Global Financing and Exchange Rate Mechanisms

¶ … IMF and World Bank in global financing and exchange rate fluctuations

The International Monetary Fund plays a crucial role in the world's economy, especially in global financing and exchange rate fluctuations. However, its influence ranges well beyond those disciplines.

The main responsibility of the International Monetary Fund is to provide loans to nations experiencing balance of payments difficulties. The International Monetary Fund's involvement allows these countries to stabilize their currencies, rebuild their international reserves, continue to import much needed goods, and generally set the stage for strong economic growth.

A country can only ask for International Monetary Fund assistance when it has a serious balance of payments deficit, as in, more money goes out than comes in, and it cannot get financing to meet its international obligations.

The general understanding is similar to the United States Bankruptcy Code, which is, no one benefits from insolvency, neither the debtor nor the creditor, and third parties suffer too. All parties benefit if investments and cash are infused into the insolvent party.

The International Monetary Fund's influence has increased rapidly over the years as new democracies are created and communism fell all over the globe. Suddenly, new economies are born with no viable means of self-support, and are gravely in need of currency help, debt-servicing and import assistance. That is where the International Monetary Fund helps.

International Monetary Fund loans differ from country to country, but in general are for a manageable term period such that the debtor nation is not plunged into more economic strife as a result.

Proponents of third world debt relief, however, would disagree strongly, arguing that the International Monetary Fund actually hurts more than it helps. Some sources argue that for every $1 of aid going to third world nations from the West, $9 comes back in debt-servicing; or at least is owed in debt-servicing.

The World Bank plays an entirely different role. With subscribed capital of $140 million and 8,000 staff, the World Bank has played a key role in the global economy. It is the biggest single financier of development projects in the world, having committed U.S.$23 billion in 1993 to Southern governments.

The World Bank operates through three affiliates.

1) The International Bank for Reconstruction & Development (IBRD), the original World Bank -- loans money at market interest rates mainly to middle-income nations.

2) The second affiliate, the International Finance Corporation (IFC) -- makes loans and equity investments to privately owned firms. It is run as a semi-autonomous agency, with its own managing vice president and a separate staff.

3) The International Development Association (IDA), makes concessional (no-interest) loans to the poorest countries --those with per capita annual incomes of $805 or less -- with payback periods of up to 40 years. The IBRD and IDA operate as a single agency with two "checkbooks," sharing a common management, staff, and facilities. They accounted for 92% of the World Bank's total loans in 1993.