Impact of IMF, WB on Municipal Finances - Essay Sample

History of IMF and World Bank

The International Monetary Fund (IMF) was founded in 1994, during the Bretton Woods Conference; it is among the United Nations specialised agencies. It aimed to expand the international liquidity, stabilise the currency exchange rates, and to secure the international monetary cooperation. The events that took place in the early 20th century during the two words left enormous economic and physical destruction that lead to the Great Depression both in the United States and Europe. The destructions kindled the need for an international monetary system that would aid in eliminating the destructive mercantilist trade policies such as foreign trade exchange restrictions and competitive devaluations. Moreover, the IMF was formed to ensure a reduction in the severity and frequency of balance-of-payments; and ensure stabilised currency exchange rates. It was the hope of the framers of the new Bretton Woods Monetary regime would promote economic growth, world trade, and investment through the maintenance of convertible currencies. The monetary regime would ensure that countries with moderate balance-of-payments would borrow foreign currency from IMF other than imposing deflationary economic policies, devaluations or exchange controls that could lead to economic problems in other countries.

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Functions of IMF and World Bank

IMF and the World Bank are often referred to as Bretton Woods Institutions; they support the world's financial and economic order. The two institutions have expanding roles. However, there are calls for these institutions to enhance a single global monetary agreement. However, the two institutions seem to have overlapping roles or confusing roles. There are similarities among these institutions; for instance, both IMF and World Bank share research efforts, sessions, and joint task forces. They are all headquartered in Washington, D.C, in the U.S. Both hold annual meetings and focus on strengthening and broadening the economies of their member states. They are both concerned with economic issues, and almost every country is a member of the two. Lastly, they are directed and owned by the governments of the member states. However, the IMF is a cooperative institution that focuses on ensuring an orderly system of receipts and payments between countries, while the World Bank is a development institution. Each of these institutions has a distinct structure, different purposes, has different sources of funds, and strives to achieve distinct objectives through different strategies and procedures. Since the inception of IMF, its core functions include providing technical assistance and advice to borrowing countries and financing member countries through the short-term balance-of-payments deficits and stabilising currency exchange rates. One of the main functions of the IMF includes economic surveillance that involves research where the institution does country studies and cross-country studies to reform the financial system. Surveillance also involves the identification of potential vulnerabilities through early warning exercises. It also assesses the financial sector stability through the financial sector assessment. The surveillance cuts across regional, multilateral, and bilateral surveillance.

The World Bank provides grants, interest-free credits, and low-interest loans to developing countries. The Bank does not fund a trade deficit, but it is directed to make loans for the projects. Its current main objective is to help raise the productivity of people in developing countries by promoting social and economic progress. For instance, the Bank provided $ 46.9 billion in 2009 to developing countries across the world to finance more than 300 projects. The projects were aimed at reducing the poverty levels in these countries. Currently, the Bank is involved in over 1,800 projects that cut across different sectors in developing countries.

The World Bank has continued to develop policies since 1944. It has attempted to tackle the challenges related to poverty. Since its inception, the Bank has always focused on guaranteeing development for loans for poorer countries from private banks and reconstructing the European economies (Rich in Danaher, 1994). From 1945-1980, the Banks projects focused on building dams and road construction and adjusting the national policies to a limited extent. However, its functions shifted to the introduction of Structural Adjustment Programs from the policies directed by the 1980s.These policies were complementary and similar to the ones that had been introduced by the International Monetary Fund. The objectives of the World Bank's SAPS where related to the IMF's program that was related to liberating trade in the developing world by imposing economic policies. The program focused on macroeconomics, domestic deregulations on trade, and privatisation that aimed at enabling social gains (World Bank, 1997). The SAP schemes worked well for some of the countries such as Singapore, Korea, Hong-Kong, and Taiwan as they experienced an unprecedented economic boom due to the liberalisation of their economies (Lateef, 1996). These countries have ended up becoming richer compared to their colonial powers (Lateef, 1996). The living standards of many people have improved, and over 230 million were lifted out of poverty (Lateef, 1996).

However, in some parts of Africa, the Structural Adjustment Programs made the situation worse other than improving them. This was due to a lack of good governance and the hand due to problems with conditionality. For instance, a country like Zambia had problems with securing new agreements with the World Bank and the IMF in 1987 as its public debt had risen due to the liberalisation of its economy. Based on the previous challenges, the World Bank shifted to addressing the financial problems that faced the developing world during the implementation of its previous programs in the 1990s. The problems that the World Bank focuses on consist of the lack of good governance and mismanagement of funds by local authorities in the receiving countries. The Bank has committed itself to support areas such as Agricultural technology or Fisheries while emphasising the environmental, financial mechanisms (Milazzo, 1998). The Bank embarked on environmental protection standards as a way of combating poverty. The Bank emphasised the protection of the environment to alleviate the living conditions of the poor (Rich, 1994). The policies on environmental management, as proposed by the World Bank, are essential in ensuring that the poor conserve the environment for their benefit. For instance, the poor could destroy a forest hence leading to environmental degradation as they source for firewood and timber for their economic use (World Bank, 1997). However, these policies, as advanced by McNamara, could behave suffered an inefficient top-down control and lack of accountability.

Role of IMF and World Bank In the International Monetary System and Credit Relations

The African countries will benefit from the New Development Bank compared to the IMF. For instance, the African Countries will benefit from stronger gross domestic product growth due to higher exports. In the future, further production achievements will be gained because there is a stronger demand for primary commodities in the world hence a new platform for Africa due to the new development of products from natural resources.

Africa, among other low-income countries, would benefit from the surge in FDI from the BRICs. For instance, in 2009, at a total of US$2.2 billion reached the LICs inform of the FDI flows from BRICs amounting to 2-3 % of the total FDI flows from these financial institutions (Forbes, 2014). Since 2008, the cross-border capital flows and the global financial intermediation has changed significantly. This scenario is large because of the reduction in the international bank lending and not the international portfolio exposures and the decline of the FDI (Cuerrutti and Claessens, 2014).

The traditional approach of benchmarking Fund against the financial and global indicators is relevant to the assessment of the size of the IMF. Fund resources consist of the borrowed resources, members' capital subscriptions to the Fund, and quota. The borrowed resources are the BBAs and the NAB, which are the credit arrangements between a group of member countries and the IMF. When the NAB is exhausted, the BBAs are used; hence this is the difference between the two resources. The balance of payments (BoP) flows-gross external liabilities, -current account payments and financial inflows, international reserves, and GDP are the indicators used to assess the size of these resources. The country's adjustment process could be more difficult and abrupt in the absence of IMF financing. A government would have to go through a painful compression of economic, imports, and spending activities as it adjusts itself if investors are unwilling to provide new financing. IMF facilities are carefully considered and are more gradual. IMF provides a seal of approval that appropriate policies take place, and its lending facilities are accompanied by a set of measures.

The World Bank and the IMF have been engaged in supporting the developing countries, especially during the COVID-19 pandemic outbreak. The institutions have provided $18 billion each to support front-line health services. The funds will also be used to help the poor and the vulnerable, and also, keep the countries, economy afloat during the current global downturn caused by the pandemic. When the world economy is suppressing the development plans, it is projected that Africa's economy will contract by at least 1 1/4 percent this year 2020. The downturn is likely to affect all the countries globally, and the developing countries will be more affected. Therefore preparations by the IMF and World Bank are to ensure that the population will access adequate healthcare by funding the healthcare systems. There is the worry that if 10% of the Africa population gets affected by the pandemic about the U.S., $36 billion will be required to support the public healthcare systems to take care of the COVID-19 patients. The funds will be used to cater for medication and diagnosis equipment and ensuring that there are enough healthcare professionals. The money-lending institutions will support operations such as contact tracing and provision of quarantine centres. The support from the global institutions will control the impact of economic inequality amongst developed and undeveloped countries. Many macroeconomists are of the view that the 2007-2009 Financial Crisis in the U.S. may not have been solely due to deregulation in the financial industry, bu...