Balance of Payment A record of all transactions made between one particular country and all other countries during

a specified period of time. BOP compares the dollar difference of the amount of exports and imports, including all financial exports and imports. A negative balance of payments means that more money is flowing out of the country than coming in, and vice versa. Balance of payments (BoP) accounts are an accounting record of all monetary transactions between a country and the rest of the world. These transactions include payments for the country's exports and imports of goods, services, financial capital, and financial transfers. The BoP accounts summarize international transactions for a specific period, usually a year, and are prepared in a single currency, typically the domestic currency for the country concerned. Sources of funds for a nation, such as exports or the receipts of loans and investments, are recorded as positive or surplus items. Uses of funds, such as for imports or to invest in foreign countries, are recorded as negative or deficit items. When all components of the BOP accounts are included they must sum to zero with no overall surplus or deficit. For example, if a country is importing more than it exports, its trade balance will be in deficit, but the shortfall will have to be counterbalanced in other ways – such as by funds earned from its foreign investments, by running down central bank reserves or by receiving loans from other countries. While the overall BOP accounts will always balance when all types of payments are included, imbalances are possible on individual elements of the BOP, such as the current account, the capital account excluding the central bank's reserve account, or the sum of the two. Imbalances in the latter sum can result in surplus countries accumulating wealth, while deficit nations become increasingly indebted. The term "balance of payments" often refers to this sum: a country's balance of payments is said to be in surplus (equivalently, the balance of payments is positive) by a certain amount if sources of funds (such as export goods sold and bonds sold) exceed uses of funds (such as paying for imported goods and paying for foreign bonds purchased) by that amount. There is said to be a balance of payments deficit (the balance of payments is said to be negative) if the former are less than the latter. Under a fixed exchange rate system, the central bank accommodates those flows by buying up any net inflow of funds into the country or by providing foreign currency funds to the foreign exchange market to match any international outflow of funds, thus preventing the funds flows from affecting the exchange rate between the country's

an exchange rate (also known as the foreign-exchange rate. and the central bank's foreign exchange reserves do not change. a documentary form (such as traveller's cheques) or electronically (such as a credit card purchase). The quoted rates will incorporate an allowance for a dealer's margin (or profit) in trading. i. It is the sum of the balance of trade (net earnings on exports minus payments for imports).e. The forward exchange rate refers to an exchange rate that is quoted and traded today but for delivery and payment on a specific future date. or else the margin may be recovered in the form of a "commission" or in some other way. With a pure float the central bank does not intervene at all to protect or devalue its currency. The two principal parts of the BOP accounts are the current account and the capital account.currency and other currencies. or spending if it is in deficit. or at the other extreme a purely floating exchange rate (also known as a purely flexible exchange rate).[2] which is open to a wide range of different types of buyers and sellers where currency trading is continuous: 24 hours a day except weekends. Different rates may also be quoted for cash (usually notes only). The current account shows the net amount a country is earning if it is in surplus. It is called the current account as it covers transactions in the "here and now" .[1] For example. allowing the rate to be set by the market. trading from 20:15 GMT on Sunday until 22:00 GMT Friday. It is also regarded as the value of one country’s currency in terms of another currency. The buying rate is the rate at which money dealers will buy foreign currency. forex rate or FX rate) between two currencies is the rate at which one currency will be exchanged for another. ¥) to the United States dollar (US$) means that ¥91 will be exchanged for each US$1 or that US$1 will be exchanged for each ¥91. The spot exchange rate refers to the current exchange rate.those that don't give rise to future claims. Exchange rates are determined in the foreign exchange market. a different buying rate and selling rate will be quoted by money dealers. and the selling rate is the rate at which they will sell the currency. Alternatives to a fixed exchange rate system include a managed float where some changes of exchange rates are allowed. Then the net change per year in the central bank's foreign exchange reserves is sometimes called the balance of payments surplus or deficit. factor income (earnings on foreign investments minus payments made to foreign investors) and cash transfers. The higher rate on documentary transactions is due to 2 . an interbank exchange rate of 91 Japanese yen (JPY. Most trades are to or from the local currency. In the retail currency exchange market. Exchange rate In finance.

• The amounts must be a significant amount (in excess of $500. to prevent churning and excessive outflow. or by the rest of the world. It also allows the people and companies not only to convert one currency to the other. • Excessive inflows and outflows should be buffered by national banks to provide collateral. and real estate transactions in India as well as abroad. but also free cross-border movement of those currencies. • Capital inflows should be invested in semi-liquid assets. CAC (Capital Account Convertibility) for Indian Economy refers to the abolition of all limitations with respect to the movement of capital from India to different countries across the globe. CAC is mostly a guideline to changes of ownership in foreign or domestic financial assets and liabilities. Capital account convertibility Capital account convertibility is a feature of a nation's financial regime that centers on the ability to conduct transactions of local financial assets into foreign financial assets freely and at country determined exchange rates. full capital account convertibility allows local currency to be exchanged for foreign currency without any restriction on the amount. with standardized exchange rates. Some dealers on the other hand prefer documentary transactions because of the security concerns with cash.the additional time and cost of clearing the document. it covers and extends the framework of the creation and liquidation of claims on. the authorities officially involved with CAC (Capital Account Convertibility) for Indian Economy encourage all companies. while the cash is available for resale immediately. between any two nations in the world. commercial entities and individual countrymen for investments.000). 3 . In fact. divestments. on local asset and currency markets. without the interventions of the law of the country concerned. In layman's terms. Tangentially. It is sometimes referred to as capital asset liberation or CAC. This is so local merchants can easily conduct transnational business without needing foreign currency exchanges to handle small transactions. CAC has 5 basic statements designed as points of action • All types of liquid capital assets must be able to be exchanged freely. • Institutional investors should not use CAC to manipulate fiscal policy or exchange rates.

However. compelled by the International Monetary Fund (IMF) Article No. 9% and 5% by the years 1997-98. VII. The primary objective behind the adoption of CAC in India was to make the movement of capital and the capital market independent and open. is to ensure total financial mobility in the country. but also escalates the production levels. with respect to the total or aggregate advances. according to the recommendations of the Tarapore Committee.5% in 1999-2000 Evolution of CAC in India economic and financial scenarios: In 1994 August. This would exert less pressure on the Indian financial market.Following are the pre-requisites for Capital Account Convertibility in India: The Tarapore Committee appointed by the Reserve Bank of India (RBI) was meant for recommending methods of converting the Indian Rupee completely. according to the Committee. 1998-99 and 1999-2000 respectively. Reasons for the introduction of CAC in India: The logic for the introduction of complete capital account convertibility in India. • The non-performing assets will experience a decline to 12%. the article of agreement. this was possible only when the following few conditions are satisfied: • The average rate of inflation should vary between 3% to 5% during the debt-servicing time • Decreasing the gross fiscal deficit to the GDP ratio by 3. there will be a complete deregulation of the structure of interest rate. 4 . the Indian economy adopted the present form of Current Account Convertibility. • By the years 1997-98. from1997-98 and 1999-2000. It also helps in the efficient appropriation or distribution of international capital in India. The proposal for the introduction of CAC was present in the recommendations suggested by the Tarapore Committee appointed by the Reserve Bank of India. The forecasts made by the Tarapore Committee regarding Indian CAC are as follows: • A prescribed average inflation rate of 3% to 5% will exist for a three-year time period. The report submitted by this Committee in the year 1997 proposed a three-year time period (19992000) for total conversion of Rupee. Such allocation of foreign funds in the country helps in equalizing the capital return rates not only across different borders.

such as LIBOR plus 1 percent.• The gross fiscal deficit will fall from 4. LIBOR became the base rate used in calculating a vast number of other products and transactions. What is capital account convertibility? There is no formal definition of capital account convertibility (CAC). We now know that some of the banks on the committee lied about the rates for a period of six years from 2005 to 2010. this may be the mother of all scandals—the one that finally leads to criminal charges and the insolvency of major banks. The lies had two purposes. Citibank. Indeed. LIBOR is the interest rate at which top-tier banks in London offer to lend to each other on an unsecured basis. As a result. In fact. Libor Scam LIBOR stands for the London Interbank Offered Rate. or several months.P. The Tarapore committee set up by the Reserve Bank of India (RBI) in 1997 to go into the issue of CAC defined it as the freedom to convert local financial assets into foreign financial assets and vice versa at market determined rates of exchange. with respect to the GDP.0% in 1998-99 and further to 3. In simple language what this means is that CAC allows anyone to freely move from local currency into foreign currency and back. perhaps longer. To some it may be just the latest entry on a list of bank frauds and blunders in recent years. LIBOR was among the lowest interest rates available in the market. The loans are usually short term.5 % in 1999-2000. The trade association would discard the highest and lowest rates and average the rest to arrive at the official LIBOR. a week. and Bank of America. The fraud is breathtakingly easy to understand once past a small amount of jargon. typically a day. LIBOR is set by a committee of banks sending their estimates of the rate at which they could borrow to a trade association.5% in 1997-98 to 4. The banks on the committee are among the largest in the world including J. from mortgage scams to MF Global and the London Whale. Morgan. The first was to 5 . Other interest rates including corporate loans were benchmarked to LIBOR and expressed as a spread. Historically the banks in the LIBOR market were among the strongest credits in the world and this type of lending was considered extremely low risk. the simplicity of the fraud is the greatest threat to the perpetrators because here at last is a fraud that is easy for juries to understand and for prosecutors to prove.

legislatures may have to intervene to limit total damages to avoid the destruction of the too-big-too-fail banks. In this sense. the LIBOR litigation may come to resemble the tobacco litigation where the big tobacco companies embraced a government-backed deal with damages of over $200 billion to avoid eventual bankruptcy in the face of state and private lawsuits. We also know that regulators acted as aiders and abettors of the fraud by ignoring clear signs.. for borrowing from other banks. These damages will be pursued not by regulators. This is a kind of direct theft from customers. Taken to the full extent of the law. which gives the class action lawyers access to internal E-mails. the facts in this case have already been made plain by Barclays. The second reason involved hiding the fact that some banks were being asked to pay high rates during the Panic of 2008. or would expect to pay.make money for the bank by lowering what it had to pay on LIBOR-based contracts. It is controlled by the British Bankers' Association (BBA). these damages are enough to render a large segment of the global banking system insolvent. they report a higher interest rate number. some arrests and criminal charges by the government seem likely. The Libor is an average interest rate calculated through submissions of interest rates by major banks in London. This is considered a sign of distress. that the rates were rigged. The Libor scandal is a series of fraudulent actions connected to the Libor (London Interbank Offered Rate) and the resulting investigation and reaction. or to give the impression that they were more creditworthy than they were. they report a low number and if the member banks feel a low degree of confidence in the financial system. but in private lawsuits by class action lawyers. Once the plaintiffs get past the motion to dismiss. In June 2012. Libor underpins approximately $350 trillion in derivatives. including admissions by the banks themselves. In the meantime. tape recordings. multiple criminal settlements by Barclays Bank revealed significant 6 . depositions. The scandal arose when it was discovered that banks were falsely inflating or deflating their rates so as to profit from trades. However. The Libor is supposed to be an overall assessment of the health of the financial system because if the banks being polled feel confident about the state of things. The banks are supposed to submit the actual interest rates they are paying. which is the one large bank to settle its case with the regulators. Bank defendants in cases like this typically ask a judge to dismiss the case because the claims are too vague. they begin discovery. and other books and records of the perpetrator banks. In the end.

In the court documents.fraud and collusion by member banks connected to the rate submissions. Citigroup Inc. and recommended criminal sanctions specifically for manipulation of benchmark interest rates. In court documents.. A year later.[13] The UK government agreed to accept all of the Wheatly Review's recommendations and press for legislation implementing them. Department of Justice was conducting a criminal investigation into Libor abuse. Wheatly's review recommended that banks submitting rates to LIBOR must base them on actual inter-bank deposit market transactions and keep records of those transactions. it was reported in February 2012 that the U. Among the abuses being investigated were the possibilities that traders were in direct communication with bankers before the rates were set. and that the bank also made on occasions rate requests for some hedge funds The Canadian Competition Bureau was reported on 15 July 2012 to also be carrying out an investigation into price fixing by five banks of the yen denominated Libor rates. Court documents filed indicated that the Competition Bureau had been pursuing the matter since at least January 2011. Barclays Bank fined for manipulation 7 . 2012 that it would transfer oversight of LIBOR to UK regulators. Commentators noted that financial institution customers may experience higher and more volatile borrowing and hedging costs after implementation of the recommended reforms. leading to the scandal. The documents offered a detailed view of how and when the international banks allegedly colluded to fix the Libor rates. that individual banks' LIBOR submissions be published after three months. The information was based on a whistleblower who traded immunity from prosecution in exchange for turning on his fellow conspirators. Regulatory investigations The Wall Street Journal reported in March 2011 that regulators were focusing on Bank of America Corp. and UBS AG in their probe of Libor rate manipulation. a trader from the Royal Bank of Scotland claimed that it was common practice among senior employees at his bank to make requests to the bank's rate setters as to the appropriate Libor rate.S. as proposed by Financial Services Authority Managing Director Martin Wheatley's independent review recommendations. thus allowing them an unprecedented amount of insider knowledge into global instruments. a federal prosecutor for the bureau stated that the “IRD (interest-rate derivatives) traders at the participant banks communicated with each other their desire to see a higher or lower yen LIBOR to aid their trading positions". The British Bankers’ Association said on September 25.

During the analysed period. calling into question its future as a benchmark standard. it was announced that the U. during the 2007–2012 global financial crisis. Routinely. Serious Fraud Office had also opened a criminal investigation into manipulation of interest rates. but without any viable alternative to replace it. Later. states. Early estimates are that the rate manipulation scandal cost U. The investigation was not limited to Barclays.On 27 June 2012. $160 million by the United States Department of Justice and £59. from at least as early as 2005.K. Barclays manipulated rates for at least two reasons. the Libor rate rose on average more than two basis points above the average on the first day of the month. above $4 billion that state and local governments have already had to spend to unwind their positions exposed to rate manipulation. the Libor rate rose on average more than seven and one-half basis points above the average on the first day of the month. traders sought particular rate submissions to benefit their financial positions. Breadth of scandal becomes apparent By 4 July 2012 the breadth of the scandal was evident and became the topic of analysis on news and financial programs that attempted to explain the importance of the scandal. and local governments at least $6 billion in fraudulent interest payments.[50] An increasingly smaller set of banks are participating in setting the LIBOR.5 million by the Financial Services Authority for attempted manipulation of the Libor and Euribor rates. counties. they artificially lowered rate submissions to make their bank seem healthy. Barclays Bank was fined $200 million by the Commodity Futures Trading Commission. and between 2007 and 2009.S. 8 . Two days later. It has been reported since then that regulators in at least seven countries are investigating the rigging of the Libor and other interest rates. The United States Department of Justice and Barclays officially agreed that "the manipulation of the submissions affected the fixed rates on some occasions". Around 20 major banks have been named in investigations and court cases. Mortgage rates manipulated on reset date Homeowners in the US filed a class action lawsuit in October 2012 against twelve of the largest banks which alleged that Libor manipulation made mortgage repayments more expensive than they should have been. Statistical analysis indicated that the Libor rose consistently on the first day of each month between 2000 and 2009 on the day that most adjustable-rate mortgages had as a change date on which new repayment rates would "reset".

In order to hedge costs on the sale of variable interest rate bonds. These losses were in addition to $4 billion that localities had already paid to unwind backfiring interest rate swaps. The review also recommended that individual banks' LIBOR submissions be published.Municipalities lost billions due to rigging The city of Baltimore and others in the US filed a class action lawsuit in April 2012 against Libor setting banks which alleged that the manipulation of Libor caused payments on their interest rate swaps to be smaller than they should have been. between 2007 and 2010 the payments to local governments on their swaps artificially decreased but the cost on their bonds remained at actual market rates. Municipalities continued to pay on their bonds at the actual market Sifma rate but were paid on their interest rate swaps at the artificially lower Libor rate.[59] Before the financial crisis. states and localities bought $500 billion in interest rate swaps to hedge their municipal bond sales. such as Baltimore. This was because most interest rate swaps are linked to the Libor interest rate. however. while municipal bond rates are linked to the SIFMA Municipal Bond Index interest rate. the swap seller saves and pays the local government the decreased cost on the bond. when the interest rate rises.[62] In a swap deal. but only after three months. which can rise and fall with the market. recommending that an independent organization with government and regulator representation. while when the interest rate falls. as proposed by Financial Services Authority Managing Director Martin Wheatley and CEO-designate of the new Financial Conduct Authority. the swap seller pays the local government the increased cost on the bond. purchased interest rate swaps which exchange a variable interest rate for a fixed interest rate. local governments.[12] On September 28. Recommendations The British Bankers’ Association said on September 25 that it would transfer oversight of LIBOR to UK regulators. manage the process of setting LIBOR under a new external oversight process for transparency and accountability. During the financial crisis the two benchmark rates decoupled. It is estimated that the manipulation of Libor cost municipalities at least $6 billion. Wheatly's independent review was published. The review left open the possibility that regulators might compel additional banks to participate in submissions if an insufficient number do voluntarily. called the Tender Committee. The review recommended criminal sanctions specifically for 9 . Banks that make submissions to LIBOR would be required to base them on actual inter-bank deposit market transactions and keep records of their transactions supporting those submissions. The interest rate swap mechanism generally works well. to reduce the risk that they would be used as a measure of the submitting banks' creditworthiness.

used its cross-country experience to offer policy solutions. Sharpening IMF analysis and policy advice. the IMF has mobilized on many fronts to support its 188 member countries. it has committed well over $300 billion in loans to its member countries. regulation.[13] The UK government agreed to accept all of the Wheatly Review's recommendations and press for legislation implementing them. The IMF has overhauled its general lending framework to make it better suited to country needs giving greater emphasis on crisis prevention. have been in high demand.[14] Bloomberg LP CEO Dan Doctor off told the European Parliament that Bloomberg LP could develop an alternative index called the Bloomberg Interbank Offered Rate that would use data from transactions such as market-based quotes for credit default swap transactions and corporate bonds. Stepping up crisis lending. and has streamlined conditions attached to loans. and policy advice. Some commentators noted that LIBOR rates may be higher and more volatile after implementation of these reforms.manipulation of benchmark interest rates such as the LIBOR. The IMF is also contributing to the ongoing effort to draw lessons from the crisis for policy. and reform of the global financial 10 . informed by a global perspective and by experience from previous crises. forecasts. It increased and deployed its lending firepower. It has done so both by obtaining commitments to increase quota subscriptions of member countries—the IMF's main source of financing—and securing large temporary borrowing agreements from member countries. Helping the world’s poorest. The IMF undertook an unprecedented reform of its policies toward low-income countries and quadrupled its concessional lending. Since the start of the crisis. Creating a crisis firewall: To meet ever increasing financing needs of countries hit by the global financial crisis and help strengthen global economic and financial stability. the Fund has greatly bolstered its lending capacity since the onset of the global crisis. saying that existing criminal regulations for manipulation of financial instruments were inadequate. including recent pledges of $456 billion. so financial institution customers may experience higher and more volatile borrowing and hedging costs. The IMF’s monitoring. and introduced reforms that made it better equipped to respond to countries’ needs. IMF’s Response to the Global Economic Crisis Since the onset of the global economic crisis in 2007.

FCL use has been found to lead to lower borrowing costs and increased room for policy maneuver. Heightened regional or global stress can affect countries that would not likely be at risk of crisis. the IMF beefed up its lending capacity and approved a major overhaul of how it lends money by offering higher amounts and tailoring loan terms to countries’ varying strengths and circumstances. To strengthen its legitimacy. The reforms. The Flexible Credit Line (FCL). expected to be effective by October 2012. Structural reforms will continue to be part of IMF-supported programs. Reforming the IMF’s lending framework In an effort to better support countries during the global economic crisis.architecture. Credit line for strong performers. and Poland have been provided combined access of over $100 billion under the FCL (no drawings have been made under these arrangements). Providing rapid and adequate shortterm liquidity to such crisis bystanders during periods of stress could bolster market confidence. In particular. but have become more focused on areas critical to a country’s recovery. limit contagion. as a form of insurance for crisis prevention. in November 2010. Colombia. The Precautionary and Liquidity Line (PLL) is designed to meet the liquidity needs of member countries with sound economic fundamentals but with some remaining vulnerabilities—Macedonia and Morocco have used the PLL. Reforming the IMF’s governance. Reformed terms for IMF lending. including through its work with the Group of Twenty (G-20) industrialized and emerging market economies. and reduce the overall cost of crises. Emphasis on social protection. the IMF agreed on wide-ranging governance reforms to reflect the increasing importance of emerging market countries. There are no policy conditions to be met once a country has been approved for the credit line. social safety net programs that can mitigate the impact of the crisis on the most vulnerable in society. Structural performance criteria have been discontinued for all IMF loans. Mexico. Access to liquidity on flexible terms. the IMF is promoting measures to increase spending on. introduced in April 2009 and further enhanced in August 2010. and improve the targeting of. also ensure that smaller developing countries will retain their influence in the IMF. The IMF is helping governments to protect and even increase social spending. including for programs with low-income countries. is a lending tool for countries with very strong fundamentals that provides large and upfront access to IMF resources. including social assistance. 11 .

Helping the world’s poorest In response to the global financial crisis. In 2010 and 2011. PCDR-financed debt relief amounted to $268 million in 2010.9 billion respectively. Establishment of a Post-Catastrophe Debt Relief (PCDR) Trust. and macroeconomic challenges of climate change. the IMF focuses on the fiscal. Fiscal instruments (carbon taxes or similar) are the most effective way to ensure that environmental costs are reflected in energy prices and promote the development of cleaner technologies. an increase of about four times the historical levels. with streamlined conditionality. They also have an important role to play in addressing other major environmental challenges. Resources available to low-income countries through the Poverty Reduction and Growth Trust over the period 2009–2014 were boosted to $17 billion. This allows the IMF to join international debt relief efforts for very poor countries that are hit by the most catastrophic of natural disasters. for all of sub-Saharan Africa. Environment.8 billion and $1. and the IMF Stabilizing global atmospheric concentrations of greenhouse gases will require a radical transformation of the global energy system over coming decades. The IMF provides advice on emissions mitigation policies and aims to promote understanding of the difficult issues of international fiscal policy cooperation confronting efforts to design a successor to the Kyoto Protocol. On average. Partly because of the crisis. the IMF has generally factored in higher deficits and spending. Increase in resources. higher concessionality and more emphasis on safeguarding social spending. fiscal deficits widened by about 2 percent of GDP in 2009. the IMF undertook an unprecedented reform of its policies toward low-income countries. Climate. Responding to climate change has become one of the world’s foremost policy challenges. financial. The IMF’s concessional lending to low-income countries amounted to $3. consistent with the call by G-20 leaders in April 2009 of doubling the IMF’s concessional lending capacity and providing $6 billion additional concessional financing over the next two to three years. In line with its mandate and expertise. IMF programs are now more flexible and tailored to the individual needs of low-income countries. The IMF has also been involved in work for the Group of Twenty 12 . As a result. More flexibility. like premature mortality caused by poor air quality. concessional lending reached $1.8 billion in 2009. and has made financial assistance programs more flexible.

but generally they should be designed to look like fiscal instruments through revenue-raising and price stability provisions. In 2011. development. Fiscal challenges created by current economic difficulties present an opportunity to consider innovative environmental charges. because they focus on a narrower range of these responses. the IMF. and deployment policies. in collaboration with the World Bank and others. Carbon taxes can also raise substantial amounts of government revenue. policy makers need to understand the pros and cons of fiscal instruments relative to regulatory approaches and or project-by-project funding. Financing responses to climate change There is broad agreement that substantial financial assistance is needed for climate adaptation and mitigation projects in developing countries. Cap-and-trade systems are another promising policy. -energy emissions. Regulatory policies (at least in isolation) tend to be much less effective. and implications of the policies. Designing a response There are a number of issues to consider in designing fiscal policies to mitigate climate change: —such as clean technology research. undertook a study for the G-20 on the 13 . Fiscal implications Broad-based charges on greenhouse gas emissions are the most effective mitigation instrument because they exploit all possible behavioral responses for reducing emissions throughout the economy.advanced and emerging economies on potential sources of climate finance for developing countries. More generally.

An IMF proposal for a Green Fund would facilitate financial flows to developing countries’ to assist in their efforts on climate change adaptation and mitigation. The Green Fund would be neither created nor managed by the IMF itself. reducing subsidies could considerably reduce greenhouse gas emissions in many countries. capital flows.effectiveness. and administration. and severe congestion of major urban centers. Other environmental work in the IMF There is also ample scope for reforming tax systems to deal better with broader environmental and related problems that can be a significant drag on economic growth. For some countries. saving and investment levels. by shifting taxes from vehicle ownership and onto fuels or vehicle mileage. but it would play an important role as a framework to mobilize resources. In the case of petroleum products for example. Ongoing work is assessing the magnitude of pollution and other major environmental side effects associated with fossil fuel use. Recent IMF papers lay out core principles of green tax design and focus on case studies for Chile and Mauritius. policies should be credible and provide long-term price stability. But IMF analysis suggests these costs can be moderate if policies are well designed. to provide actionable guidance on energy tax reforms for a broad range of developed and developing countries. the priority is to restructure existing energy tax systems (rather than raise the overall level of energy taxes) to more effectively alleviate these problems (for example. revenue potential. Macroeconomic challenges Climate change mitigation policies affect countries’ economic growth. while at the same time reducing fiscal deficits (and with better targeted instruments commonly available to protect the poor). and shifting taxes from electricity use and onto emissions). and implemented as broadly and equitably as possible. including their effects on climate change. such as the health and productivity impacts of poor air quality. Tax rates also need to be better aligned with the scale of environmental damages. flexible enough to be able to adjust to emerging information and changing economic conditions. This included analysis of potential charges for international aviation and maritime emissions and domestic (carbon-related and other) fiscal instruments. of a wide range of fiscal options for climate finance. The IMF has also analyzed subsidies on fuel products. and exchange rates. The IMF is also involved in regular monitoring of fuel pricing policies 14 . In particular. and could be the first step toward a binding global agreement on reducing greenhouse gas emissions.

The World Bank's official goal is the reduction of poverty. international trade. What is the Functions of World Bank? World Bank performs the following functions: (i) Granting reconstruction loans to war devastated countries. Another recent study defines and measures the concept of “green investment. and facilitate capital investment. power. all of its decisions must be guided by a commitment to promote foreign investment. transport.” and explains recent trends. According to the World Bank's Articles of Agreement (as amended effective 16 February 1989). (vi)Providing technical. educations. etc (iv) Providing loans to private concerns for specified projects. economic and monetary advice to member countries for specific projects (vii) Encouraging industrial development of underdeveloped countries by promoting economic reforms. health. water response to volatile international fuel prices. (ii) Granting developmental loans to underdeveloped countries. The United States of America is the largest subscriber. (v) Promoting foreign investment by guaranteeing loans provided by other organizations. Resources The World Bank had initially authorized capital of $10 billion subscribed by the member countries in accordance with their economic strength. The Bank collects funds from members as well as by issue of international bonds. whereas the latter incorporates 15 . (iii) Providing loans to governments for agriculture. in that the World Bank comprises only two institutions: the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). irrigation. The World Bank differs from the World Bank Group. Definition: The World Bank is an international financial institution that provides loans to developing countries for capital programs.

these two in addition to three more: International Finance Corporation (IFC). Multilateral Investment Guarantee Agency (MIGA). 16 . and International Centre for Settlement of Investment Disputes (ICSID).

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