Friday, August 28, 2009

International Bank for Reconstruction and Development (IBRD) or World Bank

The International Bank for Reconstruction and Development (I B R D) was established in 1945 under Bretton woods Agreement of 1944 to assist in bringing about a smooth transition from a war time to peace time economy. It is a sister institution of the IMF.

Functions of I. B. R. D:

Following are main functions of I. B. R. D.

1. To assist in the reconstructions and development of territories of its member countries by facilitating the investment of capital for productive purpose and the development of productive facilities and resources in less developed countries.

2. To promote private foreign investment by means of guarantees or participations in loans and other investment made by private investors and when capital is not available on reasonable terms to supplement private investment by providing finance for productive purpose out of its own resources or from borrowed funds.

3. To arrange the loans made or guaranteed by it in relation to international loans through other channels so that more useful and urgent small and large projects are dealt with first.

4. To promote the long ranged balanced growth of international trade and maintenance of equilibrium in the balance of payments of member countries by encouraging international investment for the development of their productive resources there by assisting in raising productivity, the standard of living and conditions of workers in their territories.

Organisation of I. B. R. D:

Like the IMF, the I B R D has a three tier structure with a President, Executive Directors and Board of Governors. Number of Executive Director’s is 21 of these 5 are appointed by five largest share holders of the World Bank. They are US, UK, Germany, France and Japan. The remaining 16 are elected by the Board of Governors. There are also Alternate Directors. The first five belong to the same permanent member countries to which the Executive Directors belong. But the remaining Alternate Directors elected from among the group of countries who cast their votes to choose the 16 Executive Directors belonging to their regions. The President of the World Bank presides over the meetings of the Board of Executive Directors. The Executive Directors decide about policy within the frame work of the Articles of Agreement. They consider and decide on the loans and credit proposals made by the president. The President has a stag of more than 6000 persons who carry on the working of the World Bank.

Funding Strategy of IBRD:

The IBRD’s funding strategy has the following four objectives. The first is to ensure the availability of funds to the Bank. For this purpose the IBRD seeks to maintain unlimited access to funds in the markets in which it borrows. The second objective is to minimise the effective cost of those funds to its borrowers. This is done through the currency mix of its borrowings and the line of borrowings. In the former case, it tends to maximise borrowings in currencies with low nominal interest rates. The time of borrowings is manipulated in two ways (a) when interest rates are expected to rise, the Bank seeks to increase its borrowings and (b) when interest rates are expected to fall, and it seeks before borrowings. The third objective is to control volatility in net income and over all loan charges. For this purpose the Bank a pool based variable lending rate system that uniformly adjusts interest charges applicable to the outstanding balance on all loans made under it. The existing loans were not affected by this lending system. When the majority of loans and borrowings are incorporated into the new lending rate system in future, the volatility of interest rates will be much reduced. The fourth objective of funding strategy is to provide an appropriate degree of maturity transformation between its borrowing and lending. Maturity transformation refers to the Bank’s capacity to lend at longer maturities than it borrows. At the same time, it provides its borrowers with a modest degree of maturity transformation.

Borrowing and Lending Activities:

The IBRD is a corporate institution whose capital is subscribed by its members. It finances its lending operations primarily from its own medium and long term borrowings in the international capital markets and currency swap agreements (CSA). The bank also borrows under the Discount Note Programme. First it places bonds and notes directly with its member governments, government agencies and central bank. Second it offers issues to investors and in the public markets through investing banking firms, merchant banks and commercial banks.

The IBRD has evolved two new borrowing instruments first, Central Bank Facility (CBF) and second borrowing in Floating Rate Notes (FRNs). CBF is one year, US dollar dominated facility for borrowing from official sources particularly central banks. FRNs are meant to help the IBRD to meet some of the objectives of its funding strategy. The FRN market enables the Bank to gain access to set of investors like commercial banks and certain other financial institutions which have not traditionally bought IBRD notes.

The Bank lends to member countries in any of the following ways.

(i) By marketing or participating in loans, out of its own funds (ii) by marketing or participating in direct loans out of funds raised in the market of a member or otherwise borrowed by the Bank. (iii) By guaranteeing in whole or in part loans made by private investors through the usual investment channels.

The Bank provides the following facilities to member countries.

(a) Structural Adjustment Facility (SAF): The IBRD has introduced SAF since 1985 to borrowing countries in order to reduce their balance of payments deficit while maintaining or regaining their economic growth. SAF funds are used to finance general imports with a few agreed exceptions such as luxury and military imports.

(b) Enhanced Structural Adjustment Facility (ESAF): In 1987 the Bank has set up the ESAF to increase the availability of concessional resources to low-income member countries. It provides new concessional resources totalling SDR 6 billion which will be financed by special loans and contribution from developed and OPEC countries. Like SAF, ESAF is meant to help the borrowing countries to reduce their balance of payments deficits and encourage growth.

(c) Special Action Programme (SAP): The Special Action Programme (SAP) has been started in 1983 to strengthen the IBRD’s ability to assist member countries in adjusting to the current economic environment. It has four major elements (i) an expansion in lending for high-priority operations that support structural adjustment, policy changes maintenance of crucial infrastructure. (ii) Accelerated disbursement under existing and new investment commitments to ensure timely implementation of high priority projects (iii) Expanded advisory services on the design and implementation of appropriate policies. (iv) Existing familiar efforts by other donors for fast disbursing assistance in support of programmes of Banks and IMF.

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