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Understanding IMF and the World Bank

It’s your world“, the motto of the United Nations (UN) embodies the importance of the unity of the nations to advance peace and prosperity. The death and destruction caused by the World Wars led the global community to sit together and deliberate on the ways to ensure global peace. This paved the way for the establishment of the United Nations Organization in 1945. One of the four objectives of the UN is “Fostering cooperation between nations in order to solve economic, social, cultural, or humanitarian international problems”. This shows that solving economic problems of the member countries is also the joint responsibility if the global community represented in the UN.

Each country has a unique geographic location, geo political situation and available natural resources. As such, every country has its own distinctive economic set up and face different set of economic problems and issues. Due to globalization and international trade, the modern world especially its economies have become interdependent. Economic recession in one country or the region can create financial ripples travelling across the globe economy and can adversely affect the global economic system. To check this adverse economic effect and ensure better global economy, the world community has established various organizations to help and strengthen the struggling economies to minimize the contagious effects of economic meltdowns. IMF and World Bank are the two most important organizations in this regard.

IMF and World Bank are functioning across the world providing help and assistance to all the countries facing financial restraints to come out of economic shambles. However, their role in developing countries has always been suspected and questioned. Moreover, most of the people generally confuse IMF and World Bank being two names for the same organization. The basic purpose of this article is to help the readers understand the difference between IMF and World Bank and to review the criticism these organizations generally face, especially in Pakistan.

Let us start with their globally acknowledged characterizations explained on their respective websites.

The International Monetary Fund (IMF) is an organization of 189 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. The World Bank is a component of the World Bank Group. The World Bank is an international financial institution that provides loans to countries of the world for capital projects. It comprises two institutions: the International Bank for Reconstruction and Development (IBRD), and the International Development Association (IDA).

 

The world is aware of this confusion as to the identification of IMF and World Bank, which is not confined to masses only. Even professionals including its founding member John Maynard Keynes admitted this confusion in the inaugural meeting of the IMF. World Bank and IMF exhibit various commonalities but still they are quite distinct in their overall role assigned by the international community. IMF has explained these differences on its website, which we have tried to summarize in the following lines:

  • Purpose: The primary responsibility of the World Bank is to finance the economic development. As such, the initial loans of the World Bank were issued to reconstruct the war-torn Western Europe. The IMF in contrast is assigned to help the nations to come out of their financial crises by overcoming their problems like balance of trade, forex reserves, loan payment etc.
  • Size & Structure: The IMF is small with about 2,300 staff members and, unlike the World Bank, has no affiliates or subsidiaries. The World Bank Group with over 7,000 staff members, is about three times as large as the IMF, and maintains about 40 offices throughout the world, although 95 percent of its staff work at its Washington, D.C., headquarters. Among its staff, the World Bank has a unique combination of experts from almost all the social and technical fields.
  • Source of Funding: The World Bank is an investment bank. It acts as an intermediary between investors and recipients. It borrows from the one lending to the other. Its owners are the governments of its 180 member nations with equity shares in the Bank. The IMF, on the other hand, is more like a credit union, which has a common pool of resources. IMF members have access to this common pool of resources subject to meeting certain criteria laid down by IMF. The common pool of resources is the sum total of members’ individual contributions to assist the needy countries in times of need.
  • Recipients of Funding: World Bank lends only to credit worthy governments of developing nations. Poorer the country the more favourable terms they can negotiate with the Bank. Countries having per capita GNP of US$ 1305 or more are entitled to loan from IBRD having an interest rate slightly higher than what bank itself borrows with maturity of 12-15 years. While IDA extend loans to poorer countries with per capita GNP of less than US$1305 with zero interest rate and maturity of 35-40 years. However, when it comes to IMF all the member nations have a right to financial assistance from IMF when there need be. Money received from IMF has an interest rate of slightly below market rate but not as concessional as allowed by World Bank.
  • Operations: The World Bank view development as a long term, integrated endeavor. The Bank helps the poorer countries to realize their economic potential by providing them the financial and technical support. IMF, on the other hand, helps the member countries to achieve exchange stability and balance of payment difficulties.

World Bank and the IMF receives a lot of criticism in Pakistan. People think that we have to compromise our sovereignty and economic independence to get loans from IMF. This is true to some extent as to qualify for the loan the borrowing country have to abide by certain policy guidelines given by IMF. Most of these conditions relate to the financial discipline and can be good for the country in the longer run. However, use of the IMF loans by USA as a tool to dictate the borrowing country to alter its policy to suit USA is also not baseless. Despite all criticism and fears, the role of the World Bank and IMF as a tool of development and savior in case of economic muddle is irrefutable. This is the World Bank and IMF that reflects the resolve of the global community to help each other in case of financial crises to avoid economic chaos and disorder.

(The writer is a sales and business specialist based in Islamabad. He can be reached at nadeem_naj@hotmail.com)

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