International financial institutions: IMF, World Bank
It is a cooperative institution with 178 member countries.
Purposes of the IMF
§ To maintain stable currency exchange rates
§ To facilitate international payments
Instruments of the IMF
§ It lends money to members with liquidity problems
§ Its members inform each other about fiscal and monetary policies. (Technical assistance and publications.)
There was a great depression of the world economy in the 30’s. There was a great need for cooperation in order to establish an innovative monetary system and an institution to supervise it. The IMF was founded in July 1944 at Bretton Woods.
§ Board of Governors: ministers of finance for each country
§ Alternate Governors: heads of central banks (They hold meetings once a year.)
§ Executive Directors: represent the governments of their countries during the rest of the year.
These days, member countries are allowed to choose their own method of determining their currency exchange rates, but supervision by IMF is necessary.
Each member country pays in a sum of money called quota. This will be the source of loans to member countries with a severely negative balance of payments. These loans are called SDR’s (Special Drawing Rights) and can be received in periodic allocations. An IMF member earns interest on its quota contribution only if other members borrow its currency.
Before a member country obtains the loan, it has to demonstrate how it will solve its payment problem. They can immediately withdraw the 25% of its quota. Repayment is made within 3 or 5 years. (Costs: 0,5% for service charges and commitment fees, 5% for interest)
The aim of loans are devaluation, export encouragement and reduction of government expenditure.
World Bank Group
It is a family of multilateral development institutions owned by governments. These governments exercise their ownership function through Boards of Governors on which each member country is represented individually.
It consists of five international organisations:
§ IBRD (International Bank for Reconstruction and Development),which a source of loans to developing countries.
§ IFC (International Finance Corporation),which support private enterprises in the developing world through provision of loans.
§ IDA (International Development Association), which provides finance on concession terms to low-income countries. It provides them with interest-free credits. Contributions are made by donor countries (US, Japan, Germany, Brazil, Hungary, Korea, Turkey…), and borrowers are Africa and Asia.
§ ICSID (International Centre for Settlement of Investment Disputes), which provides arbitration services for disputes between foreign investors.
§ MIGA (Multilateral Investment Guarantee Agency), which provides investment risk insurance, and information on investment opportunities.
Duties of the World Bank Group
Reducing poverty (setting out a strategy)
Access to education, healthcare and social services
Economic growth through increasing earnings of poor countries. The Bank lends for broad improvements in economic policies towards reducing budget deficit or stem inflation.