The structure and functions of World Bank and IMF
The International Monetary Fund, also known as the IMF or simply the ‘Fund’, was conceived at a United Nations Conference convened in Bretton Woods, New Hampshire, US in July 1944. The 45 governments represented at the conference sought to build a framework for economic cooperation that would avoid a repetition of the disastrous economic policies that had contributed to the Great Depression of the 1930s.
The IMF offers regular dialogue and policy advice to each of its members. Generally, once a year, the Fund conducts in-depth appraisals of each member country’s economic situation. It discusses with the country’s authorities the policies that are most conducive to stable exchange rates and a growing and prosperous economy.
In its overview of its members’ economic policies, the IMF looks mainly at a country’s macro-economic performance. This comprises total spending and its major components such as consumer spending and business investment, output, employment and inflation, as well as the country’s balance of payments.
Functions of the International Monetary Fund:
(i) Surveillance :
A core responsibility of the IMF is to encourage a dialogue among its member countries about the national and international consequences of their economic and financial policies, to promote external stability.
This process of monitoring and consultation, normally referred to as ‘surveillance’, has evolved rapidly as world economy has changed. IMF surveillance has also become increasingly open and transparent in recent years.
The initiatives used to inform bilateral surveillance and aimed at promoting global economic stability are as follows:
i. The IMF works to improve its ability to assess the member countries vulnerabilities to crisis, identifying and promoting effective responses to to economic stability, including risks from payments imbalances. currency misalignment and financial market distrubances.
ii. In collaboration with the World Bank, the IMF conducts in-depth assessments of countries’ financial sectors under the Financial Sector Assessment Programme (FSAP). The Fund is further deepening financial and capital market surveillance, particularly in its analysis of emerging market members.
iii. The IMF has developed and actively promotes standards and codes of good practice in economic policy making. It is also involved in international efforts to combat money laundering and the financing of terrorism.
The importance of effective surveillance was underscored by the financial crises of the late 1990s. In response, the IMF has undertaken many initiatives to strengthen its capacity to detect vulnerabilities and risks at an early stage, to help member countries strengthen their policy frameworks and institutions and to improve transparency and accountability.
(ii) Technical Assistance :
The objective of IMF technical assistance is to contribute to the development of the productive resources of member countries by enhancing the effectiveness of economic policy and financial management. The IMF helps countries strengthen their capacity to design and implement sound economic policies.
The IMF helps its member countries build their human and institutional capacity to design and implement effective macroeconomic and structural policies, put in place reforms that strengthen their financial sector and reduce vulnerability to crises.
The IMF generally provides technical assistance free of charge to any requesting member country within the IMF. resource constraints. About three-quarters of the Fund’s technical assistance go to low-and lower-middle income countries, particularly in sub-Saharan Africa and Asia and post conflict countries.
The IMF provides technical assistance in its areas of expertise : namely macroeconomic policy, tax policy and revenue administration, expenditure management, monetary policy, the exchange rate system, financial sector sustainability and macro-economic and financial statistics.
Since the demand for technical assistance for exceeds supply, the IMF gives priority in providing assistance where it complements and enhances the IMF’s other key forms of assistance, i.e. surveillance and lending.
(iii) Lending:
Even the best economic policies cannot eradicate instability or avert crises. In the event that a member country does experience financing difficulties, the IMF can provide financial assistance to support policy programmes that will correct underlying macroeconomic problems, limit disruptions to the domestic and global economies and help restore confidence, stability and growth.
IMF financing instruments can also support crisis prevention.
The IMF is accountable to the governments of its member countries. At the apex of its organizational structure is its board of governors, which consists of one governor from each of the IMF’s 185 member countries. All governors meet once a year at the IMF-World Bank Annual Meetings,
The IMF’s resources are provided by its member countries, primarily through payment of quotas, which broadly reflect each country’s economic size. The annual expenses of running the Fund are met mainly by the difference between interest receipts on outstanding loans and interest payments on quota ‘deposits’.
Special drawing right:
The special drawing right (SDR) is an international reserve asset, created by the IMF to supplement the existing official reserves of member countries. SDKS, sometimes known as ‘paper gold’ although they have no physical form, have been allocated to member countries (as book-keeping entries) as a percentage of their IMF quotas. Its value is based on a basket of international currencies.
The SDR was introduced by the IMF in 1969 as an international reserve asset to support the Bretton Woods fixed exchange rate system. A country participating in this system needed official reserves government or central bank holdings of gold and widely accepted foreign currencies that could be used to purchase the domestic currency in world foreign exchange markets, as required to maintain its exchange rate.
Since the supply of the two key reserve assets, i.e., gold and the US dollar proved inadequate for supporting the expansion of world trade, the international community decided to create a new international reserve asset under the auspices of the IMF.
However, the Bretton Woods System collapsed barely two years later and the major currencies shifted to a floating exchange rate regime. Moreover, the growth in international capital markets facilitated borrowing by credit to worthy governments. These developments lessened to need for SDKs.
Presently, the SDR has only limited use as a reserve asset and its main function to serve as the unit of account of IMF and some international organizations. Readers should not that the SDR is neither a currency, nor a claim on the IMF Rather it is a potential claim on the freely usable currencies of IMF members.
The value of the SDR was initially defined as equivalent to 0.888671 grams of fine gold which at the time was also equivalent to one US dollar. After the collapse of the Bretton Woods System in 1973, the SDR was redefined as a basket of currencies.
Presently, it comprises the Euro, Japanese Yen, Pound Sterling and the US dollar. The basket composition is reviewed every five years to ensure that it reflects the relative importance of currencies in the world’s trading and financial systems.
The weights of currencies in the SDR basket were revised in the most recent review in November 2005, based on value of goods and services and the amount of reserves denominated in respective currencies. which were held by other members of the IMF these changes became effective from I January, 2006 and the next review is likely to take place in late 2010.
World bank Origin :
The World Bank (WB) was originally created as the International Bank for Reconstruction and Development (IBRD) in 1944 along with its twin, the IMF. Together they came to be known as the ‘Bretton Woods’ twin sisters. When it was set up it was decided that this international bank would assist in the economic reconstruction of the world war II- damaged European economies. In early 1946 this international bank launched its carrier as the multilateral development bank and since then the IBRD came to be known as the World Bank. Its headquarters is located in Washington, opposite the IMF building and it lies as the next door neighbor of the White House.
Functions:
Being twin sisters, membership in the IMF is a prerequisite for membership in world Bank (188 countries in May, 2012).
The Bank performs the following functions:
1. To assist in the construction and development of the territories of its members by facilitating investment of capital for productive purposes, including the ‘restoration of economies destroyed or disrupted by war’, and the encouragement of the “development” of productive facilities and resources in less developed countries.
II. To promote private investment and long run balanced growth of international trade and BOP equilibrium by means of guarantees or participation in international loans and investments.
III. To arrange loans made or guaranteed by it. so that more useful and urgent projects receive preference.
IV. To provide finance to projects from its own capital, funds raised by it and by participating with other members.
In addition, the Bank provides advice and expertise. It now puts more emphasis on institutional technical assistance and infrastructure assistance. Over the years, it has been able to generate and disseminate policy relevant knowledge. Today, it has been concentration more on this asset rather than financial resources. This organisation is now called the ‘knowledge bank’.
