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Multilateral Financing

Multilateral Financing

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Multilateral Financing ,The International Monetary Fund (IMF),www.gkguide.net
Multilateral Financing ,The International Monetary Fund (IMF),www.gkguide.net

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MULTILATERAL FINANCING

Multilateral Financing By www.GkGuide.Net

Introduction
 This lecture is designed to expose you to the type of

funding that emanate from the Britton Woods Institutions; the World Bank and the International

Monetary Fund. These institutions continue to play a significant role in the development of third world countries. Understanding their operations will facilitate your appreciation of the criteria used to fund public sector projects from these sources. This lecture is very useful for public sector management.

The Bretton Wood Institutions; what are they?
 The term “Britton Woods Institutions” was coined in

reference to the place in which these institutions were established. Britton Wood is a resort in the White Mountains, of the New Hampshire, USA. This was the venue for the United Nations monetary conference which was held from 1-22 July 1944. It is this conference that established a new International Monetary System the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development, (The World Bank)

The Bretton Wood Institutions; what are they? Cont…..
 The World Bank and the International Monetary Fund

were created after the end of the Second World War, in 1944. They were set up according to the ideas of three key experts: the US Treasury Secretary Henry Morganthau, his chief economic advisor Harry Dexter White, and the British economist John Maynard Keynes. Their plan was to establish a postwar economic framework based on mutual decision-making and cooperation in the field of trade and economic relations.

The Bretton Wood Institutions; what are they? Cont…..
 The birth of the World Bank and the IMF managed to

institutionalize the principle of government responsibility for the economic outcomes in market economies, at a global level. The vision of the ones who designed the Bretton Woods institutions was that within a short period of time governments should fix the exchange rates and remove the restrictions on current account transactions.

The Bretton Wood Institutions; what are they? Cont…..
 The role of the IMF was to ensure the temporary

financing and the timely adjustment of the balance-ofpayments deficits, which would arise from the account imbalances. The World Bank was established to ensure the long term financing of the reconstruction that followed the destruction caused by the war in Europe, Japan and China. Furthermore, it would ensure development in non-industrial countries.

The International Monetary Fund (IMF)
 The

IMF was established in 1945. Its current membership is 184 members to date, including Kenya. According article to I of Articles of Agreements of the International Monetary Fund, it has the following aims: i. To promote the international monetary co-operation through a permanent institution. ii. To ensure that consultation and collaboration on international monetary problems is achieved. iii. To facilitate the expansion and balanced growth of international trade that is aimed to promote, high

The International Monetary Fund (IMF)n cont….
levels of employment, real income and the development of the productive resources of all members as primary objectives of economic policy. iv. To promote exchange stability, v. To maintain orderly exchange arrangement among members, vi. To assist in the establishment of a multilateral system of payment in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade.

The International Monetary Fund (IMF)n cont….
vii. To give confidence to members by making the

general resources of the Fund temporarily available to them under adequate safeguards thereby providing them with the opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity. In accordance with the above, to shorten the duration and lessen the degree of disequilibrium in international balances of payment of members.

Focus of IMF
 To fulfill its objects, its operations revolve around the

following four areas: i. Surveillance: The monitoring of economic and financial developments, and the provision of policy advice, aimed at crisis prevention. ii. Lending: to countries with balance of payments difficulties as a means of providing temporary financing and in order to support policies aimed at correcting the underlying problems. In addition, loans are provided to low-income countries which are especially aimed at poverty reduction.

Focus of IMF cont…
iii. Technical assistance and training: these are

provided in its areas of expertise. iv. Research and statistics: This function is aimed at supporting the previous three aspects of the work of IMF.  In recent years the IMF has applied its surveillance and technical assistance work to the development of standards and code of practice in its areas of responsibility and to the strengthening of financial sectors. Examples of these standards and codes are data standards, fiscal transparency and transparency in monetary and financial policies.

Focus of IMF cont…

Loans from IMF are usually provided under an arrangement whereby there are conditions that a country must meet in order to gain access to the loans stipulated. These arrangements are based on economic programmes formulated by countries in consultation with the International Monetary Fund. Loans are released in phased installments as the agreed programmes are carried out. The IMF lending can take the form of concessional and nonconcessional lending. These diverse loan instruments or facilities are tailored to the requirements of its diverse membership. The IMF attempts to discourage an excessive use of its resources by imposing a surcharge (an interest rate premium) on large loans.

Concessional IMF Facilities
 A facility is said to be concessional when the cost of

money; interest rate charged is significantly below the market rates. The Poverty Reduction and Growth facility (PRGF): Assistance to developing countries was for many years provided through Enhanced Structural Adjustment Facility (ESAF). In 1999 a decision was made to strengthen the focus on poverty alleviation and the ESAF was replaced by the Poverty Reduction and Growth Facility (PRGF). Loans under this facility are based on a Poverty Reduction Strategy Paper which is prepared by the country in collaboration with civil society and other developing partners, especially the World Bank. The interest rate levied on PRGF loans is in the vicinity of 0.5 percent and loans repayment is over a period of 5.5-10 years.

Concessional IMF Facilities cont….
 The following example demonstrates the extent of

failure of ESAF. Most of these countries (even those that were considered “success stories” of Ghana and Uganda) could not pay back zero-interest Structural Adjustment Loans, and the World Bank and IMF had to forgive the debts through the Heavily Indebted Poor Countries (HIPC) initiative. It is this dismal experience that led to rethinking of how aid could raise growth, even if it were unsuccessful at changing policy.

Concessional IMF Facilities cont….
a d a g a sn ca e a o ’o h i. I a g m n g vt a l u e o y in a b r g a i w a i rt a e i a l i . 1 2 6 % 7 8 2 9 1 4 3 5 0 6 2 . % 8 2 3 0 % 0 % % r a

Examples

Non-Concessional IMF Facilities
 The non-concessional IMF facilities are subject to IMF’

s market related interest rate which takes into account the changes in short term interest rates in the major international money markets. You must take note that the majority of the IMF facilities are non-concessional which partially explains why the debt burden for developing countries has increased over time. The nonconcessional facilities include the following:

Non-Concessional IMF Facilities cont….
Stand-By Arrangements (SBA): this facility is

designed to deal with short-term balance- ofpayments problems and is the most widely used facility of the IMF. It typically has a length 12-18 months and repayment is normally expected within 2.5-4 years unless an extension is approved. It is the commonly used facility because the majority of the third world countries often experience balance of payment constraint resulting from the trade imbalance between them and their trading partners in the developed world.

Non-Concessional IMF Facilities cont….
 The Extended Fund Facility (EFF): this facility was

established in1974 with the aim of helping countries to address protracted balance-of- payments problems that were rooted in the structure of the economy. Given this emphasis arrangements under this facility are longer and repayment is normally expected within 4.5-7 years unless an extension is specifically approved. You will remember that the years 1993/4 was characterized by the international oil crisis that impacted negatively to poor countries. This facility was therefore conceived to assist the many countries which experienced protracted balance-of-payments problems. You, as a discerning student should notice that this solution, proposed by IMF did not target the root cause of balance of payments problems, it is no wonder that many countries found themselves dependent on the IMF.

Non-Concessional IMF Facilities cont….
 Supplementary

Reserve Facility (SRF): this facility was introduced in1997 in order to meet a need for very short term financing on a large scale. Under this facility countries are expected to repay loans within 1-1.5 years, although an extension of up to 1 year may be requested.

Non-Concessional IMF Facilities cont….
 Contingent Credit Lines (CCL): this facility was

established in 1999 and it differs from the other IMF because it aims to help member countries to prevent crises. It is aimed at countries which are implementing sound economic policies but which may find themselves threatened by a crisis elsewhere in the world economy. It is subject to the same repayment conditions as the SRF except it carries a smaller surcharge of 1.5-3.5 percentage point.

Non-Concessional IMF Facilities cont….
 Compensatory

financing facility (CFF): this facility was established in the 1960s with the aim of helping the countries that were experiencing a sudden shortfall in export earnings or an increase in the cost of cereal imports caused by fluctuating world commodity price. The financial terms are the same as those of the SBA facility, except that CFF loans carry no surcharge. Emergency Assistance (EA): the IMF provides emergency assistance to countries that have experienced natural disaster or are emerging from a conflict situation. Those loans are subject to the basic rate of charge and must be repaid within 3.25-5 years.

The World Bank Group
 The World Bank Group is made up of five closely

associated institutions all owned by the member countries. These institutions are: i. The International Bank for Reconstruction and Development ii. The International Development Association iii. International Finance Corporation (IFC) iv. The Multilateral Investment Guarantee Agency v. International Centre for Settlement of Investment Dispute

The World Bank Group cont….
 The role of the World Bank group is to fight poverty

and improve living standards in developing countries. Each of these institutions plays a distinct role in poverty reduction. Notice that the term World Bank Group includes all the 5 institutions whereas the term World Bank refers to the International Bank for Reconstruction and Development (IBRD) and the International Development Agency (IDA).

The International Bank for Reconstruction and Development (IBRD)
 The World Bank (IBRD) was established in 1945 and

has currently 184 members, including Kenya which became a member on February 3rd 1964. The IBRD aims to reduce poverty by promoting sustainable development in the middle-income and creditworthy poorer countries by means of loans, guarantees and none lending services such as analytical and advisory services. You need to notice, the term “credit worthy”. The World Bank is not a charity; member countries must merit such lending.

The International Bank for Reconstruction and Development (IBRD) cont…
 The IBRD does not aim at maximizing profits although it

has earned a net income each year since 1948. This explains the level at which its services are patronized by especially the needy countries, the third world. Its profits fund several developmental activities and ensure financial strength which in turn enables relatively low-cost borrowing in capital markets. It is owned by the member countries and the voting powers power is linked to member capital subscription. These subscriptions are in turn based on a country’s relative economic strength. This explains why the World Bank is perceived to be controlled by western countries especially the USA. Poor countries that in fact happen to be the major customers of the bank do not have significant voting power. This fact raises the question about whose interest does the World Bank promote and the extent to which the customers are heard.

International Development Association (IDA)
 IDA was established in 1960 and has 162 members to

date. The IDA helps the world’s poorest countries to reduce their level of poverty by providing interest free credit with a ten year grace period and maturities of 35 to 40 years. In most of the countries supported by IDA, per capita incomes are less than US$ 500 per year. Its aim is to provide access to better basic services such as health and education and supports reforms and investment aimed at employment creation and productivity growth.

International Finance Corporation (IFC)
 IFC was established in 1956 and currently has 175

members. The mandate of IFC is to further economic development through the private sector. In association with business partners it invests in sustainable private enterprises in developing countries and also provides long-term loans, guarantees, and risk management and advisory services to its clients. The IFC invests in regions and projects in regions and sectors which are insufficiently served by private investment and seek new ways to develop promising opportunities in markets which are considered too risk by commercial investors in the absence of IFC participation.

Multilateral Investment Guarantee Agency (MIGA)
 MIGA was established in 1988 and to date has 157

members. MIGA aims at promoting foreign direct investment into emerging economies in order to improve people’s lives and to reduce poverty. This mandate is fulfilled by offering political risk insurance in the form of guarantees to investor and lenders thereby helping developing countries to attract and retain foreign investment. These non-commercial risks include expropriation, currency inconvertibility and transfer restrictions, and war, political and civil disturbances. MIGA’s guarantee coverage requires investors to adhere to high social and environmental standards. MIGA also provides technical assistance to help countries disseminate information on investment opportunities. MIGA offers investment dispute mediation on request.

International Centre for Settlement of Investment Dispute (ICSID)
 The ICSID was established in 1966 and currently has 134

members. ICSID aims at encouraging foreign investment by the provision of international facilities for conciliation and arbitration of investment disputes. It helps to encourage an environment of mutual confidence between states and foreign investors. Many international agreements in the area of investment refer to arbitration facilities provided by ICSID. Recourse to ICSID reconciliation and arbitration is voluntary, although once parties have consented to arbitration under the ICSID Convention; neither can unilaterally withdraw its consent. ICSID has research and publishing activities in the areas of arbitration law and foreign investment law.

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