BB0030 - Role of International Finance Institutions

Feb drive 2011

Bachelor of Business Administration-BBA Semester 6

BB0030 - Role of International Finance Institutions- 2 Credits

Marks - 30

Q1. Explain briefly the methods by which the IMF lends funds to member countries.

Ans : The International Monetary Fund (IMF) is an international organization that oversees the global financial system by following the macroeconomic policies of its member countries; in particular those with an impact on exchange rates and the balance of payments. It is an organization formed to stabilize international exchange rates and facilitate development.

1. The Buffer Stock Financing Facility (BSFF) :

The Buffer Stock Financing Facility (BSFF) was established in 1969 to provide assistance to members in connection with their contributions to international buffer stocks of primary products, operating in the context of approved international commodity agreements (ICAs). The BSFF was the Fund’s contribution to the international community’s efforts to stabilize commodity prices, which were seen at the time as excessively volatile.

2. The Extended Credit Facility (ECF) :

It succeeds the Poverty Reduction and Growth Facility (PRGF) as the Fund’s main tool for providing medium-term support to LICs with protracted balance of payments problems. Financing under the ECF currently carries a zero interest rate, with a grace period of 5½ years, and a final maturity of 10 years.

3. The Standby Credit Facility (SCF) :

It provides financial assistance to LICs with short-term balance of payments needs. The SCF replaces the High-Access Component of the Exogenous 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.

4. The Rapid Credit Facility (RCF) :

It provides rapid financial assistance with limited conditionality to LICs facing an urgent balance of payments need.The RCF streamlines the Fund’s emergency assistance for LICs, and can be used flexibly in a wide range of circumstances. Financing under the RCF currently carries a zero interest rate, has a grace period of 5½ years, and a final maturity of 10 years.

5. Stand-By Arrangements (SBA):

Historically, the bulk of non-concessional IMF assistance has been provided through SBAs. The SBA is designed to help countries address short-term balance of payments problems. Program targets are designed to address these problems and disbursements are made conditional on achieving these targets (‘conditionality’). The length of a SBA is typically 12–24 months, and repayment is due within 3¼-5 years of disbursement.

6. Flexible Credit Line (FCL):

The FCL is for countries with very strong fundamentals, policies, and track records of policy implementation and is useful for both crisis prevention and crisis resolution. FCL arrangements are approved, at the member country’s request, for countries meeting pre-set qualification criteria.

7. Precautionary and Liquidity Line (PLL):

The PLL replaced the Precautionary Credit Line (PCL), building on its strengths and enhancing its flexibility. The PLL can be used for both crisis prevention and crisis resolution purposes by countries with sound fundamentals and policies, and a track record of implementing such policies.

Q2. Write a brief note on the lending operations of IBRD. How are they different than the IMF.

Ans :  Lending operations of IBRD:

1. Fund Generation:

IBRD lending to developing countries is primarily financed by selling AAA-rated bonds in the world's financial markets. While IBRD earns a small margin on this lending, the greater proportion of its income comes from lending out its own capital. This capital consists of reserves built up over the years and money paid in from the Bank's 185 member country shareholders. IBRD's income also pays for World Bank operating expenses and has contributed to IDA and debt relief.

2. Loans:

Through the IBRD and IDA, we offer two basic types of loans and credits: investment operations and development policy operations. Countries use investment operations for goods, works and services in support of economic and social development projects in a broad range of economic and social sectors. Development policy operations (formerly known as adjustment loans) provide quick-disbursing financing to support a country's policy and institutional reforms. Each borrower's project proposal is assessed to ensure that the project is economically, financially, socially and environmentally sound. During loan negotiations, the Bank and borrower agree on the development objectives, outputs, performance indicators and implementation plan, as well as a loan disbursement schedule. While we supervise the implementation of each loan and evaluate its results, the borrower implements the project or program according to the agreed terms. As more than 30% of our staff is based in over 100 country offices worldwide

3. Trust Funds and Grants:

Donor governments and a broad array of private and public institutions make deposits in Trust funds that are housed at the World Bank. These donor resources are leveraged for a broad range of development initiatives. The initiatives vary significantly in size and complexity, ranging from multibillion dollar arrangements such as Carbon Finance; the Global Environment Facility; the Heavily Indebted Poor Countries Initiative; and the Global Fund to Fight AIDS, Tuberculosis, and Malaria too much smaller and simpler freestanding ones.

Difference between lending operations of IBRD and IMF :

IMF conditionality is a set of policies or conditions that the IMF requires in exchange for financial resources. The IMF does not require collateral from countries for loans but rather requires the government seeking assistance to correct its macroeconomic imbalances in the form of policy reform. If the conditions are not met, the funds are withheld.[6] Conditionality is perhaps the most controversial aspect of IMF policies. The concept of conditionality was introduced in an Executive Board decision in 1952 and later incorporated in the Articles of Agreement.

Conditionality is associated with economic theory as well as an enforcement mechanism for repayment. Stemming primarily from the work of Jacques Polak in the Fund's research department, the theoretical underpinning of conditionality was the "monetary approach to the balance of payments.

Q3. In the current scenario, examine the relevance of the above two institutions.

Ans : IMF :

The International Monetary Fund (IMF) The IMF is an international organization of 184 member countries. It was established to promote international monetary cooperation, exchange stability, and orderly exchange arrangements; to foster economic growth and high levels of employment; and to provide temporary financial assistance to countries to help ease balance of payments adjustment. Since the IMF was established its purposes have remained unchanged but its operations—which involve surveillance, financial assistance, and technical assistance—have developed to meet the changing needs of its member countries in an evolving world economy.

The executive board meets three times a week, and the IMF's five largest shareholders (the United States, Japan, France, Germany, and the United Kingdom) as well as China, Russia, and Saudi Arabia, each have a seat on the board. The other sixteen directors are elected for two-year terms by groups of countries.

There are several committees within the IMF. The International Monetary and Financial Committee, which is a committee of the board of governors, meets twice per year to evaluate policy issues relating to the international monetary system. The IMF Development Committee, which is composed of members of the boards of governors of both the IMF and the World Bank, advises and reports to the IMF governors on matters concerning developing countries.

IBRD :

The International Bank for Reconstruction and Development (IBRD) aims to reduce poverty in middle-income countries and creditworthy poorer countries by promoting sustainable development through loans, guarantees, risk management products, and analytical and advisory services. Established in 1944 as the original institution of the World Bank Group, IBRD is structured like a cooperative that is owned and operated for the benefit of its 188 member countries. IBRD raises most of its funds on the world's financial markets and has become one of the most established borrowers since issuing its first bond in 1947. The income that IBRD has generated over the years has allowed it to fund development activities and to ensure its financial strength, which enables it to borrow at low cost and offer clients good borrowing terms. BRD became a major player on the international capital markets by developing modern debt products, opening new markets for debt issuance, and by building up a broad investor base around the world of pension funds, insurance companies, central banks, and individuals.

The World Bank's borrowing requirements are primarily determined by its lending activities for development projects. As World Bank lending has changed over time, so has its annual borrowing program. In 1998 for example, IBRD borrowing peaked at $28 billion with the Asian financial crisis. It is now projected to borrow between $10 to 15 billion a year.