Global Financial Institutions Essay

This paper briefly presents the role of global financial institutions, such as the International Monetary Fund, the World Bank, and Asian Development Bank in the global financing; and examines briefly their influence on exchange rate. International Monetary Fund (IMF) Established in 1944, the IMF has a headquarters in Washington DC. , employs 2,596 staff from 146 countries, and is owned and financed by 185 member countries (IMF, 2008). Its main task is to ensure the stability of the international monetary system—â€Å"the system of exchange rates and international payments that enables countries to buy goods and services from each other† (IMF, 2008). To maintain stability in the international monetary system, it provides (1) advice on appropriate social and economic policies, (2) financing to help member countries cope with balance of payments problems when foreign exchange payments exceed foreign exchange earnings, and (3) technical assistance and training to build needed expertise and institutions to attain economic growth (IMF, 2006). To maintain exchange rate stability, member countries prior to 1971 pegged their exchange rates that could only be adjusted with the IMF’s agreement. Since 1971, member countries can freely select any type of exchange rate arrangement: â€Å"allowing the currency to float freely; pegging it to another currency or a basket of currencies; adopting the currency of another country; or participating in a currency bloc† (IMF, 2006). The World Bank (the Bank) The Bank, established in 1944, has a headquarters in Washington DC with more than 100 country offices, and employs about 10,000 staff. It is owned and financed by 187 member countries (World Bank, 2008). The Bank is made up of two development institutions: the International Bank for Reconstruction and Development (IBRD), and (2) the International Development Association (IDA). Each institution has a role in achieving the Bank’s mission of reducing global poverty and improving living standards. The IBRD is responsible for middle income poor countries, while IDA caters to the needs of the poorest countries in the world. Both provide interest-free credit and grants, and low-interest loans to developing countries for infrastructure, health, education, communications, and other purposes (World Bank, 2008). The Bank provides â€Å"local cost financing for projects in non-CFP borrowing countries† with clear indirect foreign costs and â€Å"if a specific project has too little foreign exchange cost to permit the Bank to achieve its project objectives by foreign exchange financing alone† (World Bank, 2007). It also has a project preparation facility that finances foreign exchange costs (World Bank, 2007). Asian Development Bank (ADB) Established in 1966, ADB has a headquarters in Manila with 26 country offices, and employs more than 2,400 staff. It is owned and financed by 67 members with 48 members from the region and other members from other parts of the world (ADB, 2008). As an international development finance institution, it helps its developing member countries reduce poverty and enhance people’s quality of life. It provides assistance to the public sector through grants, low-interest loans, advice, and knowledge as well as to private enterprises through loans, guarantees, and equity investments (ADB, 2008). In making direct loans, ADB assumes the foreign exchange risks involved in private sector operations, but not in public sector lending. To address the foreign exchange risks (e. g. , foreign exchange fluctuations between loan approved amount and disbursement), ADB introduced the LIBOR-based loan, which allows borrowing countries to match the procurement currencies with loan denomination currencies, or convert the loan denomination currencies at any time to match the revenue denomination currencies (ADB, 2004). ADB may also provide financing to meet the â€Å"indirect foreign exchange cost of items procured in local currency for ADB-financed projects with foreign exchange costs† (ADB, 2003). References Asian Development Bank (2008). About ADB. Retrieved June 16, 2008, from http://www. adb. org/About/default. asp. Asian Development Bank (2004, July 1). Foreign exchange risk. Retrieved June 16, 2008, from http://www. adb. org/Documents/Manuals/Operations/OMH07_1apr04. pdf. Asian Development Bank (2003, October 29). Financing indirect foreign exchange cost of projects. Retrieved June 16, 2008, from http://www. adb. org/Documents/Manuals/Operations/OMH07_1apr04. pdf. International Monetary Fund (2008, May). IMF at a glance. Retrieved June 12, 2008, from http://www. imf. org/external/np/exr/facts/glance. htm. International Monetary Fund (2006, September 30). What is IMF? Retrieved June 12, 2008, from http://www. imf. org/external/pubs/ft/exrp/what. htm/. The World Bank (2008). About us. Retrieved June 16, 2008, from http://web. worldbank. org/WBSITE/EXTERNAL/EXTABOUTUS/0,,pagePK:50004410~piPK:36602~theSitePK:29708,00. html The World Bank (2007, March 23). Specific expenditure eligibility and cost sharing requirements for investment projects in countries without approved country financing parameters. Retrieved June 16, 2008, from http://wbln0018. worldbank. org/Institutional/Manuals/OpManual. nsf/22b87a45c65c