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World Bank March 31, 2010

Posted by Chetan Chitre in International Business Management, International Organisations.
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(This note is prepared from material available on the World Bank Group websites on 31st March, 2010)

INTRODUCTION –

While IMF was established under the Bretton Woods Conference to achieve monetary and exchange rate stability in international economy, a need was also felt to help countries in their post was reconstruction efforts.

So while the IMF focused largely on Macroeconomic stability of economies pertaining to their Balance of Payments, the International Bank for Reconstruction and Development (IBRD) was set-up to fund specific reconstruction and redevelopment projects. Over time IBRD has refocused itself into extending financial assistance for developmental projects in the Less Developed Countries (LDCs). IBRD has been commonly referred to as ‘The World Bank.’

Subsequently, more institutions were set-up with the common objective of extending developmental assistance to the LDCs in various forms, which today forms the ‘World Bank Group’. The World Bank Group, thus currently constitutes a group of 5 institutions –

(a)    International Bank for Reconstruction and Development (IBRD)

(b)   International Development Association (IDA)

(c)    International Finance Corporation (IFC)

(d)   Multilateral Investment Guarantee Agency (MIGA)

(e)   International Centre for Settlement of Investment Disputes (ICSID)

Each of the above institutions has been assigned a specific role and help the World Bank in achieving its objective. The Bank focuses on helping countries achieve the Millennium Development Goals

(a)    Eradicate extreme poverty and hunger

(b)   Achieve universal primary education

(c)    Promote gender equality and empower women

(d)   Reduce child mortality

(e)   Improve maternal health

(f)     Combat HIV/AIDS, malaria, and other diseases

(g)    Ensure environmental sustainability

(h)   Develop a Global Partnership for Development

The Bank seeks to achieve inclusive and sustainable globalization through its efforts in six strategic areas

(a)    Helping overcome poverty and spur sustainable growth in the poorest countries, especially in Africa.

(b)   Addressing the special challenges of countries that are emerging from conflict or seeking to avoid the breakdown of the state.

(c)    Building a competitive menu of development solutions for middle-income countries, with customized services as well as finance.

(d)   Playing a more active role in regional and global issues that cross national borders, including climate change, infectious diseases, and trade.

(e)   Strengthen development and opportunity in the Arab world.

(f)     Increasingly leverage the best global knowledge to support development.

IBRD –

IBRD is the key soft-loan window of the World Bank. Structured like a cooperative, IBRD is owned and operated for the benefit of its 186 member countries. Members also have access to capital on favorable terms in larger volumes, with longer maturities, and in a more sustainable manner than world financial markets typically provide. IBRD primarily focuses on the middle-income countries.

Financial Products of the IBRD

Flexible Loan

(a)    Long maturities (up to 30 years)

(b)   Transparent LIBOR-based pricing

(c)    Built-in hedging products to manage financial risks over the life of the loan

(d)   Ability to customize repayment schedules to project, program, or debt management requirements.

Local currency loans

Through options embedded in the IBRD Flexible Loan borrowers have access to local currency at the time of disbursement or at any time during the life of the loan to reduce future vulnerabilities to foreign exchange risk.

Financing for Sub-nationals

The World Bank Group offers sub-nationals two options: IBRD financing with a sovereign guarantee on the same terms as national governments, or financing without a sovereign guarantee on commercial terms through the joint IFC-World Bank Sub-national Finance program.

Contingent financing

For rapidly financing requirements arising due to an unexpected a shortfall in resources. The IBRD Deferred Drawdown Option – or DDO – is a committed line of credit with similar pricing and the same built-in risk management features and flexibility as the IBRD Flexible Loan.

Resources of IBRD –

IBRD raises most of its funds on the world’s financial markets. It has become one of the most established borrowers since issuing its first bond in 1947 to finance the reconstruction of Europe after World War-II. IBRD enjoys its high credit rating because it is backed by the capital commitments of its 186 shareholder governments. IBRD typically borrows upto USD 10 to 15 bn every year. So far IBRD has extended loans of about USD 400 bn to various developmental projects.

INTERNATIONAL DEVELOPMENT ASSOCIATION –

The International Development Association (IDA) is the part of the World Bank that helps the world’s poorest countries. Established in 1960, IDA aims to reduce poverty by providing interest-free credits and grants for programs that boost economic growth, reduce inequalities and improve people’s living conditions.

IDA complements the World Bank’s other lending arm–the International Bank for Reconstruction and Development (IBRD)–which serves middle-income countries with capital investment and advisory services. IBRD and IDA share the same staff and headquarters and evaluate projects with the same rigorous standards.

IDA is one of the largest sources of assistance for the world’s 79 poorest countries, 39 of which are in Africa. It is the single largest source of donor funds for basic social services in the poorest countries.

IDA lends money (known as credits) on concessional terms. This means that IDA credits have no interest charge and repayments are stretched over 35 to 40 years, including a 10-year grace period. IDA also provides grants to countries at risk of debt distress.

Since its inception, IDA credits and grants have totaled US$207 billion, averaging US$14 billion a year in recent years and directing the largest share, about 50 percent, to Africa.

INTERNATIONAL FINANCE CORPORATION –

International Finance Corporation (IFC) is an arm of the World Bank that lends projects based assistance to private sector entities in the developing countries. IFC has a wide range of products like any other financial institution to cater to its clients’ needs.

To be eligible for IFC funding, a project must meet a number of criteria. The project must:

(a)    Be located in a developing country that is a member of IFC;

(b)   Be in the private sector;

(c)    Be technically sound;

(d)   Have good prospects of being profitable;

(e)   Benefit the local economy; and

(f)     Be environmentally and socially sound, satisfying IFC environmental and social standards as well as those of the host country.

IFC does not lend directly to micro, small, and medium enterprises or individual entrepreneurs, but many of our investment clients are financial intermediaries that on-lend to smaller businesses.

MULTILATERAL INVESTMENT GUARANTEE AGENCY –

As a member of the World Bank Group, MIGA promotes FDI into developing countries to help support economic growth, reduce poverty, and improve people’s lives providing political risk insurance (guarantees) to the private sector.

MIGA helps investors and lenders deal with these risks by insuring eligible projects against losses relating to:

(a)    Currency transfer restrictions

(b)   Expropriation

(c)    War and civil disturbance

(d)   Breach of contract

(e)   Non-honoring of sovereign financial obligations

INTERNATIONAL CENTRE FOR SETTLEMENT OF INVESTMENT DISPUTES –

International Centre for Settlement of Investment Disputes (ICSID) is an autonomous international institution established under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID or the Washington Convention) with over one hundred and forty member States. The primary purpose of ICSID is to provide facilities for conciliation and arbitration of international investment disputes. The ICSID Convention is a multilateral treaty formulated by the Executive Directors of the International Bank for Reconstruction and Development (the World Bank). It was opened for signature on March 18, 1965 and entered into force on October 14, 1966.

The Convention sought to remove major impediments to the free international flows of private investment posed by non-commercial risks and the absence of specialized international methods for investment dispute settlement. ICSID was created by the Convention as an impartial international forum providing facilities for the resolution of legal disputes between eligible parties, through conciliation or arbitration procedures. Recourse to the ICSID facilities is always subject to the parties’ consent. Today, ICSID is considered to be the leading international arbitration institution devoted to investor-State dispute settlement.

India is not a contracting party to ICSID.

WORLD BANK’S INVOLVEMENT IN INDIA –

World Bank involvement in India’s developmental efforts has been consistent and constructive. Over the last 60 odd years it has funded several projects in areas including poverty alleviation, education, sanitation, urban development, irrigation and water supply, housing and employment generation, development of infrastructure, etc. The total assistance from the Bank in the post-independence period was –

IBRD (USD bn) IDA (USD bn)
Original Principle 35.4 34.2
Disbursed 26.1 31.5
Repaid 17.6 8.4

Apart from fund based assistance, World Bank assistance also includes capacity building, technical advice and strategic advisory services. World Bank, in consultation with the government of the country prepares a strategy paper on various development related areas for a country. This strategy paper serves as a blue-print for further funding arrangements.

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