INTERNATIONAL MONETARY

INSTITUTIONS
International Monetary Institutions
 The institutions that ensure the stability of the
international monetary system—the system of
exchange rates and international payments that
enables countries (and their citizens) to transact
with one other.
 This system is essential for promoting sustainable
economic growth, increasing living standards, and
reducing poverty.
 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
 Countries’ economies affected by WWII
 Need for reconstruction in well-developed nations
 Need for development in the lesser developed
nations
• By February 1942 Harry Dexter White, Special Assistant to the U.S.
Secretary of the Treasury, and John Maynard Keynes, an advisor to
the British Treasury, began to draft plans for organizations that would
provide financial assistance to countries experiencing short-term
deficits in their balance of payments. This assistance would help
ensure that such countries would not adopt protectionist or predatory
trade policies to improve their balance of payments position.
• Protectionism is the economic policy of
restraining trade between states through methods such
as tariffs on imported goods, restrictive quotas and by variety
of government regulations to protect the domestic industry.
• Predatory trade policy means a policy or techniques
used by an organization or country to beat its competitor e.g.
dumping (A type of anti-competitive event in which foreign
companies or governments price their products below market
values in an attempt to drive out domestic competition)
Purposes and goals of Bretton wood conference

 To avoid reoccurrence of great depression II

 Rebuild the European countries after WWII
 to create a stabilizing international currency and ensure
monetary stability once and for all.
 Resolve balance of payment problem
 Promote the open economy( free trade) and end the
economic nationalism(closed economy)
 Provide financial and technical support to under
develop countries
Bretton Wood conference set up three financial institutions
1. International Monetary Fund (IMF)
2. International Bank for Reconstruction and
Development(IBRD) which is also known as World
Bank
3. General Agreement on Tariffs and Trade (GATT)
which is now known as World Trade Organization
(WTO)
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 rate.
International Monetary Fund (cont’d)
• Established in (1944)
• Formally organized on (Dec 27th 1945)

• Member states (188)

• Headquarters (Washington USA)

• Currency (SDR)
• *SDR = just a unit of account…not a real currency
• *Background Image = IMF Headquarters
 Organizational structure
• Board of Governors
– The Board of Governors consists of one governor and one
alternate governor for each member country.

• Executive Board
– 24 Executive Directors make up Executive Board. The
Executive Directors represent all 188 member-countries. eight
countries each appoint an Executive Director: the United
States, Japan, Germany, France, the United Kingdom, China,
the Russian Federation, and Saudi Arabia. The remaining 16
Directors represent constituencies consisting of 4 to 22
countries.

• Managing Director
– The IMF is led by a Managing Director, who is head of the staff
and serves as Chairman of the Executive Board.
 Organizational structure
• On July 5, 2011 CHRISTINE LAGARDE was
elected as Managing Director of the IMF for a five-
year term.
Purpose
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?
1) The quota subscriptions

2) Gold holdings

3) Borrowing arrangements (eg. GABs)

4) 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.
• SDR is not a currency, SDRs instead represent a
claim to currency held by IMF member countries for
which they may be exchanged.As they can only be
exchanged for Euros,
, or US dollars.
 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
Currency Weight value Exchange Rate US Dollar
Equivalent

US Dollar 41.9% $0.660 1.24580 0.526973

European 37.4% € 0.423 79.26000 0.152662

Euros

Japanese Yen 9.4% ¥ 12.10 1.54240 0.171206

British Pound 11.3% £ 0.111 1.00000 0.660000

SDR1 = US$ 1.510841

U.S.$1.00 = 0.661883 2
SDR
• Size of the quotas determine voting power
• IMF decides on the quota for each member
• richer countries have larger quota
 Quota Formula
 CQS = (0.5 × Y + 0.3 × O + 0.15 × V + 0.05 × R)k
 CQS = calculated quota share;
 Y = blend of GDP converted at market rates and PPPs averaged over a
three-year period (the weights of market-based and PPP GDP are 0.60
and 0.4, respectively);
 O = annual average of the sum of current payments and current receipts
 (goods, services, income, and transfers) over a five-year period;
 V = variability of current receipts and net capital flows (measured as a
standard deviation from the centered three-year trend over a 13-year
period);
 R = 12-month average over a year of official reserves (foreign exchange,
 SDR holdings, reserve position in the IMF, and monetary gold); and
 k = compression factor of 0.95. The compression factor is applied to the
uncompressed calculated quota shares, which are then rescaled to sum
to 100.
 VOTING
 Each member has 250 “basic” votes plus one additional
vote for each SDR 100,000 of quota.5 While the 250
basic votes generate a slight bias in favor of small
countries, this does nothing to alter the overwhelming
dominance of industrial countries in voting power.
 For example, the United States, with its quota of SDR
37,149,300,000 has 371,743 votes (371,493 + 250) and
Palau, with its quota of SDR 3,100,000 has 281 votes
(31 + 250). As the total of all members’ votes is
2,176,037, the U.S controls 17.08% of votes at the IMF
 while Palau has just 0.01% of the votes.
 IMF Members' Quotas and Voting Power
QUOTA Governor VOTES
Member Millions Percent of Total Number Percent of Total
of SDRs
United States 37,149.3 17.09 Timothy F. Geithner 371,743 16.77

United 10,738.5 4.94 Alistair Darling 107,635 4.86

Kingdom
Japan 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 0.44 Yaseen Anwar 10,587 0.44

An Institutional Approach
• IMF’s developing country quota….
Low-income members
hold less than 10 percent of the institution’s voting
power and a roughly similar share of its quotas,
which are based on the relative size of each
member’s economy.
• Low-income members are a large group within the
IMF, however; comprising 78 countries as they
make up more than 40 percent of the organization’s
membership. Some Low income countries are and
their quotas are as under…..
IMF Members' Quotas and Voting Power, and IMF Board of
Governors
QUOTA VOTES

Millions Percent Governor Percent

Member of SDRs of Total1 Alternate Number2 of Total1
Afghanistan, Islamic 161.9 0.07 Noorullah Delawari 2,356 0.09
Republic of
Khan Afzal Hadawal

Bangladesh3 533.3 0.22 Abul Maal A. Muhith 6,070 0.24

Kenya3 271.4 0.11 Robinson Githae 3,451 0.14

Njuguna Ndung'u

Pakistan3 1,033.7 0.43 Yaseen Anwar 11,074 0.44

Abdul Wajid Rana

Qatar3 302.6 0.13 Yousef Hussain Kamal 3,763 0.15

Abdullah Bin Saoud Al-Thani

A declared objective of IMF about developed and developing
countries
Former First Deputy Managing
Director Stanley Fisher made this point clear in his
farewell remarks to the Executive Board: “The
issue is not whether the Fund should take an
interest in poverty, but whether it should continue
working, and working better, with its poorest
member countries. The answer to that is yes: as a
universal financial institution, we have to stay
involved with all our member countries.
A Political Economy Approach
• IMF promotes its membership…..
From a political economy perspective, another
rationale for the IMF’s engagement with low income
member countries is that it provides important
information to investors and donors while offering a
commitment technology to its membership.

• Rodrik (1995) notes that from the perspective of

donor members, multilaterals also provide a useful
commitment device to their member governments,
as they enable donor members to commit resources
for humanitarian and developmental.
 IMF’s Politico-Economic assistance to member
countries
The multilateral nature of institutions
like the IMF clearly makes it easier for them to cooperate
with member countries and to collect relevant
information and experience. Their superior ability to
interconnect with several members enables them to
significantly share facts, events, and experiences of a
relevant cross-section of their membership, to pool
information, and to elaborate it accordingly.
Core responsibility of IMF
• A core responsibility of the IMF is to provide loans to
member countries experiencing actual or potential
balance of payments problems. This financial
assistance enables countries to rebuild their
international reserves, stabilize their currencies,
continue paying for imports, and restore conditions
for strong economic growth, while undertaking
policies to correct underlying problems. Unlike
development banks, the IMF does not lend for
specific projects.
 Recent IMF and Pakistan activities
• A total amount of $1.2 billion would be paid by Pakistan to IMF during the current fiscal year
2012-13, which includes $990 million of the Standby Agreement (SBA) loan and $210 million
from previous IMF loans.
• Pakistan in February has paid first installment worth $399 million of loan it received from the
IMF under Standby Arrangement signed in 2008.
• Sources said that economic team of govt. is willing to take fresh medium-term program of
about $3.5-5b for the repayment of loan to IMF. It might be recalled here that Pakistan has
not been able to meet performance criteria agreed with IMF under $11.3b Stand-by
Arrangement (SBA) including fiscal and power sector reforms, introduction of
RGST (reformed general sales tax) in integrated mode. Due to this SBA could not move
ahead to its actual conclusion and Pakistan did not get last two tranches worth of $3.4b of
SBA.
 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.
 World Bank fact and figure
• History: Similar to IMF (result of Bretton Woods)
Conference,1944)
• Formation: 27 December 1945
• Purpose/ Focus : Poverty elimination by debt
creation
• Membership: 188 countries
• President: Jim yong kim
• Main Organ: Board of Directors
• Parent Organization: World Bank Group
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)
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)
 Structure of world Bank

 Board of Governors
 The Board of Governors consists of one governor and one
alternate governor for each member country.
 Executive Directors
 There shall be twenty five Executive Directors,
 President
 The President is the presiding officer, and ordinarily has no
vote except a deciding vote in case of an equal division.
Purpose
 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
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
Authorized Capital
• The authorized capital stock of the Bank shall be
$10,000,000,000, in terms of United States dollars
of the weight and fineness in effect on July 1, 1944.
The capital stock shall be divided into 100,000
shares having a par value of $100,000 each, which
shall be available for subscription only by members.
• The capital stock may be increased when the Bank
deems it advisable by a three-fourths majority of the
total voting power
• As of April 27, 1988, the authorized capital stock of
the Bank had been increased to 1,420,500 shares.
From where WB get its Funds
• AAA rated Bonds
• Gold reserves
• Member countries
• Interest returns
• Fees
Voting
• The World Bank and the IMF have adopted a
weighted system of voting
• A quota is then assigned, equivalent to the country's
subscription to the Fund, and this determines its
voting power in the Fund
Types of loans
• The World Bank offers two basic types of loans:
– Investment loans
– Development policy loans
Investment Loans
• Investment loans provide financing for a wide range
of activities aimed at creating the physical and social
infrastructure necessary to reduce poverty and
create sustainable development.
• Over the past two decades, investment lending has,
on average, accounted for 75 to 80 percent of all
Bank lending.
 Investment Loans
• Eligibility. Investment loans are available to International
Bank for Reconstruction and Development (IBRD) and
International Development Association (IDA) borrowers
who are not in arrears with the Bank Group.
• Disbursement. Funds are disbursed against specific
foreign or local expenditures related to the investment
project, including pre-identified equipment, materials, civil
works, technical and consulting services, studies, and
incremental recurrent costs. Procurement of these goods,
works, and services is an important aspect of project
implementation. To ensure satisfactory performance, the
loan agreement may include conditions of disbursement
for specific project components.
DEVELOPMENT POLICY LOANS
• Development policy loans provide quick-disbursing assistance to
countries with external financing needs to support structural reforms
in an economic sector or in the economy as a whole. They support
the government policy and institutional changes needed to create a
dynamic environment that encourages fair and sustained growth for
every segment of society.
• Development policy loans were originally designed to provide support
for macroeconomic policy reforms and adjustment to economic crises.
Over time, they have evolved to focus on longer-term structural,
financial sector and social policy reforms.
DEVELOPMENT POLICY LOANS
• Eligibility. Development policy loans are available to IBRD and
IDA borrowers who are not in arrears to the Bank Group. Eligibility for
a development policy loan also requires agreement on policy and
institutional reform actions that can be monitored and satisfactory
macroeconomic management. Coordination with the International
Monetary Fund (IMF) is an essential part of the preparation of a
development policy loan.
• Disbursement. Funds are disbursed in one or more stages
(tranches). Tranches are released when the borrower complies with
stipulated release conditions, such as the passage of reform
legislation, the achievement of certain performance benchmarks, or
other evidence of progress toward a satisfactory macroeconomic
framework.
WORLD BANK AND PAKISTAN
• If we study history we came to know that in 1990s GDP was less than
4 % and per capita income hardly near to 1 %. And poverty was 32%.
. More importantly, differences in income per capita across regions
have persisted or widened.
• Beginning in 2000 the condition was also miserable. But in 2004/5
GDP grew over 8%. . These macroeconomic achievements have
allowed the country to achieve fiscal consolidation.
WORLD BANK ASSISTANCE TO PAKISTAN

• The World Bank's strategy is to support implementation of the

Government of Pakistan’s own Poverty Reduction Strategy
Paper (PRSP) and to provide financing and technical
assistance for both economic and human development. The
strategy is built around three main themes which correspond to
the pillars of the PRSP.
– HIGH AND BROAD BASED GROWTH, AND IMPROVING
COMPETITIVENESS
– Improving governance
– IMPROVING LIVES AND PROTECTING THE
VULNERABLE
WORLD BANK ASSISTANCE TO PAKISTAN

– HIGH AND BROAD BASED GROWTH, AND IMPROVING

COMPETITIVENESS
• Pakistan’s PRSP emphasizes the importance of sustaining
rapid and broad-based economic growth as the principle
means of reducing poverty. There were constraints in
significant policy, regulatory, and infrastructure progress. To
help address these constraints, , the Bank program will
support legal and regulatory reforms to improve the business
environment along with investments in water, power etc.
– Improving governance
• Improving government performance is a central element of
Pakistan’s poverty reduction strategy.
WORLD BANK ASSISTANCE TO PAKISTAN

• IMPROVING LIVES AND PROTECTING THE

VULNERABLE
– The World Bank also supports Pakistan’s efforts to improve
the lives of its citizens through efforts to improve access to,
and quality of, public services in education, health,
electricity, water supply, and sanitation, with an emphasis
on addressing gender disparities.
Recent loan from world bank
• According to dawn news which reflected in an “unprecedented
$1.8 billion loan” the World Bank recently approved for
development projects.
• The World Bank is also helping Pakistan raise funds for the
multi-year Dasu dam on the Indus River in Kohistan, with a
capacity to generate 1500MW of electricity.
• “This is a big sign of confidence in Pakistan’s ability to
accomplish development for its people that the World Bank is
allocating an unprecedented amount in one year,” Dr Shaikh
said.
Difference between IMF and WB
International Monetary Fund
1 Purposes
oversees the international monetary
system
2 Functions
promotes exchange stability and orderly
exchange relations among its member
countries
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
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
World Bank
seeks to promote the economic
development of the world's poorer
countries
assists developing countries through long-
term financing of development projects and
programs
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)
encourages private enterprises in
developing countries through its affiliate,
the International Finance Corporation (IFC)
 Difference between IMF and WB [cont’d]
International Monetary Fund
5 Source of Funding
draws its financial resources principally
from the quota subscriptions of its
member countries
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
billion)
7 Size and Structure
•has a staff of 2,300 drawn from 182
member countries
•has no affiliates or subsidiaries
World Bank
acquires most of its financial resources by
borrowing on the international bond market
which members pay in about 10 percent
•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
• The and world bank play an important role in trying to
stabilize financial crisis and alleviate poverty. However, their
roles have come under intense scrutiny and both have been
criticized for variety of reasons and from a range of different
sources.
• Conditions of Loans
• Higher taxes and lower spending
– It is argued that the conditions of IMF loans cause more harm than
good. Economist criticize the IMF's insistence on deflationary fiscal
policy (Spending cuts and tax rises) and higher interest rates.
•
Decline in Public Services
– The IMF's and World Bank's "structural adjustment policies"
(SAPs) ensure debt repayment by requiring countries to cut
spending on education and health
• The IMF hurts workers
– Many SAPs require changes in labor laws, such as eliminating
collective bargaining laws and lowering wages in order to
provide conditions favorable to attracting foreign investors.
Devaluation
the IMF is criticise for allowing devaluations.
Reduce the subsidies
• The impose the condition to reduce the subsidies on electricity, gas,
agriculture etc.
Free Market
• As well as being criticized for implementing 'free market reforms it
greatly effects the domestic industry of developing countries
• One Size Fits All.
• The IMF frequently argues for the same economic policies
regardless of the situation. For example, devaluation of the
exchange rate may help many countries, but, it doesn't mean that
this is always the solution. Policies of privatization and deregulation
may work better in developed countries in the West, but, maybe
more difficult to implement in the developing world.
• IMF and world bank support military dictatorship
• IMF and world bank support military dictatorship in order to
open the door for only one window operation.
IMF and world Bank rein by developed
countries
IMF and bank is dominated by developed countries The
U.S. is the largest shareholder with a quota of 16.75%.
U.S., Germany, Japan, France and Great Britain together
hold about 38% of the vote. America enjoys only veto
power.