Countries do not have the same financial muscle and this has given rise to various financial institutions. Countries, which are considered to be somewhat affluent, have played a critical role in the establishment of financial institutions like IMF and the World Bank among others. This study shows that such financial institutions are critical in enhancing the financial muscle of weak governments especially in the establishment of projects and improvement of infrastructure through grants and loans. The roles of these institutions cannot be underestimated.
Global Financing and Exchange Rate Mechanisms
Roles of International Financial Institutions: IMF, World Bank, and ADB
All international financial institutions have their different goals, objectives, varying expertise, and areas of specialization. This study will focus on the role African Development Bank, World Bank and International Monetary Fund on global finance. The partnerships enhanced are geared towards poverty reduction and economic growth that can be maintained. This is according to the recent announcements made by global financial institutions. The International Monetary Fund mainly focuses on promotion of international financial support and macroeconomic stability together with the growth of the member states.
On the other hand, the World Bank has diverted more attention on assisting member states to see a reduction of poverty levels by emphasizing on the development and social, structural, and institutional dimensions. Evidently, the reform for the financial sector is a key role promoted by international financial institutions. Collaboration will be very important in ensuring that international policies are complementary in a comprehensive approach. The African Development Bank is designated to contribute to the social and development progress of the regional members. Their main operational focus is on development of agriculture and rural areas, development of human resource, development of the private sector, environmental, cooperation, integration, economic and sex issues (Ooi, 2010).
Despite the fact that international financial institutions have different mandates, they are similar because they both contribute to capacity building and methods in which these contributions are put into practice. The emphasis suppressed by these institutions on complimentarily and coordination of their labors fosters effectiveness of the contributions they make to capacity building. International financial institutions provide financial support like loans, but to some cases that are critical, they grant element-to assist the authority of the state to achieve their objectives that had been agreed upon with former consultation. This financial assistance may offer support to certain investments-for instance capacity building and infrastructure. It may be in the specific subject sector or wide economy adjustment program (Olokesusi, & National Emergency Management Agency, 2006).
International financial institutions give support to the efforts put forward by authorities to make up policies for achievement of certain social and economic targets. In many cases, this is inclusive of the extensive consultations with the two key players like officials and representatives of the private sector. It may also include the international institutions' resident staff and the headquarters to give their consent on the identity of the bottlenecks and the most critical issues posing threat to the country. After this, preparations follow of a report that has been written analyzing the proposed policy and findings for use by the staff of the international institution. The packages of policies that have been agreed upon may be inclusive of assistance or funds that certainly target on enhancement of the capacity in economic or social areas (Bakker, 2009).
A significant aspect in encouragement of the private sector seeks participation in the arranged IFI financings is the recommended creditor status that come up from the provision of a preference to the IFIs when there is a limit of resources for repayment of the external creditors, and not linking the IFI loans with the debt rescheduling of the country. The subject status was instituted to reduce IFIs' risk (together with the shareholders) because of the special function within the society of the international financial institutions. Therefore, it would be essential to note the existing status that the creditors prefer not by law but custom, but may have been given the honor in cases where states have encountered debt problems.
Many other guarantee instruments have been developed by IFIs. Instruments used for political risks have encouraged the lenders of the private sector to be involved in projects of developing countries in the recent years. IFIs have critical attention than lenders of the private sector in evaluating whether the subject project to be financed is correct in the context of the wider economy of the host nation. This will make either side serve the same purpose when the host governments rally against IFIs attempts to use lending in financing projects whilst promoting the politico-economic agenda. Similarly, when a project encounters trouble in its course, an IFI must have more long-term agendas. This will help in resolving the problems that may not be necessary for an investor or lender seeking to repay a loan or recover the equity (Jeanne, Zettelmeyer, & International Monetary Fund 2007).
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