Skyline Business School

Assignment of
Role of International financial institutions
Faculty Mrs Rajni Gupta
Subject code BB0030

Submitted by:
Rajat suri
520771334
BBA L3S2
Q1. Explain briefly the methods by which the IMF lends funds to member countries.

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 rates and
facilitate development. 

The Buffer Stock Financing Facility (BSFF) –

The Buffer Stock Financing Facility (BSFF) was established in 1969 to provide assistance to
members in connection with their contributions to international buffer stocks of primary
products, operating in the context of approved international commodity agreements
(ICAs). The BSFF was the Fund's contribution to the international community's efforts to
stabilize commodity prices, which were seen at the time as excessively volatile, with
damaging consequences for the stability of export earnings of developing countries heavily
dependent on commodity exports. The BSFF provides support in the context of those ICAs
whose objective is the stabilization of international prices through market intervention by
buffer stocks, and that satisfy certain participation requirements adopted by the United
Nations Economic and Social Council, in particular that they are open to participation of
both consuming and producing countries, and that they do not maintain artificially high
prices through long-term restrictions of supply.

EXTENDED FUND FACILITY-EFF

 The Fund will be prepared to give special assistance to members to meet balance of
payments deficits for longer periods and in amounts larger in relation to quotas than has
been the practice under existing tranche policies. Such assistance will be given in the form
of extended arrangements in support of comprehensive programs that include policies of
the scope and character required to correct structural imbalances in production, trade, and
prices when it is expected that the needed improvement in the member's balance of
payments can be achieved without policies inconsistent with the purposes of the Fund only
over an extended period. The Fund will pay particular attention to the policy measures that
the member intends to implement in order to mobilize resources and improve the
utilization of them and to reduce reliance on external restrictions, the time required for
these measures to have the intended effect on the balance of payments, and such other
factors as the Fund considers relevant to the member's circumstances.
Supplementary financing facility-SFF

Subsidy payments made after the effective date of this Decision with respect to charges
paid on holdings of currency referred to in Section 7 of the Instrument establishing the SFF
Subsidy Account may be made, at the discretion of the Fund, in SDRs to beneficiaries
agreeing to receive them, or in U.S. dollars, or in a combination of these two assets. Subsidy
payments in U.S. dollars shall be made on the basis of the SDR/U.S. dollar exchange rate in
effect three business days before the payment date.

Structural Adjustment Facility (SAF) the Structural Adjustment Facility (SAF),

Were set up to assist low-income countries address deep-seated and persistent economic
problems, as part of a broader effort involving support from the World Bank and other
agencies and donors in the international community. When they applied for SAF or ESAF
assistance, many of these countries were struggling with the legacy of development
strategies based on state intervention, public ownership, and protectionism. These policies
had stifled entrepreneurship, promoted waste and corruption, and exacerbated their
economies' vulnerability to economic shocks. In many countries weaknesses had been
masked during the 1970s by heavy foreign borrowing and improving terms of trade. But
when world commodity prices plummeted and interest rates rose in the early 1980s, both
the debts and policies they had financed became unsustainable

Enhanced Structural Adjustment Facility (ESAF)

Arrangement through which International Monetary Fund (IMF) provides medium-term (5

to 10 years) concessional loans for balance of payments adjustment to the
poorer countries., Introduced in 1987, it follows the same policy framework paper as
the structural adjustment facility (SAF) introduced in 1986, but
has triple the resources and monitors the borrowers'performance even more closely. Some
65 countries are eligible for assistance under the ESAF.

At the new millennium, the IMF, along with the World Bank and member countries, has
been trying to help developing countries better position themselves to speed up growth
and eradicate poverty. For many developing countries, despite decades of their own efforts
and assistance from the international community, progress has been woefully inadequate,
especially in poverty reduction.

The compensatory element of the CCFF (the CFF)

The compensatory element of the CCFF (the CFF) is designed to provide compensation to
member countries experiencing shortfalls in export earnings and/or excesses in cereal
import costs. The eligibility criteria require that the shortfall/excess be temporary and
stem from factors beyond the authorities' control, and that the member have a balance of
payments need. In addition, where the member is experiencing balance of payments
difficulties beyond the effects of the temporary shortfall/excess, the member is expected to
cooperate with the Fund in an effort to address them. The export shortfall (cereal import
excess) is calculated as the amount by which a member's export earnings (cereal import
costs) for a 12-month period are below (above) their medium-term trend.6,7 Various other
provisions of the facility ensure that requests for compensatory financing are met in a
timely fashion, in particular that a request cannot be made later than six months after the
end of the shortfall year, and, in cases where the authorities foresee a shock, that the
calculation for the shortfall year may include up to 12 months of estimated data.

Q2. Write a brief note on the lending operations of IBRD. How are they different than
the IMF.

Ans- IBRD LENDING OPERATIONS

Fund Generation

IBRD lending to developing countries is primarily financed by selling AAA-rated bonds in the
world's financial markets. While IBRD earns a small margin on this lending, the greater proportion
of its income comes from lending out its own capital. This capital consists of reserves built up over
the years and money paid in from the Bank's 185 member country shareholders. IBRD’s income
also pays for World Bank operating expenses and has contributed to IDA and debt relief.

Loans
Through the IBRD and IDA, we offer two basic types of loans and credits: investment operations
and development policy operations.
Countries use investment operations for goods, works and services in support of economic and
social development projects in a broad range of economic and social sectors. Development policy
operations (formerly known as adjustment loans) provide quick-disbursing financing to support a
country’s policy and institutional reforms.
Each borrower’s project proposal is assessed to ensure that the project is economically, financially,
socially and environmentally sound. During loan negotiations, the Bank and borrower agree on the
development objectives, outputs, performance indicators and implementation plan, as well as a
loan disbursement schedule. While we supervise the implementation of each loan and evaluate its
results, the borrower implements the project or program according to the agreed terms. As more
than 30% of our staff is based in over 100 country offices worldwide
Trust Funds and Grants
Donor governments and a broad array of private and public institutions make deposits inTrust
funds that are housed at the World Bank. These donor resources are leveraged for a broad range of
development initiatives. The initiatives vary significantly in size and complexity, ranging from
multibillion dollar arrangements—such as Carbon Finance; the Global Environment Facility; the
Heavily Indebted Poor Countries Initiative; and the Global Fund to Fight AIDS, Tuberculosis, and
Malaria too much smaller and simpler freestanding ones.
 IDA grants—

Which are either funded directly or managed through partnerships—have been used to:
1. Relieve the debt burden of heavily indebted poor countries
2. Improve sanitation and water supplies
3. Support vaccination and immunization programs to reduce the incidence of
communicable
diseases like malaria
4. Combat the HIV/AIDS pandemic
5. Support civil society organizations
6. Create initiatives to cut the emission of greenhouse gases

Analytic and Advisory Services

While we are best known as a financier, another of our roles is to provide analysis, advice
and information to our member countries so they can deliver the lasting economic and
social improvements their people need. We do this in various ways. One is through
economic on broad issues such as the environment, poverty, trade and globalization Another
is through country-specific, non-lending activities such as economic and sector work,
where we evaluate a country's economic prospects by examining its banking systems and
financial markets, as well as trade, infrastructure, poverty and social safety net issues,

These are only some of the ways our analyses, advice and knowledge are made available to
our client countries, their government and development professionals, and the public:
1. Poverty Assessments
2. Public Expenditure Reviews
3. Country Economic Reports

Capacity Building

Another core Bank function is to increase the capabilities of our partners, the people
in developing countries, and our own staff —to help them acquire the knowledge and
skills they need to provide technical assistance, improve government performance
and delivery of services, promote economic growth and sustain poverty reduction
programs. Linkages to knowledge-sharing networks such as these have been set up
by the Bank to address the vast needs for information and dialogue about
development:
Q3. In the current scenario, examine the relevance of the above two institutions.

The International Monetary Fund (IMF)

The IMF is an international organization of 184 member countries. It was established to

promote international monetary cooperation, exchange stability, and orderly exchange
arrangements; to foster economic growth and high levels of employment; and to provide
temporary financial assistance to countries to help ease balance of payments adjustment.

Since the IMF was established its purposes have remained unchanged but its operations—
which involve surveillance, financial assistance, and technical assistance—have developed
to meet the changing needs of its member countries in an evolving world economy.

IMF: Role

The International Monetary Fund was established by international treaty in 1945 to help
promote the health of the world economy. Headquartered in Washington, D.C., it is
governed by its almost global membership of 184 countries.

The IMF is the central institution of the international monetary system—the system of
international payments and exchange rates among national currencies that enables
business to take place between countries.

It aims to prevent crises in the system by encouraging countries to adopt sound economic
policies; it is also—as its name suggests—a fund that can be tapped by members needing
temporary financing to address balance of payments problems.

IMF: Resources

The IMF's resources come mainly from the quota (or capital) subscriptions that countries
pay when they join the IMF, or following periodic reviews in which quotas are increased.
Countries pay 25 percent of their quota subscriptions in Special Drawing Rights (SDRs, see
Box 3) or major currencies, such as U.S. dollars or Japanese yen; the IMF can call on the
remainder, payable in the member's own currency, to be made available for lending as
needed. Quotas determine not only a country's subscription payments, but also the amount
of financing that it can receive from the IMF, and its share in SDR allocations. Quotas also
are the main determinant of countries' voting power in the IMF.

If necessary, the IMF may borrow to supplement the resources available from its quotas.
The IMF has two sets of standing arrangements to borrow if needed to cope with any threat
to the international monetary system:
1. the General Arrangements to Borrow (GAB), set up in 1962, which has 11
participants (the governments or central banks of the Group of Ten industrialized
countries and Switzerland), and

2. the New Arrangements to Borrow (NAB), introduced in 1997, with 25 participating

countries and institutions. Under the two arrangements combined, the IMF has up to
SDR 34 billion (about $50 billion) available to borrow.

Functions of IMF

1. Guardian of good conduct’ in the area of Balance of payments

2. Reducing tariffs and other trade restrictions

3. Provides technical advice

4. Provides short term financial assistance to its member countries

5. Provides machinery for orderly adjustment of exchange rates

1. Reservoir of currencies

2. Lending institution of foreign currencies

Relationship between World Bank and IMF

The World Bank is a collection of international organizations to aid countries in their

process of economic development with loans, advice, and research. It was founded in the
1940s to aid Western European countries after World War II with capital.

A multilateral development finance agency created by the 1944 Bretton Woods, (New
Hampshire) negotiations. It makes loans to developing countries for social overhead capital
projects that are guaranteed by the recipient country

While the World Bank provides support to developing countries, the IMF aims to
stabilize the international monetary system and monitors the world’s currencies.

1. IMF and World Bank both were created at an International Conference convened in
Bretton Woods.

2. IMF promotes international monetary cooperation and provides policy advice and
technical assistance to maintain strong economies.

3. The World bank promotes long-term economic development and poverty reduction
to help countries reform particular sectors or implement specific projects
4. IMF and World bank collaborate regularly and at many levels on assistance to
member countries and are involved in several joint initiatives.

World Bank: Purpose

1. The World Bank is one of the world’s largest sources of funding and knowledge to
support governments of member countries in their efforts to invest in schools and
health centers, provide water and electricity, fight disease, and protect the
environment.

Loan procedure

1. The World Bank offers two basic types of loans:

 investment loans for goods, work and services to support economic and social
development projects in a broad range of sectors;
 adjustment loans to support policy and institutional reforms

2. During loan negotiations, the World Bank agrees with the borrowing country on the
development objective of the project or program, outputs, performance indicators
(to measure the impact and success of the project) and a plan to put it all into
practice.

3. Once a loan is approved and becomes effective, the borrower puts the project or
program into practice according to the terms agreed with the World Bank.

4. The World Bank supervises how each loan is used and evaluate the results. All loans
are governed by operational policies, which make sure that operations are
economically, financially, socially and environmentally sound.