Indian Economy | Multilateral financial Institutions Download PDF
International Monetary Fund (IMF)
The International Monetary Fund (IMF) and the World Bank Group (WB) are multilateral financial institutions having their genesis in the Bretton Wood Conference during 1944. The IMF was set up, first for post-war reconstruction and for greater economic cooperation amongst the countries. Subsequently, its role changed to achieve exchange rate stability of different economies.
Its role since 1970 onwards was to provide loans to economies battling on their respective balance of payments front arising out of the collapse of the fixed exchange rates system, oil shocks and also to those economies opening up as part of global integration but having structural problems on their trade front.
Availing loan facilities from the IMF requires membership, (presently 188 members) by buying a ‘quota’ usually in relation to the output of economies and their stature in the world. The quota in turn determines voting rights for various policy decisions including loans to be provided to the affected economies by the IMF. The quota is bought by paying 25 per cent in any of the Widely Accepted Currency (WAC) comprising of the USD, Euro, Pound Sterling and Japanese Yen. The remaining 75 per cent can be bought in the home currency and maintained with the central bank of that country but cannot be withdrawn without authorization from the IMF.
All loan facilities are short-term, provide interim relief and are linked as a percentage to the quota, which carry commercial interest rate with varying repayment periods and strict conditionalities like reforms in the domestic sector for long-term structural adjustment. All the accounts of the IMF are maintained in a neutral accounting currency known as ‘special drawing rights (SDR)’ also referred as ‘paper gold’. SDRs can be converted into any WAC at predetermined rates by the IMF.
Special drawing right is not a currency but only an accounting unit of the IMF and the quota can also be purchased in SDRs. IMF besides lending for trade imbalances and currency-related issues of economies also publishes country papers for use by various governments for qualitative improvements in policy-making.
They are also playing an important role along with the World Bank Group for eradication of absolute poverty especially in Asian and African countries through its programmes like poverty reduction growth fund (PRGF), which is the only concessional assistance programme of the IMF repayable over ten years. IMF has been criticized for the large dominance of the US and its interest at the IMF is driven by a ‘Washington Consensus’, being the largest quota holder.
Recent Trends at the International Monetary Fund (IMF)
With the rebalancing amongst the global economies, emergence of BRICS economies, with their increasing contribution to the world output, a need was also felt to realign the quotas of the IMF by giving them larger share, commensurate with their growing international stature and contribution to the global output. BRIC economies have thus been allocated 6 per cent additional quotas, with India’s share in voting rights increasing from 2.44 to 2.75 per cent, making it the eighth highest quota holder and voting rights from the earlier eleventh highest quota holder.
In terms of quota and voting rights, India ranks behind US, Japan, China, Germany, France, UK and Italy but ranks ahead of Russia and Brazil, amongst the top ten quota holders at the IMF. The rebalancing has doubled the total quota to SDR 477 billion or USD 756 billion.
Post-global crisis, IMF is likely to have a large role in revival but more importantly, functions as a true multilateral financial institution providing greater global financial stability from its present role of currency management. Since, its coming into existence, for the first time IMF has also opened a different window, new arrangement to borrow (NAB), for crisis ridden economies in the euro zone. This functionality would require greater inter-government monetary co-operation, greater transparency in functioning of monetary authorities and the IMF would have to take the lead role.
International Monetary Fund (IMF) and India
India has been a major borrower of the IMF before the reforms were initiated. The borrowings had been from various facilities of the IMF. However, all the loans taken by India have not only been ‘repaid but prepaid’ to the IMF and our present outstanding is nil. The IMF also has a financial transaction plan (FTP) which is a plan to help the BOP of impoverished low income countries and only forty-seven strong economies are permitted to lend to the IMF for funding this plan.
India has also been admitted as a lender to the IMF for this plan since 2002. The amount contributed towards the plan is taken as a part of foreign exchange reserves of the country. So far, the contribution made by India to the FTP is USD 205 million.
Probably India would be the only country in the world to have become a lender (creditor) to the IMF, from being a borrower (debtor) just two decades ago. It is also an acknowledgement by the IMF of the strong fundamentals, maturity and growing stature of India post-reforms. With the increased quota and voting rights India will now find a greater, say, in various policy decisions at the IMF.
The World Bank Group
The World Bank Group also set up first, for rebuilding of economies post-World War II. Gradually, the emphasis was shifted to development oriented for developing countries and addressing issues of growing poverty and poor countries in Asia and Africa. The WB provides financial and technical assistance to developing countries through multiple sister institutions playing a complementary role, for eradication of poverty, education, public health, public administration, agriculture, addressing environmental issues and funding projects which have predominant socio-welfare considerations covering schools, hospitals, dams, etc.
These projects are not World Bank-driven but are of the governments with World Bank only providing financial assistance to them and thus does not come with conditionalities except that the projects for which assistance has been provided is completed on schedule. Their funding not only covers central but also state governments, NGOs and other such institutions, domestic as well as overseas, engaged in development-related work in the country. The financial assistance, unlike the IMF, is not commercial borrowing, but concessional, repayable over long time periods.
As mentioned previously, World Bank comprises of complementary institutions of International Bank for Reconstruction and Development (IBRD) the International Development Agency (IDA), International Finance Corporation (IFC), Multilateral Investment Guarantee Agreement (MIGA) and International Center for Settlement of Investment Disputes (ICSID). The IBRD is more focused on reducing poverty in middle income credit worthy relatively poor countries through income generation activities and capacity building measures.
The IDA looks at the poorest seventy-nine economies including thirty-five countries of Africa, with per capita gross national income of less than USD 1165. Assistance provided is for infrastructure, public health and social sectors. Assistance provided is interest-free and have repayment periods of 35-40 years.- _
IFC provides technical and financial assistance to medium and small enterprises in developing countries and also to promote entrepreneurship especially in developing countries. MIGA provides guarantees of ‘political risks’ to overseas investments, while ICSID resolves investment disputes of member countries.
The major role of the WB has been centred around eradication of absolute poverty in African and Asian countries and also making poverty a global issue and not restricted to one or group of countries. It has also given its own definition of poverty of those living below USD 1 per day. –
Besides, it also prepares country level papers on developing countries outlining developmental requirements of developing countries and eradication of poverty in a sustained manner. It also provides insights to economies for inclusive and sustainable growth by providing assistance to the governments and communities.
The WB has already committed USD 14 billion assistance to India during 2009-2012. Recently RBI would subscribe to special private placement of bonds issued by WB to the extent of USD 4.3 billion, which will make India eligible for higher concessional borrowings from WB. It will also provide a stable and long-term source for meeting current account deficit. The WB has set up the catastrophe risk deferred draw down option (CRDD) with a corpus of USD 500 million for providing assistance to middle income economies affected by natural disasters.
Playing its role post-global crisis, it has established vulnerability financing facility (VFF) within the IDA, to provide fast track financial assistance and also a rapid social response fund (RSRF) for meeting emergent social needs of low income economies. The ‘group’ is also committed to fund stabilizing of existing infrastructure and ensure delivery of priority projects amongst developing member countries. The ‘bank’ also undertakes continuous review of public expenditure and debt management for economies useful for policy-makers of the respective economies.
Asian Development Bank (ADB)
The Asian Development Bank (ADB) is a multilateral development bank with sixty-seven members and with the US and Japan as the largest shareholders. However, the character is Asian in nature focused on regional cooperation amongst Asian and Pacific regions.
The objective of the ADB is eradication of poverty in the Asian countries, sustainable economic growth, inclusive social development, environment sustainability, information dissemination and greater regional integration. It provides assistance, co-financing and technical assistance to member countries. It not only partners the central governments of economies but also private sector as well as NGOs engaged in poverty alleviation.
All the three multilateral financial institutions comprising of the IMF, the WB and the ADB have played a pivotal role for developing countries and at least, established that indeed poverty is a global issue and the biggest curse of mankind not confined to few countries. ,
It is too large an issue, in magnitude and wide ranging in impact, incapable to be addressed by individual countries, requiring global interventions, both in terms of resources as well as intensified efforts at their successful eradication.
Their role will be further redefined post-global crisis, in creating an oversight mechanism, not regulatory and also fostering greater economic cooperation amongst countries.
It can be said that these institutions, in future, will play a much larger role than in the past and go beyond the ‘Washington Consensus’ to emerge truly as multilateral institution not visible earlier.