BB0030 – Role of International Financial Institutions

Feb drive 2011

Bachelor of Business Administration-BBA Semester 6

BB0030 – Role of International Financial Institutions – 2 Credits

(Book ID: – B0172 )

Assignment Set- 1 (30 Marks)

Note: Each question carries 10 Marks. Answer all the questions.

Q.1. Explain why Special Drawing Rights were introduced by IMF. Discuss how SDRs are used by member countries.

Ans :  Special Drawing Rights by IMF :

The SDR was created by the IMF in 1969 to support the Bretton Woods fixed exchange rate system. A country participating in this system needed official reserves—government or central bank holdings of gold and widely accepted foreign currencies—that could be used to purchase the domestic currency in foreign exchange markets, as required to maintain its exchange rate. But the international supply of two key reserve assets—gold and the U.S. dollar—proved inadequate for supporting the expansion of world trade and financial development that was taking place. Therefore, the international community decided to create a new international reserve asset under the auspices of the IMF. However, only a few years later, the Bretton Woods system collapsed and the major currencies shifted to a floating exchange rate regime. In addition, the growth in international capital markets facilitated borrowing by creditworthy governments. Both of these developments lessened the need for SDRs.

The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways: first, through the arrangement of voluntary exchanges between members.

Use of SDRs by member countries :

SDR allocations to IMF members:

Under its Articles of Agreement (Article XV, Section 1, and Article XVIII), the IMF may allocate SDRs to member countries in proportion to their IMF quotas. Such an allocation provides each member with a costless, unconditional international reserve asset on which interest is neither earned nor paid. However, if a member's SDR holdings rise above its allocation, it earns interest on the excess. Conversely, if it holds fewer SDRs than allocated, it pays interest on the shortfall. The Articles of Agreement also allow for cancellations of SDRs, but this provision has never been used. The IMF cannot allocate SDRs to itself or to other prescribed holders.

General allocations of SDRs have to be based on a long-term global need to supplement existing reserve assets. Decisions on general allocations are made for successive basic periods of up to five years, although general SDR allocations have been made only three times. The first allocation was for a total amount of SDR 9.3 billion, distributed in 1970-72, and the second allocated SDR 12.1 billion, distributed in 1979-81.

Separately, the Fourth Amendment to the Articles of Agreement became effective August 10, 2009 and provided for a special one-time allocation of SDR 21.5 billion. The purpose of the Fourth Amendment was to enable all members of the IMF to participate in the SDR system on an equitable basis and correct for the fact that countries that joined the IMF after 1981—more than one fifth of the current IMF membership—never received an SDR allocation until 2009. The 2009 general and special SDR allocations together raised total cumulative SDR allocations to about SDR 204 billion.

Q.2. Describe how IMF has impacted the Indian economy.

Ans : The relationship between India and the IMF dates back to the time when India needed economic reform packages to strengthen its international reputation and fiscal policy. IMF provided major loans to India to structure its finances and maintain average economic growth rate.

The International Monetary Fund (IMF) is an association of 186 nations, working towards strengthening the international fiscal system, protecting monetary stability, assisting international trade, endorsing greater employment, maintaining fiscal growth, and diminishing poverty rate across the globe.

The organization maintains its association by facilitating:

• Policy guidance to administrations and nationalized financial institutions on the basis of the assessment of fiscal trends cross national know-how;
• Providing study data, statistics, predictions and assessments based on the survey of international, local and respective financial systems and markets.
• Providing loans to assist nations to surmount financial difficulties;
• Providing provisional finances to help evade poverty in progressing nations and
• Providing technological support and training to aid nations enhance the administration of their financial systems.

IMF and India Relations:

India is among one of the developing economies that effectively employed the various Fund programmes to fortify its fiscal structure. Through productive engagement with the IMF, India formulated a consistent approach to expand domestic and global assistance for economic reforms. Whenever India underwent balance of payments crises, it sought the help of IMF and in turn the internationally recognized reserve willingly helped India to overcome the difficulties.

Recently, India purchased IMF gold to lend money to developing countries. This proves that the fiscal reforms set in motion by the previous finance ministers have finally started gaining momentum, transforming India from fiscal borrower to major lender.

The speed at which the gold was purchased by India on September 18, 2009 astonished the market observers, who later considered it as a smart move towards shoring its bullion funds and steadily trying to stake on the US dollar. Some analysts predict that India is purchasing gold to move forward for higher voting share in the IMF. India is also seeking for a considerable say in global fiscal affairs and greater account in the IMF.

The Reserve Bank of India forfeited USD 1,045/ ounce of yellow metal paying the amount in hard exchange and not in the IMF's internal division of account.

The history of India's engagement with IMF illustrates that with premeditated planning it is possible to alleviate a macroeconomic calamity and sustain the rights of reform package without negotiating on democratic organizations or international policy autonomy.

IMF 2010-11 prediction of Indian Economy:

India's long term economic prospects will continue to remain sturdy in 2010-11 followed by lower growth rate at 7.7% for the FY 2011-12. Other than high inflation and rising financial deficit, the major areas of concern are rise in asset cost and the prospects of an unanticipated slowdown in the influx of foreign investment in India caused due by the chaos in worldwide financial markets.

Q.3. Discuss how World Bank has helped developing countries.  

Ans :  The World Bank is a vital source of financial and technical assistance to developing countries around the world. We help governments in developing countries reduce poverty by providing them with money and technical expertise they need for a wide range of projects—such as education, health, infrastructure, communications, government reforms, and for many other purposes.

Roles of world bank in the development of developing countries :

1. Eradicate Extreme Poverty and Hunger:

From 1990 through 2004, the proportion of people living in extreme poverty fell from almost a third to less than a fifth. Although results vary widely within regions and countries, the trend indicates that the world as a whole can meet the goal of halving the percentage of people living in poverty. Africa's poverty, however, is expected to rise, and most of the 36 countries where 90% of the world's undernourished children live are in Africa. Less than a quarter of countries are on track for achieving the goal of halving under-nutrition.

2. Achieve Universal Primary Education:

The percentage of children in school in developing countries increased from 80% in 1991 to 88% in 2005. Still, about 72 million children of primary school age, 57% of them girls, were not being educated as of 2005.

3. Promote Gender Equality:

The tide is turning slowly for women in the labor market, yet far more women than men- worldwide more than 60% – are contributing but unpaid family workers. The World Bank Group Gender Action Plan was created to advance women's economic empowerment and promote shared growth.

4. Reduce Child Mortality:

There is some what improvement in survival rates globally; accelerated improvements are needed most urgently in South Asia and Sub-Saharan Africa. An estimated 10 million-plus children under five died in 2005; most of their deaths were from preventable causes.

5. Improve Maternal Health:

Almost all of the half million women who die during pregnancy or childbirth every year live in Sub-Saharan Africa and Asia. There are numerous causes of maternal death that require a variety of health care interventions to be made widely accessible.

6. Combat HIV/AIDS, Malaria, and Other Diseases:

Annual numbers of new HIV infections and AIDS deaths have fallen, but the number of people living with HIV continues to grow. In the eight worst-hit southern African countries, prevalence is above 15 percent. Treatment has increased globally, but still meets only 30 percent of needs (with wide variations across countries).

7. Ensure Environmental Sustainability:

Deforestation remains a critical problem, particularly in regions of biological diversity, which continues to decline. Greenhouse gas emissions are increasing faster than energy technology advancement.

8.Develop a Global Partnership for Development:

Donor countries have renewed their commitment. Donors have to fulfill their pledges to match the current rate of core program development. Emphasis is being placed on the Bank Group's collaboration with multilateral and local partners to quicken progress toward the MDGs' realization.