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When can a country borrow from the IMF?

A member country may request IMF financial assistance if it has a balance of payments needthat is, if it cannot find sufficient financing on affordable terms to meet its net internationalpayments while maintaining adequate reserve buffers going forward. An IMF loan provides a

cushion that eases the adjustment policies and reforms that a country must make to correct itsbalance of payments problem and restore conditions for strong economic growth.

The changing nature of IMF lending

The volume of loans provided by the IMF has fluctuated significantly over time. The oil shock ofthe 1970s and the debt crisis of the 1980s were both followed by sharp increases in IMF lending.In the 1990s, the transition process in Central and Eastern Europe and the crises in emergingmarket economies led to further surges of demand for IMF resources. Deep crises in LatinAmerica kept demand for IMF resources high in the early 2000s, but these loans were largelyrepaid as conditions improved. IMF lending rose again starting in late 2008, as a period of

abundant capital flows and low pricing of risk gave way to global deleveraging in the wake ofthe financial crisis in advanced economies.

The process of IMF lending

Upon request by a member country, an IMF loan is usually provided under an arrangement,which may, when appropriate, stipulate specific policies and measures a country has agreed toimplement to resolve its balance of payments problem. The economic program underlying anarrangement is formulated by the country in consultation with the IMF and is presented to theFundsExecutive Boardin a Letter of Intent. Once an arrangement is approved by the Board,the loan is usually released in phased installments as the program is implemented.

IMF Facilities

Over the years, the IMF has developed various loan instruments, or facilities, that are tailoredto address the specific circumstances of its diverse membership. Low-income countries mayborrow on concessional terms through the Extended Credit Facility (ECF), the Standby CreditFacility (SCF) and the Rapid Credit Facility (RCF) (seeIMF Support for Low-IncomeCountries). Nonconcessional loans are provided mainly through Stand-By Arrangements (SBA),the Flexible Credit Line (FCL), and the Extended Fund Facility (which is useful primarily forlonger-term needs). The IMF also providesemergency assistanceto support recovery fromnatural disasters and conflicts. All non-concessional facilities are subject to the IMFs market-

related interest rate, known as the rate of charge, and large loans (above certain limits) carry asurcharge. Therate of chargeis based on theSDR interest rate, which is revised weekly to takeaccount of changes in short-term interest rates in major international money markets. Theamount that a country can borrow from the Fund, known as its access limit, varies depending onthe type of loan, but is typically a multiple of the countrysIMF quota. This limit may beexceeded in exceptional circumstances. The Flexible Credit Line has no pre-set cap on access.
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The new concessional facilities for LICswere established in January 2010 under the PovertyReduction and Growth Trust (PRGT) as part of a broader reform to make the Funds financial

support more flexible and better tailored to the diverse needs of LICs. Access limits and normshave been approximately doubled compared to pre-crisis levels. Financing terms have been mademore concessional, and the interest rate is reviewed every two years. All facilities support

country-owned programs aimed at achieving a sustainable macroeconomic position consistentwith strong and durable poverty reduction and growth.

The Extended Credit Facility (ECF)succeeds the Poverty Reduction and GrowthFacility (PRGF) as the Funds main tool for providing medium-term support to LICs withprotracted balance of payments problems. Financing under the ECF currently carries azero interest rate, with a grace period of 5 years, and a final maturity of 10 years.

The Standby Credit Facility (SCF)provides financial assistance to LICs with short-term balance of payments needs. The SCF replaces the High-Access Component of theExogenous Shocks Facility (ESF), and can be used in a wide range of circumstances,including on a precautionary basis. Financing under the SCF currently carries a zero

interest rate, with a grace period of 4 years, and a final maturity of 8 years. The Rapid Credit Facility (RCF)provides rapid financial assistance with limited

conditionality to LICs facing an urgent balance of payments need. The RCF streamlinesthe Funds emergency assistance for LICs, and can be used flexibly in a wide range ofcircumstances. Financing under the RCF currently carries a zero interest rate, has a graceperiod of 5 years, and a final maturity of 10 years.

Stand-By Arrangements (SBA). The bulk of Fund assistance to middle-income countries isprovided through SBAs. The SBA is designed to help countries address short-term balance ofpayments problems. Program targets are designed to address these problems and Funddisbursements are made conditional on achieving these targets (conditionality). The length of a

SBA is typically 1224 months, and repayment is due within 3-5 years of disbursement. SBAsmay be provided on a precautionary basiswhere countries choose not to draw upon approvedamounts but retain the option to do so if conditions deteriorateboth within the normal accesslimits and in cases of exceptional access. The SBA provides for flexibility with respect tophasing, with front-loaded access where appropriate.

Flexible Credit Line (FCL).The FCL is for countries with very strong fundamentals, policies,and track records of policy implementation and is particularly useful for crisis preventionpurposes. FCL arrangements are approved for countries meeting pre-set qualification criteria.The length of the FCL is one or two year (with an interim review of continued qualification afterone year) and the repayment period the same as for the SBA. Access is determined on a case-by-case basis, is not subject to the normal access limits, and is available in a single up-frontdisbursement rather than phased. Disbursements under the FCL are not conditioned onimplementation of specific policy understandings as is the case under the SBA. There isflexibility to either draw on the credit line at the time it is approved or treat it as precautionary.

Precautionary Credit Line (PCL). The PCL is for countries with sound fundamentals andpolicies, and a track record of implementing such policies. While they may face moderatevulnerabilities that may not meet the FCL qualification standards, they do not require the same
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large-scale policy adjustments normally associated with traditional SBAs.The PCL combinesqualification(similar to the FCL) with focused ex-postconditionsthat aim at addressing theidentified vulnerabilities in the context of semi-annual monitoring. It can have the length ofbetween one and two years. Access can be front-loaded, with up to 500 percent of quota madeavailable on approval and up to a total of 1000 percent of quota after 12 months subject to

satisfactory progress in reducing vulnerabilities. While there may be no actual balance ofpayments need should at the time of approval, the PCL can be drawn upon should such a needarise unexpectedly.

Extended Fund Facility (EFF). This facility was established in 1974 to help countries addresslonger-term balance of payments problems requiring fundamental economic reforms.Arrangements under the EFF are thus longer than SBAsusually 3 years. Repayment is duewithin 410 years from the date of disbursement.

Emergency assistance. The IMF provides emergency assistance to countries that haveexperienced a natural disaster or are emerging from conflict. Emergency loans are subject to the

basic rate of charge, although interest subsidies are available for some countries, subject toavailability. Loans must be repaid within 35 years.

International Bank for Reconstruction and Development (IBRD) established in 1945for providing debt financing on the basis of sovereign guarantees.

International Financial Corporation (IFC) established in 1956 for providing variousforms of financing without sovereign guarantees primarily to the private sector.

International Development Association (IDA) established in 1960 for providingconcessional financing (interest free loans, grants etc.) usually with sovereign guarantees.

International Centre for Settlement of Investment Disputes (ICSID) established in1966 which works with various governments of various countries to reduce investment

risks. Multilateral Investment Guarantee Agency (MIGA) established in 1988 for providing

insurance against certain types of risks including political risks primarily to the private````````````` ````````````` `````````````` ````````````` ````````````` ``````````````` ```````````` `````````````` ```````````````````

````````````` International finance is the examination of institutions, practices, and analysisof cash flows that move from one country to another. There are several prominentdistinctions between international finance and its purely domestic counterpart, but themost important one is exchange rate risk. Exchange rate risk refers to the uncertaintyinjected into any international financial decision that results from changes in the price ofone country's currency per unit of another country's currency. Examples of otherdistinctions include the environment for direct foreign investment, new risksresulting from changes in the political environment, and differential taxation of assets

and income.

The level of international trade is a relevant indicator of economic growth worldwide.

Foreign exchange markets facilitate this trade by providing a resource where

currencies from all nations can be bought and sold. While there is a heavy volume of

foreign exchange between some countries, such as the United States and Canada, other
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countries with little international trade may have only intermittent need for such

transactions. Current exchange rates of one country's currency versus another are

determined by supply and demand for these currencies. As an example of an exchange

rate, consider a recent rate at which U.S. dollars (US$) could be exchanged for Canadian

dollars (C$): US$0.65 per C$1. This implies that a Canadian dollar can be purchased for

US$0.65 and conversely, a U.S. dollar can be purchased for C$1.54 (or 1/0.65). These

current rates are also called spot rates.

In addition to international trade, there is a second motivation for international

financial activity. Many firms make long-term investments in productive assets in

foreign countries. When a firm decides to build a factory in a foreign country, it has

likely considered a variety of issues. For example: Where should the funds needed to

build the factory be raised? What kinds oftax agreements exist between the home and

foreign countries that may influence the after-tax profitability of the new venture? Are

there any government-imposed restrictions on moving profits back to the home

country? Do the forecasted cash flows of the new venture enhance the parent firm's

exposure to exchange rate fluctuations or does it lessen this exposure? Are the economic

and political systems in the foreign country stable?

The short-term motive for foreign exchange (trade) and the long-term motive (capital

formation) are related. For example, for most of the 1980s Japan maintained a sizable

balance of trade surplus with the United States. This is because Japan exports more

to the United States than they import from the United States, resulting in aflow of

funds from the United States to Japan. This was also a period, however, when Japan

provided considerable capital investments in automobile plants and other U.S.

securities. These investment funds from Japan far outweighed the flow of investment

funds moving from the United States to Japan. While some motivation for Japan's large

investment in U.S. assets is strategic, the overall result is an inflow of investment fundsfrom Japan that offsets the outflow created by the trade imbalance.

By the late 1990s the Japanese economy was in a deep recession. This made the trade

imbalance even more extreme as demand for U.S. exports declined precipitously. The

lack of appealing domestic investment alternatives in Japan, however, encouraged
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Japanese investors to pursue international options. Again, the flow of investment funds

tends to offset the trade imbalance. While the two motives for foreign exchange do not

always offset, they typically do for major trading partners over longer periods.

THE NATURE OF EXCHANGE RATES AND

EXCHANGE RATE RISK

Consider two developed countries, A and B. If A and B are trading partners and make

investments in each other's country, then there must also be a well-developed market

for exchange of the two currencies. From A's perspective, demand for B's currency will

depend on the cost of B's products when compared with domestic substitutes. It will also

depend on investment opportunities in B compared with those available domestically in

A. Likewise, the supply of B's currency depends on the same issues when examined from

B's perspective.

Ignoring everything else, A will demand more of B' s currency if it can buy it more

cheaply. For example, if the exchange rate moves from 2 B per 1 A to 3 B per I A,

imports from B become cheaper since it costs A's residents fewer units of their own

currency to buy them. Conversely, if the exchange rate moves to 1.5 B per 1 A, the cost of

imports has risen and demand for B's currency will fall. The supply of B's currency will

change for the same reasons, but the change will be in the opposite direction. If B's

citizens can trade the same number of their own currency units for fewer units of A's

currency, they will offer less currency for exchange. At some exchange rate, the supply of

B's currency will exactly satisfy the demand and an equilibrium, or market-clearing rate,

will be established.

This market-clearing exchange rate does not stay in one place. This is because of a

variety of events including: (1) changes in the relativeinflation rates of the two

countries, (2) changes in the relative rates of return on investments in the two countries,

and (3) government intervention. Examples of government intervention include quotas

on imports or restrictions on foreign exchange. As a brief example of how the market-

clearing exchange rate can move, suppose that the current equilibrium exchange rate is

2 B per I A. Next, consider new information that indicates investors can achieve a higher
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rate of return on investments in B while returns on investments available domestically

in A remain the same. As investors in A realize this, they have greater interest in making

investments in B. This increases the demand for B's currency and means that investors

in A are now willing to pay more for a unit of B's currency. B's investors, however, now

see that investment prospects in A have deteriorated in relative terms. They are less

interested in making these investments and will supply fewer units of B's currency in

exchange for A's currency. The dual influences of A's investors becoming more eager to

buy B's currency and the increased reluctance of B's investors to offer their currency

indicates that the market clearing exchange rate must be different than the prior rate of

2 B per I A. In this example, to reach equilibrium, the rate should move to a point where

I unit of A's currency can be exchanged for less than 2 units of B's currency. This

movement can be interpreted as a weakening of A's currency and a strengthening of B'scurrency.

Specific movements in the market-clearing exchange rate can be modeled by a several

economic equalities called parity conditions. Three specific parity conditions are

commonly used to model exchange rate equilibrium. Purchasing power parity indicates

that currencies experiencing high inflation are likely to weaken while those experiencing

low inflation are likely to strengthen. The international Fisher effect indicates that

currencies with highinterest rateswill tend to strengthen while currencies with lowlevels of interest will weaken. A third parity condition, interest rate parity, indicates that

exchange rates must move to a level where investors in either country cannot make a

riskless profit by borrowing or lending a foreign currency.

EXAMPLES OF EXCHANGE RATE RISK

Since forecasts of future inflation rates, interest rates, and government actions are

uncertain, exchange rates are also uncertain. This means that an investment that will

pay its return in units of a foreign currency has an uncertain return in the home

currency. For example, suppose an investor in A bought a security B for 100 B. This one-

year investment has a guaranteed return of 10 B, or 10 percent. If the exchange rate

remains at a constant 2 B per I A over the life of the investment, the investor must

initially commit 50 A to exchange for 100 B to make the investment. After one year, the
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110 B returned (including the 10 B in interest) is exchanged for 55 A. The profit of 5 A on

an investment of 50 A represents a 10 percent return to the investor from A. If, however,

the exchange rate moved to 1.8 B per 1 A during the year, the investor would now receive

the same 110B from the investment, but when converted to the home currency, 61.1 A is

received. This represents a profit of 11.1 A on an investment of 50 A, or 22.2 percent.

Note that the return is amplified because B's currency strengthened during the holding

period. Likewise, if the exchange rate moved to 2.2 B per 1 A, the return of 110 B

translates to 50 A and a rate of return of 0 percent.

As another example, suppose an importer in country A purchases a quantity of goods

from an exporter in country B and agrees to pay 1,000 B in 90 days. The importer is now

obligated to make a foreign exchange transaction and must purchase the units of B's

currency at the exchange rate that prevails in 90 days. Since that rate is likely to be

different from the current rate, the importer is exposed to exchange rate risk. One

common method for reducing this exposure is to enter into a forward contract to buy

B's currency. A forward contract is an agreement to trade currencies at a specified date

in the future at an exchange rate determined today. By purchasing the needed currency

through a forward contract, the importer can eliminate concern with exchange-rate

volatility by locking in a specific rate today.

TYPES OF EXPOSURE TO EXCHANGE

RATE RISK

Exposure to exchange rate fluctuations can be placed into three categories: translation,

transaction, and economic. Translation exposure refers to the changes inaccounting

profits that result from reporting requirements. Transaction exposure is created when

the firm enters into agreements that will require specific foreign exchange transactions

during the current period. The example of the importer in the previous paragraph would

be classified as transaction exposure. Economic exposure is the need for foreign

exchange transactions and exposure to exchange rate fluctuations that results from

future business activities.
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foreign currency purchase or a floor under the value of revenue from an upcoming

foreign payment.

Economic exposure to exchange rate fluctuations is often more difficult to manage. The

Japanese automobile manufacturer Toyota provides a prominent example of this

exposure and its management. This company developed a very sizable market in the

United States by initially producing an inexpensive, fuel-efficient vehicle. As time

passed, Toyota developed a broader line of products to expand its share of the U.S.

automobile market. Beginning in the early 1980s, however, the yen began to appreciate

relative to the dollar. Even with constant dollar sales in the U.S. market, Toyota's

revenues began to drop significantly when converted back to yen. Since the majority of

their production costs were already yen denominated, this hurt their profitability.

Toyota was reluctant to raise the dollar price of their products because they feared that

they would lose market share. The firm had significant economic exposure because a

large proportion of its revenues were denominated in dollars while most of its costs were

denominated in yen. Toyota responded to this problem by building manufacturing

facilities in the United States. This generated dollar-denominated production costs that

could be used to offset dollar revenues. The result was a reduced need for foreign

exchange and more stable corporate earnings in Toyota's home country of Japan.

Note that economic exposure results from having revenue and cost streams that have

different sensitivities to exchange rate changes. This is very different from measuring

the need for foreign exchange transactions during an upcoming period and hedging the

cost. Economic exposure to exchange rate fluctuations cannot be hedged with simple

financial instruments. It must be managed more dynamically and requires actions such

as relocating production facilities, borrowing in foreign countries, and developing

product markets in a more diverse set of countries.

COUNTRY RISK

Layered on top of the other sources of risk that make international business decisions

unique from a financial perspective are the concerns with country risk. Country risk can

be divided into two parts, economic risk and political risk. Economic risk refers to the

stability of a country's economy. It embodies concerns such as dependence on individual


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industries or markets, the ability to sustain a vibrant level of activity and to grow, and

the supply of natural resources and other important inputs. Political risk is more

concerned with the stability of the government that manages the economy. It

encompasses concerns such as the ability to move capital in and out of the country, the

likelihood of a smooth transfer of power after elections, and the government's overall

attitude toward foreign firms. Obviously, these two branches of country risk overlap

significantly. There are a variety of services that provide in-depth assessments of

country risk for virtually every country; multinational firms make considerable use of

these services to form their own decisions regarding international projects.

In summary, the basic objective of international finance is no different than that of its

purely domestic counterpart. The firm should attempt to identify profitable business

opportunities that will provide benefit to the owners of the corporation. When these

opportunities traverse an international border, a variety of new complexities arise in the

financial analysis. Many of the new concerns with this analysis stem from the risk that is

introduced by the need for foreign ex-change transactions in an environment of

fluctuating exchange rates. Once these risks are identified, steps can be taken to address

them. Short-term, specific sources of exchange rate risk can often be hedged using

standard financial contracts. Longer term exposure to exchange rate risk requires more

strategic management. Additional risks arise due to the potential for major shifts inforeign economic or political climates. It is the recognition, assessment, and

management of risks such as these that provides the unique character of financial

decision making in an international context.

111111111111111111111

Financial Management Differences

Among the few differences between financial management of a multinational company (MNC)and domestic company (DC) is that the MNC has got operations around the world. This meansthey have to deal with an international group of customers, shareholders and suppliers. What thismeans is that they are exposed to exchange rate changes, issues about raising capitalinternationally, and also different accounting standards of reporting. In my opinion, the mostimportant difference between an MNC and DC is the exchange rate. The MNC have to takeconsideration into exchange rate fluctuations, as it affects their sales and investment decisions (
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exchange rate changes will change their revenue from customers and also make investmentdecisions difficult, as they have to constantly convert back to their home country and see if thereturn is higher or if the investment is worth it ). It also affects the way they report their financialstatements, which is balance sheet or profit and loss. The MNC faces more difficulty in reportingthis, as they have various standards to follow. ( for example, how should they report the profit or

loss for the year, in a foreign currency or home currency. Either way, it tells us different thingsabout the MNC, as they can be making money in the home currency, but losing money in theforeign currency ). Generally speaking, the financial management for an MNC has to deal withthe larger external influence affecting the company, and a large part of books for MultinationalFinancial Management or International Financial Management, deal with exchange rates. Hopethis helps.

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The World Bank provides over $24 billion in assistance to developing and transition countriesevery year. The Bank's projects and policies affect the lives and livelihoods of billions of people

worldwide - sometimes for the better, but very often in controversial and problematic ways.

The World Bank was originally established to support reconstruction in Europe after World WarII, but has since reframed its mission and expanded its operations both geographically andsubstantively. Today, the Bank's mission is to reduce poverty. It has over 184 membercountries and provides over $24 billion annually for activities ranging from agriculture to tradepolicy, from health and education to energy and mining. The World Bank provides funding forbricks-and-mortar projects, as well to promote economic and policy prescriptions it believes willpromote economic growth. For example, part of the over $300 million the Bank is currentlyproviding the West African country of Niger funds health programs addressing HIV/AIDS andirrigation. However, the Bank also promotes more controversial projects in the country, like

privatization of state enterprises.

The World Bank is not a bank in the common sense of the word. A single person cannotopen an account or ask for a loan. Rather, the Bank provides loans, grants and technicalassistance to countries and the private sector to reduce poverty in developing and transitioncountries.

The World Bank Group is actually comprised of five separate arms. Two of those arms - theInternational Bank for Reconstruction and Development (IBRD) and the InternationalDevelopment Association (IDA) work primarily with governments and together are commonlyknown as "the World Bank". Two other branches - the International Finance Corporation(IFC) and Multilateral Investment Guarantee Agency (MIGA) - directly support privatebusinesses investing in developing countries. The fifth arm is the International Center forSettlement of Investment Disputes (ICSID), which arbitrates disagreements between foreigninvestors and governments. This webpage outlines key features of the two arms that are nowcollectively referred to as the World Bank: IBRD and IDA. Find out more aboutMIGAand theIFC(BIC website).

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The World Bank Group - International bank for reconstruction

and development (ibrd)

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13/27

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As early as February 1943, United States Undersecretary of State Sumner B. Welles

urged preparatory consultation aimed at the establishment of agencies to finance

reconstruction and development of the world economy after WWII. The US and the UK

took leading roles in the negotiations that were to result in the formation of the IBRD

and the IMF. The IBRD is the main lending organization of the World Bank Group and,

like its sister institution, the International Monetary Fund (IMF), was born of the Allies'

realization during World War II that tremendous difficulties in reconstruction and

development would face them in the postwar transition period, necessitating

international economic and financial cooperation on a vast scale. The IBRD, frequently

called the "World Bank," was conceived in July 1944 at the United Nations Monetaryand Financial Conference in Bretton Woods, New Hampshire, US.

Purposes

Although one of the Bank's early functions was to assist in bringing about a smooth

transition from wartime to peaceful economies, economic development soon became the

Bank's main object. Today, the goal of the World Bank is to promote economic

development that benefits poor people in developing countries. Loans are provided to

developing countries to help reduce poverty and to finance investments that contribute

to economic growth. Investments include roads, power plants, schools, and irrigation

networks, as well as activities like agricultural extension services, training for teachers,

and nutrition-improvement programs for children and pregnant women. Some World

Bank loans finance changes in the structure of countries' economies to make them more
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stable, efficient, and market oriented. The World Bank also provides technical assistance

to help governments make specific sectors of their economies more efficient and more

relevant to national development goals.

Membership

The Bank's founders envisioned a global institution, the membership of which would

eventually comprise all nations. Membership in the IBRD rose gradually from 41

governments in 1946 to 184 as of July 2002.

A government may withdraw from membership at any time by giving notice of

withdrawal. Membership also ceases for a member suspended by a majority of the

governors for failure to fulfill an obligation, if that member has not been restored togood standing by a similar majority within a year after the suspension. Only a few

countries have withdrawn their membership from the Bank, and all but Cuba (withdrew

in 1960) have rejoined.

Although the Soviet Union took part in the 1944 Bretton Woods Conference, and signed

the final act establishing the IMF and the IBRD, it never ratified the Articles of

Agreement or paid in the 20% of its subscribed capital that was due within 60 days after

the Bank began operations. Had it joined, the Soviet Union would have been the Bank'sthird largest shareholder, after the United States and the United Kingdom. Over the next

four decades, as the Bank grew in size and scope, it couldn't fulfill its founders'

intentions of being a truly global institution due to the absence of the Soviet Union.

Then, at the beginning of the 1990s, as political and economic change swept through the

15 republics of the USSR, the Soviet government indicated its interest in participating in

the international financial system and sought membership in the IMF and World Bank.

On 15 July 1991, Soviet President Mikhail Gorbachev formally applied for membership

for the USSR in the IBRD and its three affiliates (IFC, IDA and MIGA). However, by

December 1991, the USSR had ceased to exist. During 1992, the Russian Federation and

15 former Soviet republics (including the Baltic states) applied for membership and

were accepted. Eleven of them also applied to IDA, 14 to IFC and 15 to MIGA. To

accommodate these countries, the total authorized capital of the bank was increased.


15/27

A "graduating" country is one where lending is being phased out. As of 2002 there were

27 countries that had "graduated" from the IBRD. These include (with the fiscal year of

their final loan): France (1947), Luxembourg (1948), Netherlands (1957), Belgium

(1958), Australia (1962), Austria (1962), Denmark (1964), Malta (1964), Norway (1964),

Italy (1965), Japan (1967), New Zealand (1972), Iraq (1973), Iceland (1974), Finland

(1975), Israel (1975), Singapore (1975), Ireland (1976), Spain (1977), Greece (1979),

Oman (1987), Bahamas (1989), Portugal (1989), Cyprus (1992), Barbados (1993), the

Republic of Korea (1995), and China (1999).

Structure

Board of Governors

All powers of the Bank are vested in its Board of Governors, composed of one governor

and one alternate from each member state. Ministers of Finance, central bank

presidents, or persons of comparable status usually represent member states on the

Bank's Board of Governors. The board meets annually.

The Bank is organized somewhat like a corporation. According to an agreed-upon

formula, member countries subscribe to shares of the Bank's capital stock. Each

governor is entitled to cast 250 votes plus 1 vote for each share of capital stocksubscribed by his country.

Executive Directors

The Bank's Board of Governors has delegated most of its authority to 24 executive

directors. According to the Articles of Agreement, each of the five largest shareholders

the United States, Japan, Germany, France and the United Kingdomappoints one

executive director. The other countries are grouped in 19 constituencies, eachrepresented by an executive director who is elected by a group of countries. The number

of countries each of these 19 directors represents varies widely. For example, the

executive directors for China, the Russian Federation, and Saudi Arabia represent one

country each, while one director speaks for 24 Francophone African countries and

another director represents 22 mainly English-speaking African countries.


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President and Staff

The president of the Bank, elected by the executive directors, is also their chairman,

although he is not entitled to a vote, except in case of an equal division. Subject to their

general direction, the president is responsible for the conduct of the ordinary business

of the Bank. Action on Bank loans is initiated by the president and the staff of the Bank.

The amount, terms, and conditions of a loan are recommended by the president to the

executive directors, and the loan is made if his recommendation is approved by them.

According to an informal agreement, the president of the Bank is a US national, and the

managing director of the IMF is a European. The president's initial term is for five years;

a second term can be five years or less. Past presidents of the Bank include Robert S.

McNamara (1968

81), A. W. Clausen (1981

86), Barber B. Conable (1986

91), and

Lewis T. Preston (199195). James D. Wolfensohn became president on 1 June 1995. On

September 27, 1999, Mr. Wolfensohn was unanimously reappointed by the Bank's Board

of Executive Directors to a second five-year term as president beginning June 1, 2000.

He is the third president in World Bank history to serve a second term. He heads a staff

of more than 8,000 persons from over 130 countries.

The IBRD's headquarters are at 1818 H Street, N.W., Washington, DC 20433.

Budget

A total administrative budget ofUS $1,924 million was approved for fiscal year 2002.

Activities

A. FINANCIAL RESOURCES

Authorized capital.At its establishment, the IBRD had an authorized capital ofUS$ 10

billion. Countries subscribing shares were required to pay in only one-fifth of their

subscription on joining, the remainder being available on call but only to meet the

IBRD's liabilities if it got into difficulties. Moreover, not even the one-fifth had to be

paid in hard cash at that time. The sole cash requirement was the payment in gold or US

dollars of 2% of each country's subscription. A further 18% of the subscription was


17/27

payable in the currency of the member country concerned, and although this sum was

technically paid in, in the form of notes bearing no interest, it could not be used without

the member's permission. In 1959, each member was given an opportunity to double its

subscription without any payment. Thus, for countries joining the IBRD after the 1959

capital increase and for those subscribing to additional capital stock, the statutory

provisions affecting the 2% and 18% portions have been applied to only one-half of their

total subscriptions, so that 1% of each subscription that is freely usable in the IBRD's

operations has been payable in gold or US dollars, and 9% that is usable only with the

consent of the member is in the member's currency. The remaining 90% is not paid in

but is subject to call by the IBRD.

Financial Resources for Lending Purposes. The subscriptions of the IBRD's members

constitute the basic element in the financial resources of the IBRD. Subscribed capital

for fiscal year 2002 was about US $121.6 billion. The Bank also draws money from

borrowings in the market and from earnings. In 2002, the Bank's outstanding

borrowings were US $110.3 billion, raised in the capital markets of the world. The IBRD

is able to raise large sums at interest rates little or no higher than are paid by

governments because of confidence in the Bank engendered by its record of stablility

since 1947 and the investors' knowledge that if the IBRD should ever be in difficulty, it

can call in unpaid portions of member countries' subscriptions. In connection with itsborrowing operations, the Bank also undertakes a substantial volume of currency and

interest rate swap transactions. These swaps have enabled the IBRD to lower its fund-

raising costs and to expand its direct borrowing transactions to markets and currencies

in which it otherwise would not have borrowed.

B. LENDING OPERATIONS

The IBRD lends to member governments, or, with government guarantee, to political

subdivisions, or to public or private enterprises.

The IBRD's first loan, US$ 250 million for postwar reconstruction, was made in the latter

part of 1947. Altogether, it lent US$ 497 million for postwar reconstruction, all to

European countries. The IBRD's first development loans were made in the first half of


18/27

1948. As of 30 June 2002, the cumulative total of loans made by the Bank was overUS$

371 billion.

Loan Terms and Interest Rates. The IBRD normally makes long-term loans, with

repayment commencing after a certain period. The length of the loan is generally related

to the estimated useful life of the equipment or plant being financed. Since July 1982,

IBRD loans have been made at variable rates. The lending rate on all loans made under

the variable-rate system is adjusted semiannually, on 1 January and 1 July, by adding a

spread of0.5% to the IBRD's weighted average cost during the prior six months of a

"pool" of borrowings drawn down after 30 June 1982. Since July 1989, only borrowings

allocated to lending have been included in the cost of borrowings with respect to new

loans and existing variable rate loans that are amended to apply the new cost basis. For

interest periods beginning from 1 July 2002 through 31 December 2002, the variable

lending rate was 5.27%. Before July 1982, loans were made at fixed rates, and,

accordingly, the semiannual interest-rate adjustments do not apply to payments made

on these older loans.

C. PURPOSES OF THE LOANS

The main purpose of the Bank's operations is to lend to developing member countries

for productive projects in such sectors as agriculture, energy, industry, and

transportation and to help improve basic services considered essential for development.

The main criterion for assistance is that it should be provided where it can be most

effective in the context of the country's specific lending programs developed by the Bank

in consultation with its borrowers. In the late 1980s, the World Bank came under

criticism that its policies, intended to encourage developing countries to restructure

their economies in order to render them more efficient, were actually imposing too

heavy a burden on the world's poorest peoples. This, and charges by environmentalists

that World Bank lending had underwritten projects that were severely detrimental to

the environment of developing countries, led to a re-thinking of the Bank's policies in

the 1990s.


19/27

Implementing the Bank's Poverty Reduction Strategy. The fundamental objective of the

World Bank is sustainable poverty reduction. Underpinning this objective is a two-part

strategy for reducing poverty that was proposed in the World Development Report 1990.

The first element is to promote broad-based economic growth that makes efficient use of

the poor's most abundant asset, labor. The second element involves ensuring

widespread access to basic social services to improve the well being of the poor and to

enable them to participate fully in the growth of the economy. Progress in implementing

the poverty-reduction strategy is clearly visible in Bank-wide statistics on new lending.

At the September 1999 annual meetings of the World Bank Group and IMF, ministers

agreed to link debt relief to the establishment of a poverty reduction strategy for all

countries receiving World Bank/IMF concessional assistance.

Sector and Structural Adjustment Lending. Bank lending for sector adjustment and

structural adjustment increasingly supports the establishment of social safety nets and

the protection of public spending for basic social services.

In its assistance to countries that are preparing adjustment programs, the Bank works

with them to (a) design the phasing of programs to accommodate the needs of the poor,

(b) give priority to relative price changes in favor of the poor early in the reform process,

(c) secure adequate resources for the provision of basic social services aimed at the poor,

and (d) design social safety nets into economic-reform programs. These efforts better

position of the poor to be major beneficiaries of the economic growth and associated

employment opportunities that are facilitated by the implementation of adjustment

programs.

Human Resource Development. Bank lending for human resource development has

largely been committed for education, and its focus has been towards development of

basic education. Lending for education increased from an average US$ 700 million

during the 1980s to an average US$ 1,907 million during the first four years of the 1990s.

In 1999 the amount climbed to US $2,014 million.


20/27

Bank lending for population, health, and nutrition has expanded even more rapidly.

Average yearly lending to this sector during the 1980s wasUS$ 207 million, while

lending during fiscal 1999 was US$ 1,726 million.

The Environment. The Bank has continued to support environmental protection efforts

with loans totaling US$ 978 million in fiscal 1999, compared to US$ 404 million in fiscal

1990. But the full story cannot be told by stand-alone environmental projects. As of the

late 1990s, half of all World Bank projects now have an environmental component of

some kind.

In fiscal 1993 the World Bank undertook structural changes to respond to growing

borrower demand for Bank assistance in environmental issues, and to the need for

internal strengthening of monitoring and implementation. A Vice Presidency for

Environmentally and Socially Sustainable Development was established. Three

departments were placed under this vice presidencythe Environment Department, the

Agriculture and Natural Resources Department, and the Transport and Urban

Development Department.

The Global Environment Facility is a cooperative venture between the World Bank, the

United Nations Development Programme, the United Nations Environment

Programme, and national governments. The Facility provides grants to help developing

countries deal with environmental problems that transcend boundaries, such as

airborne pollution produced by smokestacks or hazardous waste dumped into rivers.

The GEF gives priority to four objectives: limiting emissions of greenhouse gases;

preserveing biodiversity; protecting international waters; and protecting the ozone

layer.

Private Sector Development. The promotion of private sector growth in developing

member countries has always been central to the Bank's overall mission of fostering

sustainable growth and reducing poverty. In December 1999, the Bank Group

announced a restructuring to better align and expand its work related to the private

sector. The reforms took effect 1 January 2000. The reorganization tightened the link

between the Bank's public sector work and its private sector transactions in the


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developing world, which are made through the IFC. The World Bank helps governments

to formulate policy frameworks that encourage a positive environment for business to

function as the primary engine of growth while the IFC, the private sector arm of the

Bank Group, provides advice and makes loans and equity investments in companies in

developing countries. According to an IFC official the changes were in response to "one

of the biggest challenges facing [the Bank's] client countries: How to create a favorable

business environment and help finance small and medium enterprises." In addition to

creating a new combined unit to coordinate Bank Group activities, help capitalize local

financial institutions, and teach them the business of financing small and medium

enterprises, the restructuring also involved the creation of joint World Bank-IFC

departments, or product groups, for industries where there is a strong interface between

public policy and private sector transactions. Three new industry groups,telecommunications/informatics, oil/gas/petrochemicals, and mining, include both

policy and transaction capacity. Beyond the new industry groups, the principal advisory

services focused on the private sector in both the World Bank and IFC are coordinated

under single management.

D. OTHER ACTIVITIES

Technical Assistance. The Bank provides its members with a wide variety of technical

assistance, much of it financed under its lending program. The volume of technical

assistance in which the Bank is involved as lender, provider, or administrator rose

sharply during the 1990s. In addition to loans and guarantees to developing countries,

the World Bank carries out its mission by providing advice and assistance with

telecommunications sector reform and national information infrastructure strategies.

Special programs in this category include InfoDev and TechNet. The Information for

Development Program (InfoDev) began in September 1995 with the objective of

addressing the obstacles facing developing countries in an increasingly information-driven world economy. It is a global grant program managed by the World Bank to

promote innovative projects on the use of information and communication technologies

(ICTs) for economic and social development, with a special emphasis on the needs of the

poor in developing countries. In recognition of the critical role that science and

technology play in promoting economic growth and social progress, in July 1999


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TechNet was created as a cross-cutting thematic group to promote knowledge and

education in the areas of science and technology and informatics. TechNet acts as a

clearing-house and network for professionals inside and outside the Bank.

Interagency Cooperation. The Bank's overarching purpose is helping to reduce global

poverty. To this end, the institution encourages the involvement of other development

agencies in preparing poverty assessments and works closely with other UN agencies in

preparing proposals to improve the quality of poverty-related data. At the country level,

the Bank is broadening its efforts to coordinate work with UNDP, UNICEF, and the

International Fund for Agricultural Development in specific countries on preparing or

following up poverty assessments and planned human development assessments.

Coordination between the Bank and the UN system on poverty at the project level is

extensive, particularly in the design of social funds and social action programs. Together

with other UN agencies, the World Bank has taken the lead in mobilizing groups of

donors, both multilateral and bilateral, to tackle specific areas of concernfor example,

the Consultative Group on International Agricultural Research (CGIAR), which is

cosponsored by the FAO, UNDP, and the World Bank. The Bank is an active partner in

interagency activities which include the follow-up to the World Conference on

Education for All and the World Summit for Children; the Safe Motherhood Inter-

Agency Group; the Onchocerciasis (riverblindness) Control Programme; the Global

Programme for AIDS; and the Task Force for Child Survival. The Bank also has links

with the United Nations at the political and policy making level in the work of the

General Assembly and its related committees, and the Economic and Social Council.

The Economic Development Institute was the Bank's department responsible for such

dissemination. Through seminars, workshops and courses, EDI enabled policy-makers

to assess and use the lessons of development to benefit their own policies. On 10 March

1999, the World Bank unveiled the successor to the EDI, the World Bank Institute

(WBI). The new learning entity also absorbed the World Bank's Learning and

Leadership Center. The WBI drives the Bank's learning agenda, working in three main

areas: training, policy services, and knowledge networks. WBI is located at World Bank

headquarters in Washington, DC. Many of its activities are held in member countries in


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cooperation with regional and national development agencies and education and

training institutions. The Institute's distance education unit conducts interactive

courses via satellite links worldwide. While most of WBI's work is conducted in English,

it also operates in Arabic, Chinese, French, Portuguese, Russian and Spanish.

Economic Research and Studies. The Bank's economic and social research program,

inaugurated in 1972, i

Inrernationa Monetary Fund

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