Difference between the IMF and the World Bank

Teaching external debt and the role of IMF and World Bank which is part of Unit 4 of CIE A2 syllabus. This is area where students get confused as to the role of each organisation.

The International Monetary Fund (IMF) (http://www.imf.org) promotes international financial stability of the world’s monetary system. Lends to countries with balance of payments problems and aims to promote development by restoring short run stability and by supporting long term adjustment and reform

The World Bank (http://www.worldbank.org) promotes institutional, structural and social development by providing low interest loans and technical assistance for domestic investment projects. It’s goal is to reduce poverty by offering assistance to middle-income and low-income countries. It aims to help countries meet the UN Millennium Development Goals.

Below is a useful video from CNBC on the differences.

Sign up to elearneconomics for multiple choice test questions (many with coloured diagrams and models) and the reasoned answers on developing economies and the IMF/World Bank. Immediate feedback and tracked results allow students to identify areas of strength and weakness vital for student-centred learning and understanding.

IMF: SDR’s and poor countries

When teaching development economics most courses reference special drawing rights (SDR) from the IMF to assist both developing and developed countries. SDR was created in the 1960’s and is a part currency consisting of reserve assets such as dollars and gold. They are valued against a basket of several major currencies and can be swapped for those currencies. Unlike a lot of loans there are no conditions with SDR’s and the interest rate is only 0.05% with no payment deadline.

Since COVID-19 the IMF has assisted countries as follows:

  • extended loans worth about $130bn to 85 countries
  • provided debt-service relief to some poor economies
  • created $650bn in new foreign-exchange reserves

The important aspect about this is that the availability of these reserves should lift market confidence and put less pressure on a country’s foreign currency reserves. The IMF estimates that the global economy will be short of reserve assets of 1.1 to 1.9 trillion.

Why are SDR’s useful for countries

Assuming there is a recovery in the USA this will lead to higher interest rates and money will leave predominately poorer countries to take advantage of the higher return. This will weaken those domestic currencies which in turn make imports more expensive. The new allocation of SDRs will give governments the finance to import essentials like food and vaccines – see graphic.

The more you give the more you get.

The new distribution of SDR’s equates to the proportion of funding that a country provides to the IMF which means that more developed countries will receive more than half the quota. Low income countries get 3.2% or $21bn of the total which seems to be insufficient to cope with public health issues caused by COVID-19 as well as climate change and an economic recovery. Furthermore, more developed countries have greater ability to borrow on global markets than those less developed. However, richer countries are looking at ways of donating some of their new SDRs to poorer nations with contributions of about $15bn in existing SDR holdings have already helped expand an IMF facility offering no-interest loans to poor countries over the past year.

Source: The Economist -Every little helps – 17th July 2021

IMF World Evaluation from the FT

Below is a very good video put together by the FT which summarises the recent IMF Report on the World Economy. Includes:

  • Better growth in China and the Euro zone makes up for slow US growth.
  • US infrastructure spending and tax reform still has to be approved by the senate.
  • Europe looking stronger than expected.
  • Emerging economies still face tough conditions.

Aussie dollar – Pacific Peso to Swiss Franc of the South

A little over a decade ago the Australian dollar was being dismissed as the Pacific Peso but today some are referring to it as the Swiss Franc of the south. This is an indication of its safe-haven status as central banks worldwide start to diversify their reserves away from US dollars and Euros into Aussie dollars.

The IMF recently announced that they intend to make the Australian dollar and Canadian dollar Global Reserve Currencies. Both will be included in the COFER (Currency Composition of Official Foreign Exchange Reserves) surveys, which currently consists of the:

U.S. dollar
Swiss franc
pound sterling
Japanese yen.

The IMF is asking member countries from next year to include the Australian and Canadian dollar in statistics supplied by reserve-holding nations on the make-up of their central banks’ foreign exchange reserves. In previous years the world has had just two reserve currencies:

1. Sterling up to 1914
2. US dollar since the WWI

Notice the drop in the Australian dollar during the start of the financial crisis but its strengthening since 2009. Australia is just one of only seven countries in the world with a AAA-rating from all three global credit ratings agencies – Moodys, Standard & Poors, and Fitch.

Emerging v Developed: Changing of the Guard

The Economist recently focused on the significance of emerging countries over developed countries – a useful article for the Development Economics part of the Cambridge A2 course. As output in most of the developed world contracts, amidst the pressure of austerity measures, those economies that are less developed or emerging have seen the output increase by approximately 20%. Nevertheless how big are emerging markets relative to the developed world?

As successful emerging economies graduate to developed status the prevalence of the emerging economies is eroded. Therefore to appreciate the true shift in global economic power, The Economist looked at numbers using the IMF’s pre-1977 classification. Developed economies based on 1990 data: Australia, Austria, Belgium, Canada, Denmark, Finland, France, Germany, Greece, Iceland, Ireland, Italy, Japan, Luxembourg, Netherlands, New Zealand, Norway, Portugal, Spain, Sweden, Switzerland, United Kingdom, United States. Newly industrialised countries such as South Korea count as emerging.

From the graph below you can see that the combined output of emerging countries accounted for 38% of world GDP in 2010 twice its share in 1990. If GDP was measured at purchasing-power parity, emerging economies overtook the developed world in 2008 and are likely to reach 54% of world GDP this year. Other key indicators are:

– in 2010 emerging economies accounted for over 50% of world exports
– in 2010 they accounted for over 47% of world imports – domestic demand up markedly
– they attracted over 50% of world foreign direct investment (FDI).
– they consume 60% of world energy, 65% of copper, 75% of steel, 55% of oil
– they make up 46% of world retail sales, 52% of purchases of new cars, and 82% of mobile-phone subscriptions

But maybe more importantly emerging economies are only responsible for 17% of all outstanding debt – one indicator that you don’t want to at the top. With less debt, a growing middle class and huge potential to lift productivity, emerging economies will become the drivers of global growth.

Lagarde IMF head – number 12 from Europe

France’s Christine Lagarde was named the new head of the International Monetary Fund at a critical time for that organization and for the global economy. Historically the IMF’s managing director has been European and the president of the World Bank has been from the United States – currently Robert Zoelick former US Deputy Secretary of State. Below is a clip from PBS Newshour where Judy Woodruff discusses what kind of challenges she faces with Cornell University’s Esward Prasad and George Washington University’s Scheherazade Rehman. There is also good coverage of what the IMF does which is useful for those A2 students.

One, it lends money to countries in trouble. But, more importantly in the new world economy, what it does is, it tells countries what they should be doing with their policies. It evaluates their financial systems. It evaluates their policies, talks about whether those policies are good for the country, but, more importantly, also for the global economy, what is, somewhat strangely, called surveillance.

A new global reserve currency?

Dominque Straus-Kahn, the managing director of the IMF, has signaled the recommendation of a new global currency. Member countries hold with the IMF reserves that are referred to as Special Drawing Rights (SDR). His intention is the SDR could act as an alternative to the US$ in central banks’ foreign currency reserves.

The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. Its value is based on a basket of four key international currencies, and SDRs can be exchanged for freely usable currencies. With a general SDR allocation that took effect on August 28 and a special allocation on September 9, 2009, the amount of SDRs increased from SDR 21.4 billion to SDR 204 billion (equivalent to about $308 billion, converted using the rate of August 31, 2010). SDR’s are based on a basket of currencies – US$, £, €, ¥ – and should be broadened to include the Chinese Yuan.

Using the SDR would act as a safeguard from exchange rate volatility while issuing SDR-denominated bonds could create a potentially new class of reserve assets.

International policy makers have become increasingly concerned about the threat of currency wars. This is where governments have been trying to reduce the value of their currency to increase the competitiveness of their exports and claw its way out of recession.

NZ debt – the good news and the bad news

Despite a glowing report from the IMF which stated that New Zealand has the second smallest government debt among 23 developed countries, credit rating agency Standard and Poor’s (S&P) has indicated that the overall level of debt has the country vulnerable. Treasury estimate govenment debt to be 27% of GDP by 2015 but this compares to total net debt at 90% of GDP with much of this in the private sector.
Their concern is that if there is a major budget crisis in other countries this could make markets nervous about investing in high debt economies – both government and private debt. New Zealand is borrowing up to $240 millilon dollars a week and if the former were to happen interest charges on that borowing would go up (maybe a downgrade by credit rating agencies) which ultimately would effect growth in the economy and the NZ$. S&P suggest that there is a need to rely less on foreign funds and generate more export revenue especially from the Asian markets. The balancing act is making sure that debt as a % of GDP doesn’t get too high but at the same time generating growth in the economy. Click here for Brian Fallow’s column in the NZ Hearld.