF program be in good
standing!
 So the conditionality may run through the IMF
Both institutions founded in 1944 at BW, NH
Both have a similar governance structure
Head of the IMF (“Managing Director”) always a European;
Head of the World Bank (“President”) always American
 Some Critics of the world Banks
 Criticism of the World Bank often takes the form of protesting as seen
in recent. Such demonstrations have occurred all over the world.
 Another source of criticism has been the tradition of having an
American head the bank, implemented because the United States
provides the majority of World Bank funding
 One of the strongest criticisms of the World Bank has been the way in
which it is governed. While the World Bank represents 186 countries,
it is run by a small number of economically powerful countries. These
countries (which also provide most of the institution's funding)
choose the leadership and senior management of WB.
 In the 1990s, the World Bank and the IMF forged the
Washington Consensus, policies which included deregulation and
liberalization of markets, privatization and the
downscaling of government. Washington Consensus placed too much
emphasis on the growth of GDP, and not enough on the permanence
of growth or on whether growth contributed to better living standards.
The End