16581293 International Financial Institutions

International Financial Institutions Constance L. Danner

• Maria 05 • Maryam 22 • Hina 26 • Nada 36 • Zohra 48

Financial System • • • • •

Money Financial Instruments Financial Markets Financial Institutions Central Banks

Financial Institutions • “A financial institution is an institution that provides financial services for its clients or members.” • Act as financial intermediaries.

International Financial Institutions ~Definition~ “International Financial Institutions (IFIs) Refers to financial institutions that have been established (or chartered) by more than one country and hence are subject to international law”

Types Of IFIs • • • •

Bretton Woods institutions Regional development banks Bilateral development banks Other regional financial institutions

Examples Of IFIs • • • • • •

International Monetary Fund World Bank Group Asian Development Bank African Development Bank Inter-American Development Bank Islamic Development Bank

History Of IFIs • After the Great Depression in the 1930s there was a need for an organization to create a system for exchange rate stability • The World Bank and the International Monetary Fund were created in the aftermath of World War II • Countries’ economies affected by WWII • need for reconstruction in welldeveloped nations • need for development in the lesser developed nations

Bretton Woods (Cont’d) • The meeting was born out of the determination by US President Franklin D Roosevelt and UK Prime Minister Winston Churchill to ensure post-war prosperity through •Churchill & Roosevelt at their first meeting ~Bretton Woods~

Bretton-Woods

President Roosevelt told the conference: "The economic health of every country is a proper matter of concern to all its neighbours, near and distant” 1944 Bretton Woods

IFIs: that We’ll discuss • International Monetary Fund • World Bank • Asian Development Bank • Islamic Development Bank

* ADB & IsDB will be explained briefly

International Monetary Fund (The IMF)

International Monetary Fund • The International Monetary Fund (IMF) is an international organization that oversees the global financial system by following the macroeconomic policies of its member countries, in particular those with an impact on exchange rates and the balance of payments. It is an organization formed to stabilize international exchange

International Monetary Fund (cont’d) • Established in (1944) • Formally organized on (Dec 27th 1945) • Member states (185) • Headquarters (Washington USA) • Currency •

(SDR)

*SDR = just a unit of account…not a real currency

• *Background Image = IMF Headquarters

IMF: Managing Director • Dominique Strauss-Kahn • Nationality: French • 10th Managing Director of the International Monetary Fund • Assumed this position on Nov 1st ,2007.

IMF: Purposes Articles of Agreement of the IMF i) promote international monetary cooperation ii) expansion and balanced growth of international trade iii) promote exchange rate stability

iv) help establish multilateral system of payments and eliminate foreign exchange restrictions v) make resources of the Fund available to members vi) Shorten the duration and lessen the degree of disequilibrium in international balances of payments

Where does the IMF get its money? •

The quota subscriptions

•

Gold holdings

•

Borrowing arrangements (eg. GABs) Interest charges and Fees

•

What IMF Does? The work of the IMF is of three main types: • Surveillance • Lending • Technical Assistance

Economic Surveillance • The IMF oversees the international monetary system and monitors the financial and economic policies of its members. It keeps track of economic developments on a national, regional, and global basis

Technical Assistance • To assist mainly low- and middle-income countries in effectively managing their economies, the IMF provides practical guidance and training on how to upgrade institutions, and design appropriate macroeconomic, financial, and structural policies.

Lending • The IMF provides loans to countries that have trouble meeting their international payments and cannot otherwise find sufficient financing on affordable terms

Special Drawing Rights (SDRs) • The SDR is an international reserve asset, created by the IMF in 1969 to supplement the existing official reserves of member countries.

• Unit of account • Need of SDR

“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.”

SDR valuation criterion • the value of the exports of goods and services • the amount of reserves denominated in the respective currencies which were held by other members of the IMF

SDR valuation • SDR was initially equivalent to 0.888671 grams of fine gold • today consisting of the euro, Japanese yen, pound sterling, and U.S. dollar. • Values revised after five years

How to calculate SDR Friday, May 22, 2009 Currency Euro Japanese yen Pound sterling U.S. dollar

Weigh Currency amount Exchange ts under Rule O-1 rate 44% 34% 11% 11%

U.S. dollar equivalent

0.4100

1.35910

0.557231

18.4000

97.89000

0.187966

0.0903

1.51090

0.136434

0.6320

1.00000

0.632000 1.513631

U.S.$1.00 = SDR

0.660663

SDR1 = US$

1.51363

SDR Interest Rate Calculation • Currently 42%

How to Calculate *Interest Rate

* (Interest that’s charged on SDR)

For the week of May 18, 2009 to May 24, 2009

Currency

Euro

Currency Exchange rate amount against the under Rule O-1 SDR 1 (A) (B)

Interest rate 2 (C)

Product (A) x (B) x (C)

0.4100

0.893571

0.7330

0.2685

18.4000

0.00670294

0.1950

0.0241

U.K. Pound Sterling

0.0903

1.0012

0.5500

0.0497

U.S. Dollar

0.6320

0.665602

0.1800

0.0757

Total

0.4180

SDR Interest Rate

0.42

Japanese Yen

Potential pitfalls as a reserve currency The SDR does not contain Chinese Yuan, Indian Rupee,  Australian Dollar or Canadian Dollar, (which are important benchmark or secondary global reserve currencies.)

The current SDR is a relatively small basket of currencies.

“QUOTAS”

Quotas “Definition” Each member country of the IMF is assigned a quota, based broadly on its relative size in the world economy and characteristics .

• Size of the quotas determine voting power • IMF decides on the quota for each member • richer countries have larger quota

IMF Members' Quotas and Voting Power *Source IMF site May 2009 Member

QUOTA Millions of SDRs

Governor

Percent of Total

United States

37,149.3

17.09

United Kingdom

10,738.5

Japan

VOTES Number

Percent of Total

Timothy F. Geithner

371,743

16.77

4.94

Alistair Darling

107,635

4.86

13,312.8

6.13

Kaoru Yosano

133,378

6.02

Germany

13,008.2

5.99

Axel A. Weber

130,332

5.88

France

10,738.5

4.94

Christine Lagarde

107,635

4.86

Italy

7,055.5

3.25

Giulio Tremonti

70,805

3.19

China

8,090.1

3.72

ZHOU Xiaochuan

81,151

3.66

India

4,158.2

1.91

P. Chidambaram

41,832

1.89

Pakistan

1,033.7

10,587

0.48

0.48 Salim Raza

The Multifaceted Role of Quotas • (1) The amount of financial resources • (2) The member's voting power in institutional decision making (along with basic votes); • (3) The level of access of the member to IMF financing; • (4) The members' share of general SDR allocations.

More on quotas • Quotas are reviewed every 5 years by the IMF • Formula calculation • Quotas also determine how much each member can borrow from the IMF when in need of aid

When is a country in need ? A country that had not taken in enough foreign currency to pay the other countries for what they have bought • spends more money than it takes in • So IMF will lend foreign exchange to that member

How much money a member can borrow from the IMF • 25% of the country’s quota may be used • If this is not sufficient, then members can borrow up to 3 times the amount of its quota • present plans for reform to Executive Directors • If these plans are sufficient for the Executive Directors, the IMF grants the member a loan

IMF & Pakistan

Why does Pakistan need IMF? As Pakistan is a developing country and has a struggling economy we often have to turn to IMF for help. Pakistan gets loans from IMF for the following main purposes: • Balance of payment deficits. • Stabilization of currency. • Rebuilding international reserves • Managing liquidity problems.

IMF’s Attitude towards Pakistan • IMF attitude towards developing nations has always been humiliating so same is the case with Pakistan • The conditions imposed for lending have a crushing effect on the economy

The Latest Loan November 24th 2008 Pakistan has accepted 11 tough conditions from the International Monetary Fund (IMF) to overcome its pending balance of payment crisis some of them are as follow: • Pakistan government has agreed to gradually impose the central excise duty (CED) on services and agriculture sectors at the rate of eight to 18 percent in place of the general sales tax (GST) • The Pakistani currency was devalued after slight changes in the discount rate and exchange rate decreased officially by 6-7%

The WORLD BANK

• The World Bank is an international financial institution that provides financial and technical assistance to developing countries for development programs (e.g. bridges, roads, schools, etc.) with the stated goal of reducing poverty.

: Facts & Figures • History: Similar to IMF (result of Bretton Woods Conference,1944) • Formation: 27 December 1945 • Purpose/ Focus : Poverty elimination by debt creation • Membership: 185 countries • President: Robert B. Zoellick • Main Organ: Board of Directors • Parent Organization: World Bank Group • First loan: $ 250m to France (for post-war reconstruction)

World Bank: Headquarters

• *Location: Washington, D.C.

World Bank: President • Robert Bruce Zoellick • Nationality: American • Current (11th) President of World Bank • Since: July 1st, 2007 • Nominated by: George W. Bush

World Bank: a Bank? • The World Bank is not a bank in the common sense of the word. • A single person cannot open an account or ask for a loan.

World Bank Group • International Bank for Reconstruction and Development (IBRD) • International Development Association (IDA) • International Finance Corporation (IFC) • Multilateral Investment Guarantee Agency (MIGA) • International Centre for Settlement of Investment Disputes (ICSID)

The World Bank Group

World Bank • The World Bank differs from the World Bank Group, in that the World Bank comprises only two institutions: • International Bank for Reconstruction and Development (IBRD) • International Development Association (IDA)

IBRD Orign • The foundation of IBRD was laid in the Bretton Wood conference. • It was founded in 1944.

Purpose • It was founded to finance reconstruction projects in warravaged countries despite their poor creditworthiness.

IBRD: Function • To assist in process of reconstruction, development and restoration of countries destroyed by war. • To promote long term balanced growth all around the world. • To encourage international investments for development of the member countries. • To encourage private foreign investments by means of gurantees. • To help member countries in maintenances of equilibrium of BOP. • To play a role so that smooth transition may take place from war time to peace time economies.

IBRD • Mode of funding • Loans • Membership

IDA Orign In 1959, the US made the resolution for the articles of agreement for IDA and in September 1960 the IDA was established.

Objectives and functions • To promote economic development • increase productivity • raise standard of living • It was established to provide confessional (no interest or "soft") loans to the world's poorest governments.

Loans

World Bank Background and Objectives • • • •

Natural disasters Needs affecting developing economies Post conflict rehabilitation Needs affecting a transitioning economy

WB: Areas of operation The World Bank is active in the following areas: • Agricultural and Rural Development • Conflict and Development • Development Operations and Activities • Economic Policy • Education • Energy • Environment • Financial Sector • Gender • Governance • Health, Nutrition and Population • Industry • Information and Communication Technologies • Information, Computing and Telecommunications • International Economics and Trade

• • • • • • • • • • • • • • • • • •

International Economics and Trade International Economics and Trade Labor and social protection Law and Justice Macroeconomic and Economic Growth Mining Poverty Reduction Poverty Private Sector Public Sector Governance Rural Development Social Development Social Protection Trade Transport Urban Development Water Resources Water Supply and Sanitation

Globalization and the role of World Bank • The World Bank serves to eradicate the evils of globalization. • The first step of the World Bank towards the accomplishment of the task is debt relief. • The World Bank has also drawn plans to help the middle income countries in the development of their infrastructure and develop their trade

Millennium Development Goals • Goal 1: Eradicate extreme poverty and hunger • Goal 2: Achieve universal primary education • Goal 3: Promote gender equality and empower women • Goal 4: Reduce child mortality • Goal 5: Improve maternal health • Goal 6: Combat HIV/AIDS, malaria, and other diseases • Goal 7: Ensure environmental sustainability • Goal 8: Develop a global partnership for development

Projects of World bank in Pakistan • • • • • •

In Pakistan WB is supporting reforms at both the federal and provincial level. working with Pakistan Poverty Alleviation Fund to bring difference in the lives of poor. helping the victims of the Earthquake. working with the government to improve education outcomes. joining with international partners to help Pakistan fight polio. helping Pakistan prevent the spread of HIV/AIDS. They (the WB) rely on local expertise.

Difference between IMF and WB International Monetary Fund

World Bank

1

Purposes oversees the international monetary system

seeks to promote the economic development of the world's poorer countries

2

Functions promotes exchange stability and orderly exchange relations among its member countries

assists developing countries through longterm financing of development projects and programs

3

Recipients of Funding assists all members--both industrial and developing countries--that find themselves in temporary balance of payments difficulties by providing short- to medium-term credits

provides to the poorest developing countries whose per capita GNP is less than $865 a year special financial assistance through the International Development Association (IDA)

4

Operations supplements the currency reserves of its members through the allocation of SDRs (special drawing rights); to date SDR 21.4 billion has been issued to member countries in proportion to their quotas

encourages private enterprises in developing countries through its affiliate, the International Finance Corporation (IFC)

Difference between IMF and WB [cont’d] International Monetary Fund

World Bank

5

Source of Funding draws its financial resources principally from the quota subscriptions of its member countries

acquires most of its financial resources by borrowing on the international bond market

6

Capital has at its disposal fully paid-in quotas now has an authorized capital of $184 billion, of totaling SDR 145 billion (about $215 which members pay in about 10 percent billion)

7

Size and Structure •has a staff of 2,300 drawn from 182 member countries •has no affiliates or subsidiaries

•has a staff of 7,000 drawn from 180 member countries (World Bank Group is about three times as large as the IMF) •Has a more complex structure •WB itself comprises of 2 major organizations

Asian Development Bank (The ADB)

The Asian Development Bank (ADB) • is a regional development bank established in 1966 to promote economic and social development in Asian and Pacific countries through loans and technical assistance. • It is a multilateral development financial institution owned by 67 members (48 from the region and 19 from other parts of the globe) • ADB's vision is a region free of poverty. • Its mission is to help its developing member countries reduce poverty and improve the quality of life of their citizens.

ADB: Headquarters

• *Location: Manila, Philippines

Islamic Development Bank (The IsDB)

IsDB: Fact & Figures • Founded in: 18 December 1973 (officially began it’s activities on 20 October, 1975 [15 Shawwal 1395H])

• • • • •

Headquarter: Jeddah, Saudi Arabia Members: 56 Countries Financial year: lunar Hijri Year Unit of Account: Islamic Dinar Official Language: Arabic (English & French are also used)

IsDB: Funtions • to provide equity participation and grant loans for productive projects and enterprises. • It also gives financial assistance to member states in other forms for their economic and social development and to foster foreign trade among member countries.

IsDB: Purpose • “To foster the economic development and social progress of Member States and Muslim Communities individually as well as collectively in accordance with the principles of the Shariah…”

IsDB: Main Shareholders • • • • •

Saudi Arabia Sudan Kuwait Libya Turkey

• • • • •

UAE Iran Egypt Indonesia Pakistan

*IsDB: Bulding in Dhaka

IsDB: Capital • The authorised capital of the Bank is six billion Islamic Dinars, • divided into 600,000 shares • The value of the Islamic Dinar is equivalent to one Special Drawing Right of the IMF (SDR). • The subscribed capital of the Bank is 4 billion Islamic Dinars. One Islamic Dinar =1.3 US Dollar. • `

n o m s i c i t i r d C n a F k IM n a B d l r o W

Criticism of the IMF & World Bank often takes the form of protesting

• * A demonstrator waves a red and black flag during an intersection occupation outside the World Bank. (october Rebellion 19-20 Oct, 2007)`

* video

1.Conditionalities (so called SAPs) • On giving loans to countries, the IMF makes the loan conditional on the implementation of certain economic policies. • These policies tend to involve: – Reducing government borrowing - Higher taxes and lower spending – Higher interest rates to stabilize the currency. Allow failing firms to go bankrupt. – Structural adjustment. Privatization, deregulation, reducing corruption and bureaucracy.

• The problem is that these policies of structural adjustment and macro economic intervention make the situation worse. (Argentina -2001 Example)

[cont’d] Conditionalities (so called SAPs) • Slows down social stability • Leads to an increase in poverty • “Strict programs," increasing taxes to balance budget deficit

What if the debtor countries don’t fulfill IMF’s conditions? •

The alternative is for debtor countries to suffer the same kind of economic sanctions as Iran, Cuba and preinvasion Iraq.

2.Impact on Public Health

In 2008, A study by Cambridge and Yale concluded:

• strict conditions on the international loans by the IMF resulted in thousands of deaths as public health care had to be weakened. • In the 21 countries which the IMF had given loans, tuberculosis deaths rose by 16.6 % • WB: AIDS controversy

3.Devaluations 3.Devaluations

• IMF is also criticized for allowing inflationary devaluations – How ??

4.Crititsm from free-market advocates • Believers in free markets argue that: – it is better to let capital markets operate without attempts at intervention. – And attempts to influence exchange rates only make things worse

5.IMF/World Bank support of military dictatorships •

Arguments in favor of the IMF “Economic stability is a precursor to democracy”

• However, The role of the Bretton Woods institutions has been controversial since the late Cold War period, as the IMF policy makers supported military dictatorships friendly to American and European corporations. • there are various examples in which democratized countries fell after receiving IMF loans. • E.g World Bank’s support to a Brazilian Dictator • In Pakistan, the IMF used the military government to impose the General Sales Tax (GST)

6. IMF & WB : secretive institutions with no accountability • The IMF is funded with taxpayer money, yet it operates behind a veil of secrecy. • Members of affected communities do not participate in designing loan packages. • The IMF works with a select group of central bankers and finance ministers to make polices.

7.Democracy is being torn apart by a financial oligarchy (Might is right)  Undemocratic System While the WB represents 185 countries, it is run by a small number of economically powerful countries • a.

Past Managing Directors

Historically – the IMF's managing director = European – president of the World Bank = from United States

• b. Americanization – IMF & World Bank: an instrument for the promotion of US or Western interests in certain regions of the world – The United States has an exclusive veto power in major IMF decisions – WB’s president :always an American

8.Violation of Islamic Principles • In Islam distribution of income is the vital element • Interest is un-Islamic • IMF has disregarded all these Islamic Norms by only nurturing the rich.

*The world divided into “rich” & “poor”

9.Other Criticisms

• IMF Hurts the environment Some of the most Ironic Facts: IMF itself is exempt from all taxes, along with its sister institutions, eg. the World Bank) HQs of IMF & WB both in Washington DC. IMF’s Dominique Strauss Kahn is no stranger to controversies either

[eg. Ivroy Coast’s coca production]

• Human rights and Labor rightsviolated

Criticism: by some Famous People • “They [WB] focused on growth-based development and thus invest in energy sectors, setting up ports and infrastructure.instead of this they must focus on poor.” ~PROF MUHAMMAD YUNUS~ [Nobel laureate, Bangladeshi banker and economist, founder of Grameen Bank]

• “the IMF is not serving a useful role in low-income countries, and that low-income national governments need more policy space and less IMF interventions.” ~JACK JONES ZULU~ [Southern African Regional Poverty Network]

• “American diplomats wanted to lock foreign countries into further dependency on paper dollars.” ~MICHAEL HUDSON~ [a Wall street analyst, economist and Historian]

Why do countries sign agreements with the IFI’s if the consequences are ultimately negative? • Most countries that accept the loans do so because they have no other way of avoiding total financial collapse. • there often are international pressures on such countries to get “Aids” from the IMF and World Bank

IMF and the 3 World rd

•

•

* IMF: Lender of last resort !!

The 3rd World treated “stepmotherly” *(A Clip from John Piglers’s documentary “New rulers of the World)

Response to Criticism by IMF • • • •

Crisis always leads to some Difficulties. IMF has had Some Successes. Confidence Countries are not obliged to take an IMF loan • IMF Easy target.