INTERNATIONAL MONETARY FUND ( imf )

1. INTERNATIONAL MONETARY FUND (imf) • a multilateral financial institution, established jointly with the World Bank in 1944 • Original purpose – lending to countries experiencing BoP deficits under the system of fixed exchange rates that existed at the time • Presently – 185 member countries • Purpose – to make short-term loans to governments on commercial terms ( non-concessional) in order to stabilize exchange rates and alleviate BoP difficulties

2. Role of IMF from the 1980s forward • IMF acts as a go-between for deeply indebted countries and creditors in developed countries • IMF enables indebted countries which were unable to service loans to reschedule their debts (i.e. take on further loans under longer time periods to meet current loan payments) • The creditor nation (or commercial bank) would work out an agreement with the debtor nation and the IMF • In essence, the IMF acts as a guarantor against default (non-payment of loans) as no country was willing to default on IMF loans as this would pretty much lock the country out of future loans and IMF assistance • Therefore having the IMF involved in the process lent creditor countries credibility, enabling future loans from banks and international institutions

3. Countries borrowing from the IMF were subject to strictly imposed conditions or stabilization policies (SAPs) in order to meet IMF approval and the cooperation of the creditor bank • These policies include: • tight monetary policy - would encourage inflow of financial capital helping the BoP position • tight fiscal policy - reduced gov’t spending to reduce the size of budget deficits • currency devaluation or depreciation – to help BoP position • liberalization policies • Such as eliminating or reducing controls on prices, interest rates, imports and foreign exchange and encouraging full currency convertibility, in order to promote a free market and free trade environment

4. World bank • A development assistance organization that extends long-term credit (loans) to developing country govts for the purpose of promoting economic development and structural change (in reality an investment bank) • Established in 1944, at the end of WWII, as part of an effort to reconstruct Europe • Activities extended to developing countries from late 50s when European reconstruction was complete

5. World Bank • 185 member states which are its joint owners • Multilateral organization It consists of two organizations: • International Bank for Reconstruction and Development (IBRD) • International Development Association (IDA)

6. IBRD • The loans form the IBRD are on commercial terms (non-concessional) or near-commercial terms and there is strong emphasis on the debtors ability to service loans • Its activities and lending do not form part of foreign aid • As such the IBRD, like the IMF, demands that debtor countries implement SAPs

7. International Development Association (IDA) • The IDA is the concessional lending arm of the World Bank and lends ONLY to the poorest countries (GDP per capita below $US865) • Basically a provider of soft loans (ie. loans at less than market rates and with very favourable terms of debt servicing) • Commonly IDA loans are interest free, and have longer payback periods (30 – 40 years) • The IDA receives most of its funding via donor contributions from member countries

8. World bank activities 1950s to 1960s: development of infrastructure 1970s: poverty alleviation and the basic needs approach 1980s to mid 1990s: structural adjustment loans (SALs) and a minimal role for government Mid 90s to present: poverty alleviation, sustainable dev., a revised perspective on the role of government and the support for institutions

9. Evaluating the role of the world bank & IMF • World Bank and IMF governance dominated by rich countries • Voting power is determined by the size of financial contributions made by each country • Excessive interference in countries’ domestic affairs • Conditional lending • Damaging impacts on developing countries • SALs have been criticized for increasing inequalities and poverty within developing countries (increasing U, cuts in merit goods, cuts in food subsidies, payment for health and education)

10. 5. Inadequate attention to poverty alleviation (World Bank) • Not enough done in the area of debt relief through the HIPC initiative; many countries do not qualify for debt relief because, according to requirements for eligibility, they are not poor enough or indebted enough. As such, countries do not receive the assistance they require

11. Private-sector bank (commercial bank) • Involves ‘private’ flows as loans are extended by private commercial banks • Loans are non-concessional • No element of development assistance • Main motive = profits

12. 2008 financial crisis • resulted because of imprudent lending by commercial banks (and other financial institutions) to developed countries • banks took large risks in making far too many bad loans (loans to risky borrowers) • There are serious consequences for developing countries as well • banks are more fearful of lending, and as they cut back on their loans, this means less funding for developing countries as well • This will restrict the amount of foreign financing available to developing countries, and will have negative impacts on their growth and development efforts