International financial institutions and debt

By: Shawala Ghulam Ali
[The writer is a student of  BS Political Science Quaid-e-Azam university Islamabad.]

A financial institution is that provides financial services for its clients or members, they act as financial intermediaries. According to global survey held in 2015 by UN, Top challenge to the world is poverty. About one in seven person in the world is living less than a dollar per day and almost half of the world lives on less than 2 dollars a day. Development is a severe need as well as demand for the majority of the population of the world.
These refer to those institutions that have been established by more than one country and are subjected to international law. These institutions provide financial and technical support through loans and grants and play a critical role in promoting economic and social development to the underdeveloped nations and ensure that growth opportunities must reach to the poorest person in the world. These institutions share a mission of combating poverty and promoting development but their approach towards economic growth has historically produced debt among developing countries unfairly favored wealthy nations.
After the great depression in 1930s there was a need for an organization to create a system for exchange rate stability, initially Bretton woods system laid the foundation of these institutions. It was basically the reconstruction programs for Europe and it also provided mechanism for international cooperation in managing global financial system.
Whenever we talk about IFI (being a citizen of Pakistan) the image that is created in our mind is of international monitory fund and World Bank, because we find it common in the media but in reality there are other institutions as well working to resolve major problems. Like multilateral development bank, It is created by number of countries and provides financial and professional advising for the purpose of development. MDBs have large membership including both developed donors countries and developing borrowers countries. World Bank, Islamic Development Bank, African Development Bank, Asian Development Bank is examples of multilateral development bank. Islamic development bank is a multilateral development financing institution located in Jeddah, Saudi Arabia. The Islamic conference of Finance Minister of Muslim countries held in Jeddah in 1973 and Bank was formally opened on 1975. Saudi Arabia, UAE, Kuwait, Libya, Iran, Iraq, Egypt, Pakistan and Turkey are main shareholders of bank.
The purpose of bank is to foster the economic development and social progress of member countries and Muslim communities individually as well as jointly in accordance with the principles of sharia, Islamic law.
The Bretton wood institutions, In 1994,the USA government chose the mount Washington as the site for a gathering of representatives from 44 countries. This was to be the famed Bretton woods monetary conference. The conference established IMF, world bank and chose the American dollar as the backbone of international exchange. The meeting provided the world a badly needed post war currency stability. The meeting was born out of determination by US president Franklin D Roosevelt and UK PM Winston Churchill to ensure post war prosperity through such institutions. The aim of this system was to rebuild the shattered postwar economy and to promote international economic cooperation.
World bank came into existence on 27 December, 1945. it is the part of the United Nations with different governance structure. The World Bank is one of two major financial institutions created as a result of the Bretton wood conference in 1944. The IMF a related but separate institution, is the second. Delegates from a wide variety of countries attended the Bretton Woods Conference, but the most powerful countries in attendance, the United States and Britain, mainly shaped negotiations. World Bank conceived during World War II at Bretton Woods, New Hampshire, the World Bank initially helped rebuild Europe after the war. Its first loan of $250 million was to France in 1947 for post-war reconstruction. Reconstruction has remained an important focus of the Bank’s work, given the natural disasters, humanitarian emergencies, and post conflict rehabilitation needs that affect developing and transition economies. The World Bank provides over $20 billion in assistance to developing and transition countries every 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
Criticism of these financial institutions encompasses a wide range of issues but they mainly center around, concerned about approaches adopted by World Bank and IMF in formulating their policies. This includes the social and economic impact these policies have on the population of countries who avail themselves of financial assistance from these two mega institutions. But Crises always leads to some difficulties because IMF deals with economic crises, whatever policy they offer, there is likely to be difficulties. It is not possible to deal with balance of payment without some painful readjustments. IMF had some successes too that are published less. The fact that there is lender of last resort provides an important confidence boost for investors. This is important for current financial turmoil. It is the country that who approach IMF for loan, countries are not obliged to take loans from IMF. IMF easy target, sometimes countries may want to undertake painful short term adjustments but there is lack of political will. An IMF intervention enables government to secure loan and then pass the blame on IMF for the difficulties.
As Pakistan is a developing nation and has a struggling economy (i.e. devalued currency-(rupee), political and economic instability, a monstrous 25% inflation and a declining GDP…), we often have to turn to IMF for help. Pakistan gets loans from IMF for the balance of payment deficits, stabilization of currency, rebuilding international and domestic reserves and managing liquidity problems. Since 1988, 11 loan arrangements have taken place.
IMF approves third disbursement of 114.6 million dollars to Ghana. Loan to help macroeconomic stability, structural reforms to resist shocks, improvement in delivery of electricity expected. In 2009 Ghana secured 600 million dollar loan from IMF. Its growth rate increases over 9% in 2011 and now it becomes Africa front emerging markets.
Tunisia gets 2.9 billion dollar loan from IMF to strengthen job creation and economic growth. Tunisia faces weak economic activity, low employment, and high external imbalances. IMF loan to support governments economic vision of more inclusive growth, program includes reforms to tackle high unemployment, strengthen governance.
In short, the world can turn into a much better place to live in, for everyone. If only the IMF and the world bank use their authority and power in a healthier way and positive sense to help third world countries ,not to create problems of debt for them The funds gathered should be used sincerely and all the member countries should be held accountable.