ivity of Central Banks ..... wo 209 Chapter II Interconnectivity of Central Banks with Other International Financial Institutions Introduction Asian Development Bank (ADB) 11.3 International Monetary Fund (IMF) 11.4 World Bank 11.5 Bank for International Settlements (BIS) 11.6 Interconnectivity of Central Banks and the BIS 11.7 QuestionsWEES @£ = Vipul’s™ Central Banking (pg : nective : P _ y a 210 rw" iP ii : S: crive JE , Asian ent 0! 11.1 INTRODUCTION: | banks play a vital role in # ey is os perform variety of functions within the elop™ economy to boost economic growth an develorns they hia and doe maintain constant interaction with international bodies like the client and sl IME, World Bank, the Bank for International Settlements ete. This sxainal le gro" helps them for a variety of purposes like addressing balance of payments problem, exchange rate fluctuations, establishing systems in the financial markets regulating the inflow and outflow of capital etc. The inter connectivity of central banks with some of sREAS OF OPI the international institutions can be discussed as follows. ADB focuse he economic development of she sieve its ain ghnical assista tvironment, 11.2 ASIAN DEVELOPMENT BANK (ADB): "sional cooper ‘sistance and The Asian Development Bank was established on 19 4 December, 1966. Its head: i ila, Phili isa) UBh equity « A . quarters is at Manila, Philippines. It isa _ regional development organisation aiming at social and economic The central development in Asia. At present it has 67 members of which #8 “cussions with are form Asia and the Pacific region and the balance 19 are fromm the bank i outside, fo i ORGANISATIONAL STRUCTURE: hy 3 “ 'NTeRN The y : fe “_ = he Ss ™ain a SS into Daa The apex body is the Board of governors consisting of 0% | representative from each nation. The Board of Governors elect th K Board of Directors consisting of 12 q - documents, loans, technical assistance3 ag "3 sercomnectvity of Central Banks... 21a Ae, oBJECTIVES: “ie ina Honay bedi I Settte The Asian Development Bank is defined as a social development organisation that is committed to reduce poverty in sia and the Pacific and to achieve a prosperous, inclusive, Addreses ky) resilient and sustainable Asia and the Pacific. Thus it aims at be TB bie, sustainable growth, inclusive growth and regional integration. To ‘ Ons, ahieve its aims it provides loans, equity capital, grants and ¢ inflow an technical assistance. al ‘ Danks vithse! qREAS OF OPERATION: d as follows, Bas ‘i ADB focuses on five important areas namely education, environment, financial sector development, infrastructure, regional cooperation and integration. Member countries get the ADB): assistance and ADB assists the private sector organisations 2 8 establishe! . through equity capital, investments and loans. la, Philippi” The central banks interact and actively participate in the social ande | discussions with the ADB and try to secure maximum assistance +g of WH rom the bank for various projects. ee ge , palan af 11.3 INTERNATIONAL MONETARY FUND: The International Monetary Fund was established in 1944 as a j) FSult of a conference held at Brettonwoods, New Hampshire in USA. The main aim of the conference was to find ways and means ‘© promote economic growth and financial stability. An efficient tional monetary system was considered as a prerequisite to and regulate international trade. Hence IMF came into in 1944 and became operational in 1947.FABRA ewes —— 4 vo Vipul’s™ Central Banking (BB) OBJECTIVES: The operations of the IMF aims at the following objectives: (1) Ensuring exchange rate stability- (2) Providing assistance to member countries to overcome short term disequilibrium in balance of payments. (3) Promoting international monetary cooperation. (4) Assisting the member nations in the expansion of world trade and also ensuring balanced growth. (5) Establishing a multilateral system of payments for the smooth flow of trade. (6) Providing funds to the members to correct adverse balance of payments position. Of all the objectives, providing short term assistance and promoting exchange rate stability are the prime objectives of the IMF. FINANCIAL ASSISTANCE: Member nations get financial assistance from the IMF under various schemes. The quantum of credit depends upon the quota of the member i-e., contribution of the member to the fund. The size of quota depends upon the GDP of the memb. Wher the members borrow from IMF, the borrowin; oe se as drawing rights. Credit is provided under Br, 2 ne us schemes. Some (1) Concessional loans to low income bring about structural adjustments, developing countries t Apart from the oRs), the IMF hi siderably. SDR per gold. Memb ta. It is not linectivity of Central Banks ..... ooo 213 @ Financial support to stabilize the currency. (3) To meet emergencies like natural calamities. (4) To manage short fall in exports or excess of imports. (5) Toreduce poverty and enhance growth rate. (6) Special assistance to meet severe balance of payments difficulties, fluctuations in exchange rate etc. Apart from the above, by creating ‘Special Drawing Rights’ (DRs), the IMF has improved the international liquidity position considerably. SDR is an international reserve and is also known as paper gold. Member countries are allotted SDRs according to their quota. It is not linked to any currency or gold. It is not like any other currency. It is intangible. It is used by member countries for transactions. Central banks of the member countries actively participate in the discussions and deliberations of the IMF. They seek guidance from the Fund to overcome balance of payments crisis. Central Banks seek the help of IMF to manage capital flows and exchange “Tale volatility. The interaction and coordination with the Fund dps central banks in facing many challenges of globalisation. a WORLD BANK: The World Bank, like the IMF was established after the Bretton- Conference in 1944. It provides financial assistance and consists of five institutions, Pe Le Se ePns economies to bring about development. f¢s™ Central Banki ay row Vipul’s™ Central Banking (g3)) (1) International Bank for Reconstruction and Development (IBRD). (2) International Development Association (IDA). (3) International Finance Corporation (IFC). (4) Multilateral Investment Guarantee Agency (MIGA). (5) International Centre for Settlement of Investment Disputes (ICSID). All the five organisations work together to achieve the common goal of reduction in poverty. While the World Bank Group consists of all the five institutions, World Bank as such tefers to IBRD and IDA. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT (IBRD): IBRD came into existence in 1945. To become a member of IBRD, membership of IMF is compulsory. Member countries’ contribution constitutes the capital of IBRD. It also raises funds in the international financial markets. By providing financial assistance at reasonable cost for a long period of time, IBRD hes enabled many poor countries to accelerate the growth rate. The an fas Provided substantial assistance fo’ many developing countries to eliminate Poverty and improve the living standards of the people. Assistance by the Bank consists of financial and consul i oe aD ancy services. The World Bank supports the develop Programmes of the developing countries by collaborating with the government en: agenci an organisations (NGOs) as well asthe private 8 eetivity of Central Banks ...... row 215 rereonne nisational set up of the World Bank: orga! All the members of the Bank are its shareholders. A Board of overnors and a Board of Directors represent the member nations in policy making and implementation. The Board of Governors delegate their powers to a Board of Executive Directors which is seponsible for performing all the duties. Decisions regarding the operations, policy formation, loan disbursal etc. are taken by consensus. The headquarters of the Bank is in Washington. The President of the Bank is always a national of the United States as it isthe largest shareholder. The term of president is five years and the president is responsible for the overall management of the Bank. t ‘The main purposes of the Bank are: () Assisting the member nations in reconstruction and development. 2) Providing financial assistance to supplement private capital. ) Promoting international trade, maintaining equilibrium in balance of payments and improving productivity of labour. lending Programmes: Generally the World Bank finances infrastructure projects like ‘elopment of roads, railways, ports etc. It extends substantial “Sistance for energy development. Some of the main lending of the bank are as follows: ") Structural ‘Adjustment Lending: Under this lending Programme, the Bank extends assistance to developing “Cuntries to introduce institutional reforms, to 1 ianage26 wo Viput's™ Central Banking (5g) balance of payments effectively and to create conditions fo, better growth rate. (2) Export Credit: New financial instruments were introduced by the Bank to help the borrowing nations to enhance the flow of private capital and sustain it. (3) Special Action Programme: Under this programme, assistance is provided to enable the member nations to face the challenges of global recession. Along with financial help wided by th assistance is also provided by the Bank for policy formulation. i The various lending programmes are guided by social 4 principles. Some of them are: () Funds are made available for projects which have direct impact on productivity and accelerate economic development. By and large lending programmes focus on infrastructural projects like power, transport etc. (2) For many projects, the borrowing country should mobilize resources domestically. The Bank would extend credit only to meet the foreign exchange requirement... hike very cr (3) Before extending credit, the Bank conducts a detailed study of World p, the borrowing country’s potential to use the resources fy. POOr na: optimally, manage the project efficiently and its repayment Strat capacity. Tesult (4) Flexibility is provided to the borrower for procuring raW » By ex! materials, machines ete. for projects financed by the Bank Policies (5) The Bank monitors the progress of : 2 ign woe the project and provides tY of technical assistance whenever required, os Hreronnectvity of Central Banks....... ro 207 @ Through its programmes, the Bank encourages the domestic private sector to participate actively in economic development. The World Bank, through its assistance aims at poverty seduction in the developing world and ensuring a better life for the people of the developing countries. Criticism: Developing countries have benefitted from the assistance provided by the World Bank. However, critics have pointed out major limitations in the operations of the World Bank. The notable ones are: f () The developed World influence the decisions of the Bank due to their large contribution and voting rights. This trend continues even today though the developing nations are more in number than the developed ones in the total membership. (2) Funds available are not adequate to meet the ever increasing needs of the developing world. The critics like Joseph Stiglitz were very critical of the development strategy advanced by the World Bank for developing countries. According to’them, each poor nation has its own unique features and problems. A uniform strategy based on free market will not produce the desired result, On the contrary it has resulted in more harmful effects. By extending financial assistance, the Bank influences the policies of the developing world. This affects the _ Sovereignty of the nation. : ) World Bank has not been able to provide adequate soft loans to poor countries. A large part of it in recent times is based onQi 218 row Vipul’s™ Central Banking (8g)) commercial terms. Economists point out this as one of the reasons for the indebtedness of the developing world. (4) The Bank has not been successful in mobilizing funds from the rich nations to the poor nations. Most of its programmes and policies are influenced by the rich nations. World Bank has not been able to control them. The above criticisms clearly indicate that there is a need to revamp the policies of the Bank to meet the challenges of the developing world. INTERNATIONAL DEVELOPMENT ASSOCIATION (IDA): IDA established in 1960, mainly focusses on the poorest countries of the world. It provides concessional assistance to the poorest countries. While IBRD and IDA have the same objectives and principles, IDA provides long term loans at zero percent interest to the poorest countries. Loans are provided for a longer Period of time ranging upto forty years for developing physical capital, human capital and for achieving sustainable development. IDA has provided substantial assistance to poorest countries over a period of time. By providing assistance and guidance for stiscation, health, sanitation, rural development etc, it aims at sees poverty. African countries Teceive a major share of its assistance. Even developing countries are able to get assistance from IDA for projects like educati lucation, i A ter supply, etc. Nn, sanitation, housing, wa ie IBRD and IDA are channelizing their efforts and funds ‘less developed world and ensure equitable growth.serconnectivity of Central Bank: re 219 The central banks actively participate in the deliberations and discussions of the World Bank and try to secure adequate funds and other assistance for the development of their nation. INTERNATIONAL SETTLEMENTS 11.5 BANK FOR (BIS): The Bank for International Settlements was established on qth May 1930, in Basel, Switzerland. It is indeed the world’s oldest international financial organisation. It serves as a guide for central banks and promotes international and financial cooperation. ORGANISATIONAL STRUCTURE: The BIS consists of three. main organs namely the General Secretariat, Monetary and Economics Department and_ the Banking Department. It is administered by the Board of Directors and its staff are drawn from various countries. The Board of Directors has 17 members. The chairman of the board is elected by the members and his term is for three years. The board meets at ‘kast six times in a year. The BIS enjoys privileges and immunities like any other financial institution established in Switzerland. ROLE/FUNCTIONS OF BIS: _ The various vital functions performed by the Bank also 'ndicates the interlinkages between the bank and central banks. The functions are: 5 "D Forum for Cooperation and Information Exchange: The BIS Provides a platform for the central banks to exchange7 agercOnNECtiyi, row Vipul's™ Central Banking (8g)) Ps Seas In 1982 information and promote cooperation amongs em. Regular Faeil gh meetings of governors, presidents and officers of centraj banks help them to get assistance and guidance during financial crisis and in restoring stability. 41.6 INTE! (2) Promotion of Financial Stability: Through its research THE | activities and publications on intemational finance the Bis Eiobalisat contributes significantly to financial stability. The various governme expert committees formed by it have made valuable contribution to international financial stability. Many of the recommendations of the expert committees are accepted as global standards. A classic example is the Basle committee recommendations for Banking Supervision which are universally followed by central banks. Central b (3) Traditional Function: Central banks of various countries and technical international organisations have their accounts with the BIS. A Provision It manages their reserves and gold transactions. It also acts a3. J an agent and trustee in various occasions for its clients. ot valuabl. (4) Research and Publications: The bank conducts valuable research activities on its own and also on behalf of central Experts’ banks. Its publications provide ample information to central Managem: banks in formulating their polici ‘| 3 - Policies and dischai their functions. ee 6)< Lender of Last Resort!‘lt-acts asthe lender of the last 1660! for many central banks. In its history, it has helped many countries to overcome financial acs ¥ i nancial crisis. Many Europea" countries benefited from this function of the BIS in the 19605pterconnectvity of Central Banks ... Tor 221 _ n 1982 Mexico received assistance from the bank and in 1998 Brazil got financial support to overcome its financial crisis. 11.6 INTERCONNECTIVITY OF CENTRAL BANKS AND ; THE BIS: Globalisation has resulted in more interaction and cooperation of governments, central banks and various other organisations. "Central banks have to play a pivotal role in the smooth conduct of "the financial system for a stable and progressive economy. In this "context, the BIS offers lot of assistance to central banks. The areas of assistance are as follows: (i) Central banks of advanced countries are guided to coordinate technical assistance and selective training. ) Provision of a vast database and regular meetings with central banks and international organisations are very valuable for exchange of information and policy formulation. Experts’ guidance in specific areas like internal controls and management, information system, security information 4 technology is also provided. @ ‘The research work conducted by the Monetary and Economics Department is of immense value to the central banks. The research work is available in its journals and Publications. Such research work is also used to review ‘Various economic and financial developments. ‘The databases available with the BIS on foreign exchange> ,connectiv ate! Vipul’s™ Central Banking (88)) owe (b) IMF palance of payments position and international banking are Dray very valuable to central banks worldwide. (c) Cen (6) The various committees formed by the Bank have given their Mees recommendations which have been accepted by central banks (d) The as the standard parameters for the development and stability (e) The of the financial system. () The Thus, the link between the central banks and the BIS is of great for tl value to the financial system of the world. [Ans.: (2 (3) Explain t 11.7. QUESTIONS: (1) Fill in the blanks: (a) The headquarters of the Asian Development Bank is at in (b) The Brettonwoods Conference led to the establishment of the (4) Discuss | (5) How is th (6) Examine financial (©) The Provides long term funds for development projects in developing countries, meecey (@) The Bank for. Intemational Settlements is located at ') What is financial i Bie lei Write (e) IBRD stands for ms _ (f) IME. provides fetal eis assistance to member pee coumiies. — ons eC (©) Word Bane (4) 8056 Pentchert fh Shotseny ore ler the following statements are true or false: Brees Bank is concemed iction of he Asia-Pacific region, pe eeevity of Central Banks..... LY - (b) IMF has improved international liquidity by introducing Special Drawing Rights [SDRs]. _() Central banks have no link with international financial institutions. (d) The World Bank consists of five institutions. (May 19) {e) The BIS is the Central Bank of Switzerland. (f) The Bank for International Settlements frames prudential norms for the Banking sector. (May 19) _ [Ans:: (a) True (b) True (c) False (d) True (e) False (f) True] e Explain the objectives and financial assistance provided by the IMF. «w Discuss the important features of the Asian Development Bank. (5) Howis the World Bank different from the IMF? What is its role? Bee ercnestrescie otsthe Bagiclotuiiematonal 'Setioments in financial cooperation. (7) How does the BIS helps central banks in strengthening their (8) Wie a detailed note on ‘BIS". (May 19) _ (10) Write brief notes on: (a) IMF. (b) ADB. (€)_ World Bank. (9) Bis. (©) _Interconnectivity of Central Banks and the BIS.