International Finance

Dr SUDHEESH K
M. Com, MBA, MPhil, PhD, NET JRF(Commerce), NET (Management), SET
Assistant Professor
DEPARTMENT OF COMMERCE
International Finance
Unit 3 - International Monetary System

Part B
International Organizations and
Institutions
 Contents
01 IMF

02 World Bank

03 OECD

04 WTO

05 Asian Development Bank

06 New Development Bank

 01

IMF
One of the key
organizations of the
international economic
and monetary system
 Introduction to IMF
● During the great depression in the decade preceding World War II, countries
sharply raised barriers to foreign trade in order to improve their economies.
This led to the devaluation of national currencies and a decline in world trade.
● This breakdown in international monetary system created a need for oversight.
● Thus, the International Monetary Fund was created on July 22, 1944 at the
Bretton Woods Conference and came into existence on December 27, 1945
when 29 countries signed the Articles of Agreement.
● Headquartered at Washington D.C., United States.
 Introduction to IMF
● There were two plans on the role the IMF should assume as a global economic
institution at the Bretton Woods Conference.
● British Economist Keynes suggested that the IMF should be a cooperative fund
upon which member states could draw to maintain economic activity and
employment through periodic crises (Keynes plan).
● American delegate Harry Dexter White suggested that the IMF must function
more like a bank, making sure that borrowing states could repay their debts on
time (White plan).
● Although both plans were used, but most of White's plan was incorporated
into the final acts adopted at Bretton Woods.
 Objectives of IMF
● To promote international monetary cooperation through
a permanent institution that provides the machinery for
consultation and collaboration on international monetary
matters.
● To facilitate the expansion and balanced growth of
international trade, and to contribute thereby to the
promotion and maintenance of high levels of employment
and real income.

● To promote exchange rate stability, to maintain

orderly exchange arrangements among members
and to avoid competitive exchange depreciation.
● To assist in the establishment of a multilateral system of
payments in respect of current transactions between members
and in the elimination of foreign exchange restrictions which
hamper the growth of world trade.
● To give confidence to members by making the general resources
of the Fund temporarily available to them under adequate
safeguards, thus providing them with the opportunity to correct
their BOP without resorting to measures destructive of national
and international prosperity.

● In accordance to the above, to shorten the duration

and lessen the degree of disequilibrium in the
international BoP of members.
Functions of IMF
The functions of the International Monetary Fund can be categorized into
three types:
● Regulatory functions: IMF functions as a regulatory body and as per
the rules of the Articles of Agreement, it also focuses on administering
a code of conduct for exchange rate policies and restrictions on
payments for current account transactions.

● Financial functions: IMF provides financial support and

resources to the member countries to meet short term
and medium term BoP disequilibrium.

● Consultative functions: IMF is a

centre for international cooperation
for the member countries. It also acts
as a source of counsel and technical
assistance.
Other Functions of IMF
● To ensure stability of foreign exchange rates by orderly adjustments.
● To improve long-term balance of payments position of member nations by
altering par values of currency of member nations.
● To promote capital investment in backward and underdeveloped countries
● To assist in the establishment of a multilateral system of payments
(multilateral netting) in respect of current transactions between the member
countries
● To secure multilateral convertibility (ie., to convert the currency of any
member into the currency of any other member)
● To achieve balanced economic growth and high level of employment and
real income in member countries.
● To promote monetary cooperation among member countries
● To facilitate foreign exchange transactions among the members and
function as reservoir of currencies of member nations
● To facilitate selling or lending of currencies among member countries
● To provide short-term monetary help to member countries during crisis
Voting Rights

● Voting power in the IMF is determined by a quota system.

Each member has a number of ‘basic votes’ plus one
additional vote for each SDR of 100,000 of a member
country’s quota.
● The 2008 reform fixed the number of basic votes at 5.502%
of total votes.
 Quota System of IMF
● Quota subscription of a member country is a central component of the IMF's
financial resources. Each member country of the IMF is assigned a quota,
based broadly on its relative position in the world economy. The quota of a
member country determines its maximum financial commitment to the IMF, it's
voting power, and has a bearing on its access to IMF financing. Quotas are
denominated in SDR, IMF’s unit of account.

● India's current quota in the IMF is SDR (Special Drawing Rights) 5,821.5 million,
making it the 13th largest quota holding country at IMF

● India's quota in the IMF is 2.75 per cent

 Role of Quotas in IMF
Financial Resources: Quota subscription of a member determines the maximum
amount of financial resources which the member is obliged to provide toy the IMF. A
member must pay its full subscription at the time of joining the fund, in which up to
25 per cent must be paid in SDRs or widely accepted currencies (such as the US
dollar, the euro, the yen, or the pound sterling), while the rest is paid in the own
currency of the member country.

Voting Power or Voting Share: The quota largely determines the voting power of
Member country in IMF decisions

Access Limit to Financing: The amount of financing a member country can get from
the IMF is based on its quota.
 Quota Reviews
The Board of Governors conducts general quota reviews at regular intervals (usually
every five years) or any time is warranted. Any changes in quotas must be approved
by 85 per cent majority of the total voting power, and quota of any member cannot
be changed without its consent. The two main issues addressed in a general quota
review are as follows:
● Size of the overall increase
● Distribution of the increase among the members

The review allows IMF:

● To assess the adequacy of the quotas in terms of member countries’ BoP
financing needs and in terms of its own ability to meet those needs.
● To increase the member quotas to reflect changes in their relative position in
the world economy.
 Lending of Funds by IMF
The main purposes of IMF lending are:

● It can help a member country to avoid disruptive economic adjustment or

sovereign default, something that would be extremely costly, both for the
country itself and possibly for other countries through economic and financial
ripple effects (known as contagion).
● IMF programmes can help unlock other financing, acting as a catalyst for other
lenders because the programme can serve as a signal that the country has
adopted sound policies, reinforcing policy credibility and increasing investors'
confidence.
● IMF lending can help prevent crisis. Generally, the capital account crises
typically inflict substantial costs on countries themselves and on other
countries through contagion. The best way to deal with capital account
problems is to nip them in the bud before they develop into a full-blown crisis.
IMF and the International Liquidity Problem

The IMF contributes to international liquidity in two ways:

1. By Providing Conditional Liquidity: The IMF provides conditional liquidity

under its various lending schemes. The credit provided to its members is generally
subject to certain conditions. The funds from the IMF under agreed conditions
increase the member's access to international capital market.
E.g., When a country borrows from the IMF, its government agrees to adjust its
economic policies to overcome the problems that led it to seek financial aid. These
policy adjustments are conditions for IMF loans and serve to ensure that the country
will be able to repay the IMF
A Chief Criticism is that conditionality undermines domestic political institutions.
The recipient governments are sacrificing policy autonomy in exchange for funds,
which can lead to public resentment of the local leadership for accepting and
enforcing the IMF conditions.
2. By Providing Unconditional Liquidity: The IMF provides unconditional
liquidity through the allocation of Special Drawing Rights (SDRS), and also in the
form of reserve positions in the Fund. Member nations can use their holdings of SDRs
and reserve positions in the Fund to finance their BOPs deficits without having to
enter into policy commitments with the Fund
SPECIAL DRAWING RIGHTS
(SDRs)

The SDR is an international reserve asset, created by the IMF in 1969 to support the Bretton Woods fixed
exchange rate system and supplement its member countries’ official reserves. Its value is based on a
basket of five key international currencies. SDRs can be exchanged for freely usable currencies.

The SDR is neither a currency nor a claim on the IMF. 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; and second, by the IMF
designating members with strong external positions to purchase SDRs from members with weak external
positions. In addition to its role as a supplementary reserve asset, the SDR serves as the unit of account of
the IMF and some other international organisations. The value of a SDR is the weighted currency basket of
five major currencies: The US dollar, the Euro, the British pound, the Japanese yen and Chinese yuan. The
SDR currency value is calculated daily on working days and the valuation basket is reviewed and adjusted
every five years.

https://www.imf.org/en/Topics/special-drawing-right/seven-things-you-need-to-know-about-sdr-allocations

https://www.imf.org/en/Publications/WEO/Issues/2022/10/11/world-economic-outlook-october-2022
 World Bank
02 (IBRD)
One of the key
organizations of the
international economic
and monetary system
With 189 member countries, staff from more than
170 countries, and offices in over 130 locations, the
World Bank Group is a unique global partnership:
five institutions working for sustainable solutions
that reduce poverty and build shared prosperity in
developing countries.
 History
Founded in 1944, the International Bank for Reconstruction and Development—soon
called the World Bank—has expanded to a closely associated group of five
development institutions. Originally, its loans helped rebuild countries devastated
by World War II. In time, the focus shifted from reconstruction to development, with
a heavy emphasis on infrastructure such as dams, electrical grids, irrigation
systems, and roads.
On critical issues like climate change, pandemics, and forced migration, the Bank
Group plays a leading role because it is able to convene discussion among its
country members and a wide array of partners. It can help address crises while
building the foundations for longer-term, sustainable development.
As demand for its services has increased over time, the Bank Group has risen to
meet them. For perspective, the World Bank made four loans totaling $497 million in
1947, as compared to 302 commitments totaling $60 billion in 2015.
WORLD BANK GROUP
 Objectives of World Bank
● Providing long term capital to its member nations for economic development
and reconstruction.
● Helps in inducing long term capital for improving the balance of payments
and thereby balancing international trade.
● Helps by providing guarantees against loans granted to large and small units
and other projects for the member nations.
● Ensures that the development projects are implemented. Thus, it brings a
sense of transparency for a nation from wartime to a peaceful economy.
● Also, it promotes the capital investment for member nations by providing a
guarantee for capital investment and loans.
● So, if the capital investment is not available then it provides the guarantee and
then IBRD provides loans for promotional activities on specific conditions.
 Functions of World Bank
● Helps the war-devastated countries by granting them loans for
reconstruction.
● Provides extensive experience and the financial resources of the bank help the
poor countries increase their economic growth, reducing poverty and a better
standard of living.
● Helps the underdeveloped countries by granting development loans.
● Provides loans to various governments for irrigation, agriculture, water
supply, health, education, etc.
● Promotes foreign investments to other organizations by guaranteeing the
loans.
● Provides economic, monetary, and technical advice to the member countries
for any of their projects.
● Encourages the development of industries in underdeveloped countries by
introducing the various economic reforms.
03 OECD
Organization for Economic
Cooperation and
Development (OECD)
 What we are

“Together with governments, policy makers and citizens, we work on

establishing evidence-based international standards and finding
solutions to a range of social, economic and environmental challenges.
From improving economic performance and creating jobs to fostering
strong education and fighting international tax evasion, we provide a
unique forum and knowledge hub for data and analysis, exchange of
experiences, best-practice sharing, and advice on public policies and
international standard-setting”.

https://www.oecd.org/about/
 Introduction
OECD is a unique panel where the governments of 38 member states with market
economies work with each other, as well as with more than 70 non-member
economies to promote economic growth, prosperity, and sustainable
development.

The main purpose of the OECD is to improve the global economy and promote
world trade.
It provides an outlet for the governments of different countries to work together to
find solutions to common problems.

OECD is funded by its member countries. National contributions are based on a

formula that takes account of the size of each member’s economy. Countries may
also make voluntary contributions to financially support outputs in the OECD
program of work.
 About OECD
Most OECD members are high-income economies with a very high Human
Development Index (HDI) and are regarded as developed countries. OECD
members are democratic countries that support free-market economies.

● It provides a platform for its member countries to compare policy

experiences, seek answers to common problems, identify and share best
practices, and coordinate domestic and international policies of its member
nations.
● OECD is an official Permanent observer to the United Nations and is referred to
as a think-tank or as a monitoring group.
● The OECD’s headquarters are at the Château de la Muette in Paris, France.
● The OECD member states collectively comprised 62.2% of global nominal GDP
(US$49.6 trillion) and 42.8% of global GDP (Int$54.2 trillion) at purchasing power
parity in 2017
 OECD Objectives
The objectives of the OECD include fostering economic development and
cooperation and fighting poverty through the promotion of economic stability.

● It also ensures that the environmental impact of growth and social

development is always considered.
● Over the years, OECD has raised the standards of living in multiple countries.
● It has also contributed to the expansion of world trade.
 OECD Functions and Responsibilities
The OECD plays an integral role in promoting economic stability on a global scale. The
OECD publishes and updates a model tax convention that serves as a template for
allocating taxation rights between countries.

● The OECD is responsible for publishing economic reports, statistical databases,

analyses, and forecasts on the outlook for economic growth worldwide.
● The group analyzes the impact of social issues on economic growth and makes
recommendations to foster economic growth globally. These recommendations
extend forethoughts to the environmental concerns associated with economic
development too.
● The organization endeavors to eliminate bribery and other forms of financial crimes
worldwide.
● The OECD also maintains a “blacklist” of nations that are considered uncooperative
tax havens.
● It also took efforts to eradicate tax avoidance by profitable corporations and in the
G-20 countries. It also encourages the G-20 countries to promote tax reforms.
 Asian
05 Development
Bank
https://corporatefinanceinstitute.com/resources
/economics/asian-development-bank-adb/
 ADB is
committed to
achieving a prosperous,
inclusive, resilient, and
sustainable Asia and the Pacific,
while sustaining its
efforts to eradicate
extreme poverty
 Founding History
● The bank was founded in the early 1960s to foster cooperation among Asian
countries and spur economic growth in the region.
● In 1963, the United Nations Commission for Asia and the Far East held its first
Ministerial Conference on Asian Economic Cooperation, where a resolution
passed for the creation of this regional bank.
● The ADB was officially created two years later in Manila, the capital of the
Philippines with 31 member states and Takeshi Watanabe residing as president.
● Therefore, the Asian Development Bank (ADB) is a regional development bank
headquartered in Manila, Philippines. The bank was set up in 1966 under the
leadership of Japan as one of the first industrialized states in Asia. The ADB
finances development projects in its member states across Asia.
 Areas of Focus
● The bank focuses on the key areas of development that are aligned with the
World Bank’s sustainable development goals (SDGs).
● These key areas are: Education, Health, Transport, Energy, Finance Sector,
Climate Change
● The ADB aims to provide for sustainable and inclusive economic growth by
financing projects in areas like education and health, while also helping
improve the capital markets and business infrastructure in target countries.
● There are other more specialized areas as well, such as Public-Private
Partnerships (PPPs), Information Technology, Regional Cooperation and
Integration, etc., which serve as secondary capacity building programs.
Objectives & Functions
The main objectives of ADB, as
laid down in its Charter, are “to
foster economic growth and
cooperation in the region of
Asia and Far East, and to
contribute to the acceleration
of the process of economic
development of the developing
members in the region,
collectively and individually.”
The Bank aims at achieving this
broad objective through the
functions:
(i) Mobilisation and promotion of investment of
private and public capital for productive purposes.
(ii) Utilisation of its resources for financing those
development projects which contribute most to the
harmonious economic growth of the region as a
whole, with special emphasis on the needs of the
smaller or less developed members.
(iii) Coordination of plans and policies of the member
countries with a view to achieving better utilisation of
their resources, making them economically more
complementary, and expanding their foreign trade.
(iv) Provision of technical assistance
to the member countries for the
preparation, financing and execution
of development projects.

(v) Cooperation with the United Nations and its various

organs and other international organisations with the
objective of persuading them to make investments in this
region.

(vi) Undertaking of such other

activities which may help to achieve
its main objectives.
 New
06 Development
Bank
https://byjus.com/free-ias-prep/new-
development-bank-ndb/
 Introduction
The New Development Bank (NDB) is a development bank created by the multilateral grouping BRICS.

The purpose of NDB is to fund sustainable development projects and infrastructure projects in the
BRICS countries and other developing countries and emerging markets.

The NDB is projected as a developmental financial institution that can complement western
dominated global financial institutions (such as the World Bank and the International Monetary Fund),
rather than as a challenge to them.

It was formerly known as the BRICS Development Bank. NDB was founded in 2014.

To fulfill its purpose, the Bank supports public or private projects through loans, guarantees, equity
participation and other financial instruments.

It offers technical assistance for projects and conducts information, cultural and personnel exchanges
with the objective of contributing to the attainment of social and environmental sustainability.
It is headquartered in Shanghai, China. There are regional offices in all other member countries except
in India.
 Concerns and Challenges
● One of the major criticisms lashed out at the NDB is its financing of projects that may not be
environmentally sustainable. For instance, it received flak for financing a Trans-Amazonian
highway project (Para Sustainable Municipalities Project) in Brazil which according to many
environmentalists, affects the ecologically sensitive Amazon forest.
● Generally, while approving projects, the Bank has used the borrowing country’s socio-
environmental standards. But, if the Bank is to support more environmentally sustainable
projects as stated in its purpose statement, it should develop a set of internal compliance
standards which would balance economic rewards with environmental concerns. It should
take care to ensure that environmental damages do not outweigh economic benefits of the
project.
● A major portion of the NDB’s projects are government-backed or government-sponsored ones
in the borrowing countries. As the Bank diversifies towards making equity investments and
attempts to crowd-in private investments to complement its efforts, it should start focusing on
investing in private sector companies and projects in the borrowing countries.