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IMF and the World Bank – what are its roles and their impact on the debt and bonds markets?

August 23rd, 2021 -

About 5 Mins
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Why are both often criticized?

Despite a global economic forecast of 6% growth, the International Monetary Fund (IMF) has also warned that there will be growing tensions and gaps between poorer nations with fewer or no vaccines and richer nations. This warning comes with predictions of geopolitical tensions and social unrest. The World Bank issued similar warnings and estimated that Covid-19 will add as much as 150 million extreme poor by 2021.

At the same time, the IMF has agreed to new debt and bail-out programmes to countries such as Pakistan, and countries such as Zambia are hopeful to secure similar packages. That kind of news often leads to market rallies on government-issued bonds, since they can make emerging market government bonds look more attractive with an expected cash boost to local economies.

Emerging markets don’t have the Fed, but they do have the IMF,” said Thomas Christiansen, deputy head of emerging market fixed income at UBP.

But as the case of Pakistan highlights, IMF bailouts often come with strict strings attached that are often cited as causes for inflation, hikes in imports and difficult times for its citizens.

So, what is the role of the IMF and how does it differ from the World Bank? And why do both organisations often get heavily criticised for the lending conditions to their members?

The role of the IMF and the World Bank

Both the IMF and the World Bank were established in 1944 in the aftermath of World War II to prevent another Great Depression that led to global warfare. They were conceived at the United Nations Bretton Woods Conference in New Hampshire, US and are both run out of Washington, DC.

The IMF has currently 190 members and its primary mission is to “ensure the stability of the international monetary system—the system of exchange rates and international payments that enables countries and their citizens to transact with each other.”

The IMF can lend up to US 1trillion to its member countries.

The World Bank’s purpose and mission are slightly different. Whilst the IMF primarily exists to ensure the stability of international monetary systems, the World Bank’s mission is to end extreme poverty to promote shared prosperity and it currently has 189 members.

Both organisations can provide financing, policy advice and technical assistance, but the difference is in the how. The IMF focuses more on providing funding support and policy advice on a government level and can provide fiscal advice and usually demands certain fiscal policies to issue bail-out packages which can come with hefty interest rates and difficult-to-meet conditions.

Or, as the Council of Foreign Relations has put it: “Unlike the World Bank, which was designed as a lending institution focused on longer-term development and social projects, the IMF was conceived as a watchdog of the monetary and exchange rate policies vital to global markets.”

The World Bank supports its members through funding and technical advice on a more granular level and on a project-by-project basis and engages with both government and private organisations. It is split into five main organisations (IBRD, IDA, IFC, MIGA and ICSID) and some of those organisations such as the IDA can offer interest-free loans and funding to the world’s poorest nations.

Why are the IMF and World Bank criticized?

Given their noble missions and ability to provide much-needed funding and support to nations in need why are both organisations so heavily criticised?

The IMF is often referred to as a financial crisis firefighter that helps nations that cannot deal with their sovereign debt and in exchange for providing bail-out packages, they often require those nations to agree to reforms to repay the debt and restore foreign exchange reserves.

What this means is that nations that come to the IMF for help are often in deep financial trouble already. Getting out of that trouble is never an easy road ahead for any Fiscal Policy leader or Prime Minister of that nation. The conditions attached to the loans are often seen as harsh and too difficult to implement and can lead to governments being unable to provide social support to their people which can lead to shortages of food, higher taxes and a rise in inflation.  

The other reason for criticism is that both the IMF and the World Bank have one major influencing funding member: the US, closely followed by big European members such as the UK, Germany and France.

Both organisations have been accused of nepotism towards their main funding members calling it an elite boys’ club and there is often much fear and frustration that the projects funded by World Bank organisations are just supporting funding members’ private organisations and interests. 

Many World Bank-funded projects have been found to violate international human rights standards and have fostered environments for discrimination and exploitation of child labour and many other human rights violations.

Both organisations argue that they are trying to eradicate poverty and increase economic growth, but the success criteria and way of measuring it have also been heavily criticized and questioned given the global improvement of poverty has largely been attributed to China’s efforts who don’t prescribe to those policies.

In a global economy, the roles both the IMF and the World Bank play are complex. To say the issues all these organisations are tackling are vast and complex is an understatement. In response, BRICS nations (Brazil, Russia, India and South Africa) funded a ‘New Development Bank’ a few years ago which is to rival that of the IMF and the World Bank and has an initial authorized capital of US $100 billion.

The coming months and years will tell who is providing the real help needed in a time where nations are struggling to come to terms and manage the aftermath of the pandemic, climate change and longstanding socio-economic rifts and differences. In the short term, vaccine rollouts continue to play a key role in helping nations to recover economically.

This content is provided for general information purposes only and is not to be taken as investment advice nor as a recommendation for any security, investment strategy or investment account.
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