SIKKIM MANIPAL UNIVERSITY DIRECTORATE OF DISTANCE EDUCATION

ASSIGNMENT FOR INTERNATIONAL FINANCIAL INSTITUTIONS (BB0030)

SUBMITTED BY AHAMMED MUFASIR MUSTHAFA BBA 6TH SEMESTER 511020734

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Q1.Explain briefly the methods by which the IMF lends funds to member Countries. Since the 1960s, the Fund has created several new credit facilities for its members. Loans from these facilities are separate from tranches and are available for a longer period. These are:

Buffer Stock Financing Facility (BSFF): was created in 1969 for financing commodity buffer s to c k by m em ber c o u n t r i es . The facility is equiv alent to 30 per cent of the borrowing members quota. Repurchases are made in 3-1/4 to 5 years.

The Extended Fund Facility (EFF): is another specialized facility which was created in 1974. Under EFF, the Fund provides credit to member countries to meet their balance of payments deficits for longer periods, and in amounts larger than their quotas under normal credit facilities. EFF provides credit up to a period of 10 years and loans up to 300 per cent of a members quota are allowed. It is based on performance criteria and drawings instalments.

The Supplementary Financing Facility (SFF): was established in 1977 to provide supplementary financing under extended or stand-by arrangements to member Countries to meet serious balance to payments deficits that are large in relation to their economies and their quotas. The facility has been extended to low-income Developing member countries of the Fund. To reduce the cost of borrowing under SFF to such countries, the Fund established Subsidy Account in 1980 through which it makes subsidy payments to borrower countries.

Structural Adjustment Facility (SAF): The Fund set up SAF in March, 1986 to provide concessional adjustment to the poorer developing countries. Under it, loans are granted to them to solve balance of payments problems and to carry out medium term macroeconomic and structural adjustment programs. The SAF was created with SDR 2.7 billion of resources which come mainly from repayments on loans from the Trust Fund. Resources are made available to the poorer countries on highly concessional terms of to 1 per cent interest with the principal repayable over 5-1/2 to 10 years with a five year grace period. Disbursements are made annually and are linked to the approval of annual arrangements with members receiving equivalent of 15 per cent of quota under the first annual arrangement, 20 per cent under the second and 15 per cent under the third.

Enhanced Structural Adjustment Facility (ESAF): The ESAF was created in December, 1987 with SDR 6 billion of resources for the medium term financing needs of low income countries. The objectives, eligibility and basic program features of this facility are similar to those of the SAF. But eligible members can receive a great deal more assistance under the ESAF than under the SAF up to 190 per cent of quota over a

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three year program period, with provision for up to 255 per cent in exceptional circumstances.

Compensatory and Contingency Financing Facility (CCFF): The CCFF was created in August, 1988 to provide timely compensation for temporary shortfalls or excesses in cereal import costs due to factors beyond the control of the member and contingency financing to help a member to maintain the momentum of fund-supported adjustment program in the face of external shocks on account of factors beyond its control.

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Q2. Write a brief note on the lending operations of IBRD. How are they different than the IMF? The Bank makes loans to members in any one or more of the following ways: By granting or participating in direct loans out of its own funds. By granting loans out of the funds raised in the market of a member or otherwise borrowed by the Bank and By guaranteeing in whole or part loans made by private investors through the investment channels.

Before a loan is made or guaranteed, the Bank ensures that the Project for which the loan is asked has been carefully examined by a Competent Committee as regards the merits of the proposal. Borrower has reasonable prospects for repayment of loan. Loan is meant for productive purpose and Except in special circumstances the loan is meant to finance the foreign exchange requirements of specific reconstruction and development.

The World Bank normally makes medium and long-term loans, the term being related to the estimated useful life of the equipment of plant being financed. The Bank keeps itself informed on the projects which it finances by means of periodic reports received from the borrower and through on-the-spot inspections by its representatives. The interest rate charged by the Bank on its loan is the Estimated Cost to the Bank of borrowing money for a comparable term in the money market and is uniform without any distinction being made among the borrowers. In addition to the rate of interest, the Bank charges on all loans a commission of one per cent for the purposes of creating a special reserve against losses and 0.5 per cent charges for meeting the administrative expenses Apart from giving massive loan assistance to its members for various economic development project, the IBRD has also been giving technical assistance to members on matters relating to loan operations, particularly in regard to 1. Defining priorities among different projects, 2. Modifications in the technical plans for project designed reduce its cost or to make it more efficient, and 3. Administrative or organizational arrangements for a project or as to plans for its financing including the raising of local capital.

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The Bank has also provided technical assistance in development programming through various Survey Missions which make intensive studies of national resources of developing member countries and make recommendations to serve as the basis of long-term development programs. In addition to the conventional loans which it has made available for development projects, World Bank has made sincere efforts to secure outside assistance from developed countries for underdeveloped countries. One of the examples of the sincere efforts of the Bank is a consortium of 12 lending western nations known as the Aid India Club comprising the U.K., the U.S.A., West Germany, Japan, France, Canada, Italy, Sweden, Austria, Belgium, the Netherlands and Holland was formed to help India out of her foreign exchange difficulties.

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Q3. In the current scenario, examine the relevance of the above two institutions. The International Monetary fund (IMF) and the International Bank for Reconstruction and Development (IRDB) popularly known as World Bank were both formed by the help of an international conference in Bretton Wood, England. Known collectively as the Bretton Wood Institutions and headquartered in Washington D.C, The IMF was established in order to abolish and remove all trade restrictions and to promote multi-lateral trading system while The World Bank on the other hand was to solve the problems of war ravaged Europe and other backward countries. Purposes The World Banks primary responsibility is for financing economic development. The first loans of the IRDB were to the war ravished West European economies. When these nations recovered some economic sufficiency the bank turned its focus on developing and under developed nations to aid and finance. The World Bank has one central purpose to promote economic and social development in developing countries. The fundamental purpose of the IMF is to prevent the competitive devaluation of the national exchange currencies of the world economies. The IMF is convinced that the fundamental condition on international prosperity and economic stability is an orderly and bi-lateral currency and trade system. It also helps nations to borrow money but is not a primary lending institution, but rather an overseeing body on monetary affairs. Source of Funding The World Bank is an investment bank. At the time of establishment, the authorized Capital of World Bank was $ 10,000 million which was divided into 1, 00,000 shares of $ 1,00,000 each of this $ 9,400 million was subscribed. The Capital of the Bank provides it with substantial lending resources from its paid-up capital (20%) and much more sizable guarantee resources to enable it to mobilize private capital for international investment either through the sale of Banks obligations to private investors or through the Bank guarantees of private international credit. The IMF has a variety of facilities for lending its resources to member countries. Lending by the fund is linked to temporary assistance to members financing disequilibrium in their balance of payments on current account. The member has less currency with the Fund than its quota, the difference is called reserve tranche. It can draw up to 25 per cent on its reserve tranche automatically upon representation to the fund for its balance of payments needs. It is not charged any interest on such drawings, but is required to repay within a period of three to five years.

Relationship between the IMF and World Bank The World Bank is a collection of international organizations to aid countries in their process of economic development with loans, advice, and research. It was founded in the1940s to aid Western European countries after World War II with capital. A multilateral development finance agency created by the 1944 Bretton Woods, (New Hampshire) negotiations. It makes loans to developing countries for social overhead capital projects that are guaranteed by the recipient

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country.While the World Bank provides support to developing countries, the IMF aims to stabilize the international monetary system and monitors the worlds currencies.

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