IMF and World Bank – Bretton wood Twins

• Bretton wood Twins
• About IMF
• Objectives of IMF
• Functions of IMF
• Finances of IMF
• Loans Extended by IMF
• Special Drawing Rights
• Reforms in IMF
• Evaluation of IMF
• World Bank Group
• Asian Infrastructure and Investment Bank(AIIB)
• New Development Bank/BRICS Bank
• Contingency Reserve Arrangement
• Asian Development Bank(ADB)

Why they are called Bretton Wood Twins?

As both institutions are outcome of  a conference – United Nations Monetary and Financial Conference at the Mount Washington Hotel in In Bretton Woods, New Hampshire in 1944.

Purpose of  Bretton wood institutions:
The basic aim was to help rebuild the shattered post-war economy ( WW2 had just finished in 1945) and to promote international economic cooperation. After the war, the major powers were determined not to repeat the mistakes of the Great Depression, some of which were ascribed to post–World War I policy errors. Structurally, the victorious Allies established the United Nations and the Bretton Woods monetary system, international institutions designed to promote stability.

The Bretton Woods System: John Maynard Keynes in Britain and Harry Dexter White in the United States were the architects behind the attempt to design a new and liberal international economic order. The results of their deliberations were formalised in The Bretton Woods Conference, formally known as the United Nations Monetary and Financial Conference.

Established the International Bank for Reconstruction and Development (IBRD) and the International Monetary Fund (IMF). They were formally introduced in December 1945. The World Bank Group, initially called the IBRD was established to provide assistance to countries that had been physically and financially devastated by World War II.

The main objective of the IMF was to seek stability in exchange rates. They developed a system of pegged but adjustable exchange rates according to what was called the par (equal) value system.

Another goal of the IMF was the reconciliation of country adjustments to payments imbalances with the national autonomy in macroeconomics policy, Countries experiencing balance of payments difficulties were expected to approach the fund.

If difficulties were deemed temporary, a loan would be provided to finance the payments imbalance until it reversed itself. Thus there would be no need for alteration of the deficit nation’s macro policies in the direction of sacrificing internal goals. Further borrowing was subjected to increasingly stringent conditions which were designed to ensure that the borrowing country is taking action to reduce its balance of payments deficit.

The IMF’s responsibilities: The IMF’s primary purpose is to ensure the stability of the international monetary system—the system of exchange rates and international payments that enables countries (and their citizens) to transact with each other. The Fund’s mandate was updated in 2012 to include all macroeconomic and financial sector issues that bear on global stability.

Original aims:

• Promote international monetary cooperation;
• Facilitate the expansion and balanced growth of international trade;
• Promote exchange stability;
• Assist in the establishment of a multilateral system of payments; and
• Make resources available (with adequate safeguards) to members experiencing balance of payments difficulties.

IMF’s work

The IMF’s fundamental mission is to ensure the stability of the international monetary system. It does so in three ways:

1. Surveillance: The IMF oversees the international monetary system and monitors the economic and financial policies of its 189 member countries. As part of this process, which takes place both at the global level and in individual countries, the IMF highlights possible risks to stability and advises on needed policy adjustments. It also provides periodic assessments of global prospects in its “World Economic Outlook”, of financial markets in its “Global Financial Stability Report” , of public finance developments in its “Fiscal Monitor“ , and of external positions of the largest economies in its External Sector Report , in addition to a series of regional economic outlooks.
2. Lending: A core responsibility of the IMF is to provide loans to member countries experiencing actual or potential balance of payments problems. This financial assistance enables countries to rebuild their international reserves, stabilize their currencies, continue paying for imports, and restore conditions for strong economic growth, while undertaking policies to correct underlying problems. Unlike development banks, the IMF does not lend for specific projects.
3. Capacity Development: IMF capacity development—technical assistance and training—helps member countries design and implement economic policies that foster stability and growth by strengthening their institutional capacity and skills. The IMF seeks to build on synergies between technical assistance and training to maximize their effectiveness.

Q. ‘Global Financial Stability Report’ is prepared by the
(a) European Central Bank
(b) International Monetary Fund
(c) International Bank for Reconstruction and Development
(d) Organization for Economic Cooperation and Development

Q. Which of the following organizations brings out the publication known as ‘World Economic Outlook’?
(a) The International Monetary Fund
(b) The United Nations Development Programme
(c) The World Economic Forum
(d) The World Bank

Where the IMF gets its Money? Who Funds IMF?

IMF funds come from three sources: member quotas, multilateral and bilateral borrowing agreements.

Member quotas are the primary source of IMF funding. A member country’s quota reflects its size and position in the world economy.

New Arrangements to Borrow (NAB) between the IMF and a group of members and institutions are the main backstop for quotas. The size of the NAB was doubled in 2021. The NAB currently contributes SDR 364 billion, or $489 billion, to total IMF resources. 

Member countries also have committed resources through bilateral borrowing agreements (BBAs). In 2020, the IMF Executive Board approved a new round of BBAs, which currently contribute SDR 141 billion, or $189 billion, to total IMF resources.

IMF Quotas

When a country joins the IMF, it is assigned an initial quota in the same range as the quotas of existing members of broadly comparable economic size and characteristics. The IMF uses a quota formula to help assess a member’s relative position.

What is the current quota formula: The current quota formula is a weighted average of

1. GDP (weight of 50 percent): For this purpose, GDP is measured through a blend of GDP—based on market exchange rates (weight of 60 percent) and on PPP exchange rates (40percent).
2. Openness (30 percent),
3. Economic variability (15 percent), and
4. International reserves (5 percent).

Quotas play several key roles in the IMF: A member’s quota determines that country’s financial and organizational relationship with the IMF, including:

1. Subscriptions: A member’s quota subscription determines the maximum amount of financial resources the member is obliged to provide to the IMF. A member must pay its subscription in full upon joining the IMF: up to 25 percent must be paid in SDRs or widely accepted currencies (such as the US dollar, the euro, the Japanese yen, or the British pound sterling), while the rest is paid in the member’s own currency.
2. Voting power: The quota largely determines a member’s voting power in IMF decisions. Each IMF member’s votes are comprised of basic votes plus one additional vote for each SDR100,000 of quota. The 2008 reforms fixed the number of basic votes at 5.502 percent of total votes. The current share of basic votes in total votes represents close to a tripling of their share prior to the implementation of the 2008 reforms.
3. Access to financing: The amount of financing a member can obtain from the IMF (its access limit) is based on its quota. For example, under Stand-By and Extended Arrangements, a member can borrow up to 145 percent of its quota annually and 435 percent cumulatively. However, access may be higher in exceptional circumstances.

 How quota reviews work: There are two main issues addressed in a general quota review:

• First, a general quota review allows the IMF to assess the adequacy of quotas both in terms of members’ balance of payments financing needs and in terms of its own ability to help meet those needs.
• Second, a general review allows for increases in members’ quotas to reflect changes in their relative positions in the world economy.

Loans Extended by IMF to its Member’s:

IMF provides various types of Credit facilities to its member countries,

Unlike development banks, the IMF does not lend for specific projects. Instead, the IMF provides financial support to countries hit by crises to create breathing room as they implement policies that restore economic stability and growth. It also provides precautionary financing to help prevent crises. IMF lending is continuously refined to meet countries’ changing needs. 

The causes of crises are varied and complex. They can be domestic, external, or both.

Domestic factors include inappropriate fiscal and monetary policies, which can lead to large current account and fiscal deficits and high public debt levels; an exchange rate fixed at an inappropriate level, which can erode competitiveness and result in the loss of official reserves, and a weak financial system, which can create economic booms and busts. Political instability and weak institutions also can trigger crises.

External factors include shocks ranging from natural disasters to large swings in commodity prices. Both are common causes of crises, especially for low-income countries. With globalization, sudden changes in market sentiment can result in capital flow volatility. Even countries with sound fundamentals can be severely affected by economic crises and policies elsewhere.

The COVID-19 pandemic was an example of external shock affecting countries across the globe. The IMF responded with unprecedented financial assistance to help countries protect the most vulnerable and set the stage for economic recovery.

The IMF has several lending instruments to meet the different needs and specific circumstances of its members. 

IMF members have access to the General Resources Account on non-concessional terms (market-based interest rates), but the IMF also provides concessional financial support (currently at zero interest rates) through the Poverty Reduction and Growth Trust, which is better tailored to the diversity and needs of low-income countries. The recently established Resilience and Sustainability Trust offers longer-term financing to low-income and vulnerable middle-income countries seeking to build resilience to external shocks at affordable interest rates. 

 Q. “Gold Tranche” (Reserve Tranche) refers to
(a) A loan system of the World Bank
(b) One of the operations of a Central Bank
(c) A credit system granted by WTO to its members
(d) A credit system granted by IMF to its members

Q. Regarding the International Monetary Fund, which one of the following statements is correct?(a) It can grant loans to any country
(b) It can grant loans to only developed countries
(c) It grants loans to only member countries
(d) It can grant loans to the central bank of a country

Some of IMF Lending instruments:
Standby Arrangement(SBA), Extended Fund Facility(EFF), Rapid Financing Instrument(RFI), Flexible Credit Line(FCL), Short term Liquidity Line(SLL), Precautionary and Liquidity Line(PLL).
Standby Credit Facility(SCF), External Credit Facility(ECF), Rapid Credit Facility(RCF)

What is International Reserve? International reserves (or reserve assets in the balance of payments) are those external assets that are readily available to and controlled by a country’s monetary authorities. Reserve assets, as per the International Monetary Fund’s (IMF) balance of payments manual, must, at a minimum, comprise the following financial assets:

• Gold
• Foreign currencies: By far the most important official reserve. The currencies must be tradable (can buy/sell anywhere), such as the USD or euro (EUR).
• Special drawing rights (SDRs): Represent rights to obtain foreign exchange or other reserve assets from other IMF members.
• Reserve position with the IMF: Reserves that the country has given to the IMF that are readily available to the member country.

These reserves may be used for direct financing of international payments imbalances, or for indirect regulation of the magnitude of such imbalances via intervention in foreign exchange markets in order to affect the exchange rate of the country’s currency.

How SDR introduced?

SDR Introduced in response to concerns about the limitations of gold and dollars as the sole means of settling international accounts, SDRs augment international liquidity by supplementing the standard reserve currencies.

What is Special Drawing Rights (SDR): The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries’ official reserves. The value of the SDR is based on a basket of five major currencies—the US dollar, the euro, the Chinese renminbi (RMB), the Japanese yen, and the British pound sterling.

The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. 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 organizations.

Q. Recently, which one of the following currencies has been proposed to be added to the basket of IMF’s SDR? 
(a) Rouble
(b) Rand
(c) Indian Rupee
(d) Renminbi

Reforms in IMF:

2010 Reforms: Doubling of quotas and major realignment of quota shares

On December 15, 2010, the Board of Governors, the IMF’s highest decision-making body, completed the 14^th General Review of Quotas, which involved a package of far-reaching reforms of the IMF’s quotas and governance.

Building on the 2008 reforms, the 14th General Review of Quotas:

• Doubled quotas from approximately SDR238.5 billion to approximately SDR477 billion (about $653 billion at current exchange rates),
• Shifted more than 6 percent of quota shares from over-represented to under-represented member countries,
• Shifted more than 6 percent of quota shares to dynamic emerging market and developing countries (EMDCs),
• Significantly realigned quota shares. China became the third largest member country in the IMF, and there are now four EMDCs (Brazil, China, India, and Russia) among the 10 largest shareholders in the IMF, and
• Preserved the quota and voting share of the poorest member countries.

Governance

• Country Representation: Unlike the General Assembly of the United Nations, where each country has one vote, decision making at the IMF was designed to reflect the relative positions of its member countries in the global economy. The IMF continues to undertake reforms to ensure that its governance structure adequately reflects fundamental changes taking place in the world economy.
• Accountability: Created in 1945, the IMF is governed by and accountable to the 189 countries that make up its near-global membership.
• Corporate Responsibility: The Fund actively promotes good governance within its own organization.

Governance Reforms:

The International Monetary Fund’s (IMF) 14^th General Quota Review delivers historic and far-reaching changes to the governance structure. The reforms represent a major step toward better reflecting in the institution’s governance structure the increasing role of dynamic emerging market and developing countries. The entry into force of these reforms will reinforce the credibility, effectiveness, and legitimacy of the IMF. Following are the reforms:

• For the first time four emerging market countries (Brazil, China, India, and Russia) will be among the 10 largest members of the IMF.
• For the first time, the IMF’s Board will consist entirely of elected Executive Directors, ending the category of appointed Executive Directors (currently the members with the five largest quotas appoint an Executive Director).
• Advanced European countries have committed to reduce their combined Board representation by two chairs.
• Following the effectiveness of the 14th General Review of Quotas, the focus will now turn to work on the 15th General Review of Quotas and securing the necessary broad consensus, including on a new quota formula.

Next Step: The 15th General Quota Review provides an opportunity to assess the appropriate size and composition of the IMF’s resources and to continue the process of governance reforms. On December 5, 2016, the Board of Governors adopted a Resolution calling on the Executive Board to work expeditiously on the 15th Review in line with existing Executive Board understandings and the guidance provided by the IMFC, and with the aim of completing the 15th Review by the 2019 Spring Meetings and no later than the 2019 Annual Meetings.

 15^th General Quota Review:
15^th General Quota Review was disappointing for India as the quota not increased.

Why India need the quota to increase? India last borrowed money from the IMF in 1993 and it repaid all its outstanding by 2000 However, India doesn’t just represent itself — it also represents Bangladesh, Bhutan and Sri Lanka. An increase in quota therefore will not just benefit India but also the other three countries. We, however, consider this as a temporary setback. We hope that the discussions in the next [16th] Round of the GRQ would achieve success in terms of quota increase to take care of the Fund’s resource adequacy,

Other Outcomes:

• The deal is a compromise with the U.S., the Fund’s largest shareholder, which has resisted changes to the organisation’s voting structure as well as increases in its permanent resource base.
• It will allow an extension of non-permanent, supplementary sources of funds – such as the New Arrangement to Borrow (NAB), a renewable funding mechanism that has existed since 1998, and bilateral borrowings from countries – the IMF had entered into these after the 2008 financial crisis to increase its lending ability.
• The agreement extended the bilateral borrowing facility by a year – to the end of 2020 and a potential doubling of the NAB.

Need for reforms:

1. Some IMF members have become frustrated with the pace of governance reforms, as the balance of economic and geopolitical power has shifted, becoming more dispersed across the world, particularly with the emergence of China and India – among the world’s largest and fastest growing economies.
2. India’s quota is 2.76% and China’s is 6.41%, while the U.S.’s quota is 17.46 % (translates to a vote share of 16.52%) giving it a unique veto power over crucial decisions at the IMF, many of which require a supermajority of 85%.
3. The U.S. has resisted diluting its share, wary that it will benefit countries such as China
   
   

India and IMF:

BoP Crisis

Structural Adjustments

World Bank

Evaluation of World Bank

World Bank is a vital source of financial and technical assistance to developing countries around the world. This is not only a bank in the ordinary sense but a unique partnership to reduce poverty and support development.

Publications– Global economic prospects, Ease of doing business index.

Pre-Condition – A country has to first join IMF before it can join World Bank.

WB as an Organization: The World Bank is like a cooperative, made up of 189 member countries. These member countries, or shareholders, are represented by a Board of Governors, who are the ultimate policymakers at the World Bank. Generally, the governors are member countries’ ministers of finance or ministers of development. They meet once a year at the Annual Meetings of the Boards of Governors of the World Bank Group and the International Monetary Fund.

Q. Which one of the following issues the ‘Global Economic Prospects’ report periodically?
(a) The Asian Development Bank
(b) The European Bank for Reconstruction and Development
(c) The US Federal Reserve Bank
(d) The World Bank

Q. Which one of the following is not a sub-index of the World Bank’s ‘Ease of Doing Business Index’?
(a) Maintenance of law and order
(b) Paying taxes
(c) Registering property
(d) Dealing with construction permits

Q. India’s ranking in the ‘Ease of Doing Business Index’ is sometimes seen in the news. Which of the following has declared that ranking?
(a) Organization for Economic Cooperation and Development (OECD)
(b) World Economic Forum
(c) World Bank
(d) World Trade Organization (WTO)

These 5 institutions are as follows –

1. International Bank for Reconstruction and Development (IBRD)- Commonly known as the world bank. It is the single largest provider of development loans.
2. International Development Association (IDA) – assists the poorest countries.
3. International Finance Corporation (IFC) – supports private enterprise in developing countries.
4. Multilateral Investment Guarantee Agency (MIGA) – offers investors insurance against non-commercial risk(non-commercial risks such as political instability, govt deciding to nationalise a private business etc.) and help developing country governments attract foreign investment.
5. International Centre for the Settlement of Investment Disputes (ICSID) – encourages the flow of foreign investment to developing countries through arbitration and conciliation facilities.

Except for ICSID, India is member of other four groups because “We don’t like external interference such as arbitration in our decision making process, hence not the member of ICSID.” India is one of the founder members of IBRD, IDA and IFC.

Difference between World Bank and World Bank Group: World Bank means only IBRD and IDA. But WB Group refers to all five institutions.

Is United Nations owns it? Technically it is owned by UN, but its governance structure is different and outside of UN: each institution in the WB Group is owned by its member governments, which subscribe to its basic share capital, with votes proportional to shareholding. Membership itself gives voting rights that are same all countries but additional voting rights are also given based on the financial contribution to the organisation.

There are 2 goals for the world to achieve by 2030 –

• End extreme poverty by decreasing the percentage of people living on less than $1.90 a day to no more than 3%.
• Promote shared prosperity by fostering the income growth of the bottom 40% for every country.

 Marshal Plan, 1947

The Marshall Plan or European Recovery Program was the large-scale American program to aid Europe where the United States gave monetary support to help rebuild European economies after the end of World War II in order to combat the spread of Soviet communism. The plan was in operation for four years beginning in April 1948. The first recipient of World Bank aid was France. Initially the lending of World Bank was low and it increased later on. The Marshall Plan of 1947 caused lending by the bank to change as many European countries received aid that competed with World Bank loans.

After that, the emphasis of World Bank was shifted to non-European countries and until 1968; loans were earmarked for projects that would enable a borrower country to repay loans (such projects as ports, highway systems, and power plants). From 1968 onwards, World Bank President Robert McNamara shifted bank policy toward measures such as building schools and hospitals, improving literacy and agricultural reform. This led to rise in the third world lending. This system was changed from 1980 by A.W. Clausen.

International Bank for Reconstruction and Development (IBRD)

IBRD as the name suggest was created in 1944 to help Europe reconstruct/ rebuild after World War II. Now it has changed its role to provide loans and other assistance primarily to middle income and poor but credit worthy countries at interest rates slightly lower than that offered by other financial institutions but with long term maturity.

Main function: Long-term capital assistance to its member-countries for their reconstruction and development. It works closely with the rest of the World Bank Group to help developing countries reduce poverty, promote economic growth, and build prosperity.

Other functions of IBRD Bank –

• Supports long-term human and social development that private creditors do not finance.
• Preserves borrowers’ financial strength by providing support in times of crisis, when poor people are most adversely affected.
• Promotes policy and institutional reforms (such as safety net or anti-corruption reforms).
• Creates a favourable investment climate to catalyse the provision of private capital.
• Facilitates access to financial markets often at more favourable terms than members can achieve on their own

Resources of the Bank:

• Shareholders are member states with governments paying in about $14 billion in capital in proportion to their IMF quota.
• Other source is borrowings, for that IBRD floats bonds in the world financial markets.

 Before granting or guaranteeing a loan, the Bank considers the following matters –

• Merit of the proposal.
• The borrower has reasonable prospect for repayment i.e. credit worthiness.
• The loan is meant for productive purposes and to finance foreign exchange requirements of specific projects of reconstruction and development.

 India and the IBRD

• India is the founder-banker of the Bank.
• Bank has not been merely a lending institution to India but has also served as a worthy counsel whom India has approached for advice in difficulties
• India has been the single largest borrower of the Bank.
• Main sectors for which IBRD assistance of US$ 3049 million has been provided are roads & highways, energy, urban infrastructure (including water & sanitation), rural credit, disaster management and the financial services sector.
• The Bank has also been instrumental in the establishment of the India Development Forum, a consortium of donor nations to India.
• The massive financial assistance pledged by the consortium members has been the largest aid commitment and is a landmark in the history of development aid from developed countries to developing countries.

International Development Association (IDA)

Aim: To reduce poverty by providing loans and grants for programs that boost economic growth, reduce inequalities, and improve people’s living conditions.

Main Functions of IDA:

• IDA provides loans which are practically interest-free and for longer periods. Therefore, it is often referred to as the ‘soft loan window’ of the Bank.
• Only the poorest of the poor member countries (with per capita income below $1215 in 2016) are eligible for assistance.
• IDA complements the World Bank’s original lending arm, International Bank for Reconstruction and Development (IBRD).
• IDA is a multi-issue institution, supporting a range of development activities, such as primary education, basic health services, clean water and sanitation, agriculture, business climate improvements, infrastructure, and institutional reforms.
• These interventions pave the way toward equality, economic growth, job creation, higher incomes, and better living conditions.

International Finance Corporation (IFC)

Objectives of the IFC

• To further economic development by encouraging growth of private enterprise in member-countries.
• Invests in private enterprise in member-countries in association with private investors and without Government guarantee, in cases where sufficient private capital is not available on reasonable terms.
• Seeks to bring together investment opportunities, private capital of both foreign and domestic origin, and experienced management.
• Stimulates conditions conducive to the flow of private capital – domestic and foreign – into productive investments in member-countries.
• IFC investment normally does not exceed 40% of the total investment of the enterprise.
• In case of its investment by equity participation, it does not exceed 25% of the share capital

 IFC and India

• IFC makes strategic investments and advisory interventions to promote inclusive growth, help address climate change impacts, and encourage global and regional integration.
• In India, IFC is sharpening its focus on increasing access to energy, finance and healthcare; providing sustainable infrastructure; and boosting regional linkages.

Focus Areas –

• Building infrastructure
• Facilitating renewable energy generation
• Promoting cleaner production, energy and water efficiency
• Supporting agriculture for improved food security
• Creating growth opportunities for small businesses
• Helping reform investment climate

Glimpse at India-IFC ties: Since 1956, IFC has invested in 346 companies in India, providing over $10.3 billion in financing for its own account and $2.9 billion in mobilization from external resources. IFC also issue India’s first masala bonds to tap in foreign funding in local currency. similar IFC also issued first green masala bonds to raise investments to deal with climate change.

What is Masala Bond: The term is used to refer to rupee-denominated borrowings by Indian entities in overseas markets. The International Finance Corporation (IFC), November 2014, issued a ₹1,000 crore bond to fund infrastructure projects in India. These bonds were listed on the London Stock Exchange (LSE). IFC then named them Masala bonds to give a local flavour by calling to mind Indian culture and cuisine.

Concerns around World Bank and International Monetary Fund

Critics of the World Bank and the IMF are concerned about the ‘conditionalities’ imposed on borrower countries. Often the conditionalities are attached without due regard for the borrower countries’ individual circumstances and the prescriptive recommendations by the World Bank and IMF fail to resolve the economic problems within the countries. With the World Bank, there are concerns about the types of development projects funded. Many infrastructure projects financed by the World Bank Group have social and environmental implications for the populations in the affected areas and criticism has centred on the ethical issues of funding such projects. For example, World Bank-funded construction of hydroelectric dams in various countries has resulted in the displacement of indigenous peoples of the area. The World Bank’s role in the global climate change finance architecture has also caused much controversy. Civil society groups see the Bank as unfit for a role in climate finance because of the conditionalities and advisory services usually attached to its loans.

There are also concerns that the World Bank working in partnership with the private sector may undermine the role of the state as the primary provider of essential goods and services, such as healthcare and education, resulting in the shortfall of such services in countries badly in need of them. Critics of the World Bank and the IMF are also apprehensive about the role of the Bretton Woods institutions in shaping the development discourse through their research, training and publishing activities.

There are also criticisms against the World Bank and IMF governance structures which are dominated by industrialised countries. Decisions are made and policies implemented by leading industrialised countries—the G7—because they represent the largest donors without much consultation with poor and developing countries.

Reforms needed:

• A minimum 50 per cent increase in historical average of $24 billion per annum in the case of the IBRD (International Bank for Reconstruction and Development) and a 100 per cent increase in case of IFC (International Finance Corp) would be quite necessary to make the World Bank deliver a commitment level of $100 billion a year to make it play a meaningful and leadership role in global development landscape.
• World bank’s governing structure need to be made more democratic. At present the five largest shareholders appoint an executive director, while other member countries are represented by elected executive directors.
• Developing countries should be given a chance to shape the agenda.
• There should be more transparency on the issues that come to the table.

Q. With reference to `IFC Masala Bonds’, sometimes seen in the news, which of the statements given below is/are correct? 
1. The International Finance Corporation, which offers these bonds, is an arm of the World Bank.
2. They are the rupee-denominated bonds and are a source of debt financing for the public and private sector.
Select the correct answer using the code given below
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither1 nor 2

AIIB(Asian Infrastructure Investment Bank)
When? 2016
Members: 93
HQ: Beijing, China
Aim: To address Asia-Pacific’s acute infrastructural needs, Its mission is “to improve economic and social development in Asia by investing in high-quality, financially viable and eco-friendly infrastructure projects”. It also aims to mobilize private capital to co-finance projects. The creation of the AIIB is a welcome initiative given Asia’s huge infrastructural deficit. It has an authorised capital base of $100 billion.

Chinese interests in creation of the AIIB

• Firstly, China wants to make huge profits. China has huge forex reserves. Chinese banks seek to circulate loan money on which they will earn interest. This will help China in making huge profits with China being the largest shareholder of the Bank.
• Secondly, it is expected to bolster China’s One Belt One Road Initiative (OBOR). The AIIB is going to finance rail-roads-ports infrastructure along the ancient silk route. Hence, the Bank is going to help in China’s grand strategic designs and geopolitical motives.
• Thirdly, China wants to counter hegemonic dominance of the west-dominated World Bank and the IMF. China wants to counter the hegemony of the WB, IMF and the Asian Development Bank through New Development Bank and the AIIB. Some experts also say that countering the IMF will help in popularizing use of the Chinese yuan.

India and the AIIB
The Indian economy also has huge infrastructural funding requirements wherein the AIIB is playing a key role. India has become an important recipient of the AIIB loans. Till December 2017, AIIB had granted over $1 billion worth of loans for various infrastructure projects in India. India was the single largest borrower from the AIIB in 2017. A part of the Bengaluru Metro line and Gujarat rural roads have been granted around $330 million each. The AIIB is also involved in the unique Amravati project in Andhra Pradesh.

Recently, a top official of the AIIB has said, “India is the biggest commitment country for the Asian Infrastructure Investment Bank”. India is one of the most significant countries that the bank is supporting. The AIIB is involved in the transmission lines, rural roads and green projects among others. The bank has laid special emphasis on renewable energy projects in India and elsewhere.

New Development Bank/BRICS Bank
When? 2015
Members: 5 (Brazil, Russia, India, China and South Africa )
HQ: Shanghai, China

Aim: The New Development Bank (NDB) is a multilateral development bank established by the BRICS states. The idea for the NDB was proposed by India at the 4^th BRICS summit (2012) held in New Delhi. Then at the 6^th BRICS summit held in Fortaleza, Brazil, the BRICS states signed the agreement on the NDB. In the year 2015, an Indian K.V. Kamath was appointed as the President of the NDB. The headquarter of the Bank is in Shanghai, China. The first regional office of the NDB was established in Johannesburg, South Africa.

Q. Consider the following statements:
1. New Development Bank has been set up by APEC.
2. The headquarters of New Development Bank is in Shanghai.
Which of the statements given above is/ are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Major Objectives of the Bank

• Promotion of infrastructure and sustainable development projects with a significant development impact in member countries;
• Establish strategic partnerships with other multilateral development institutions and national development banks;
• Build a balanced project portfolio giving due respect to their geographic location, financing requirements and other factors;
• Promoting competitiveness and facilitating job creation;
• Build a robust knowledge sharing platform among developing countries.

The NDB has been envisaged as a “dedicated channel of alternate finance” with greater focus on emerging economies and the Global South. Some experts also see it as an alternative to the existing US-dominated World Bank and the IMF.

Similarities between the NDB and AIIB

• The NDB and the AIIB are very similar as far as their purposes and functions are concerned. Both are chiefly concerned with financing projects of infrastructure and sustainable development in the emerging economies and developing economies. Their strategy is also geared towards forging partnerships with national development banks. They also form partnerships with the traditional multilateral and regional development banks, through co-financing activities in the private and public sectors.
• They were created out of a shared frustration with existing multilateral lending forums, whose voting structures are stacked against emerging markets. The BRICS nations were given just 10.3 percent of the votes at the IMF. The countries like Japan, Germany, France, and the U.K., each hold greater voting shares than China, despite the latter being the world’s second largest economy.
• Both the NDB and AIIB are following democratic and egalitarian norms to the benefit of the developing countries. The founders of the NDB have repeatedly emphasized the principle of stakeholder equality. Each of the BRICS countries will contribute an equal share of the NDB’s $100 billion start-up capital, giving them 20 percent of the voting rights each. The 5-year presidency is to be rotated equally among its members in the NDB. The AIIB has also sought to give a bigger voice to developing nations. The AIIB has reserved at least 75 percent of voting shares for Asia-Pacific countries, in a powerful contrast to its hierarchal, Western-centric counterparts. The presidency at the IMF is confined to Europeans, whereas the United States has sole discretion over the top role at the World Bank. Japan has led the ADB since its founding in 1966. This is not the state of affairs in either the NDB or the AIIB.
• These banks are a sheer recognition of increasing geopolitical and geo-economic clout of the developing economies.
• Both the banks have sought to fill the gap in infrastructure investment. They are expected to meet the enormous demand for infrastructure investment in the developing world.
• Both the banks are a peaceful way of projecting Chinese power on the global stage concealing the assertive grand strategic designs of Chinese foreign policy. They are expected to help in consolidating and cementing the grand Chinese plan of One Belt One Road initiative (OBOR).
• The WB and the IMF seek “strict conditionality of market and structural reform” before helping the developing countries. Fortunately, the NDB and the AIIB do not insist on such strict conditionalities and better understand the specific and contextual developmental requirements of the developing countries. These banks do not interfere in the internal affairs of the countries seeking economic help from them.
• Both the NDB and the AIIB are strongly influenced by China’s leadership.
• The NDB and the AIIB share the similar four-tier governance structure: a Board of Governor, a Board of Directors, a President (with senior management), and other officials and staff, in the descending order of authority. The Board of Governors, which is represented by all member countries at the Ministerial level, is responsible for most important decisions to these institutions.

Differences between the NDB and AIIB

• Although the two institutions have overlapping mandates and other significant similarities they have substantial differences as well.
• The NDB has been more of a collaborative effort among the BRICS members where China’s role is markedly different from that in the AIIB. China’s dominance is more starkly visible in the AIIB.
• Membership of the two banks is also different. The five BRICS members are members of the NDB and its membership has not expanded since its inception. The AIIB began its operations with a large membership of 57 signatories (including many non-regional members). However, its membership has since grown rapidly to more than 75 members
• The NDB because of its small membership is institutionally less complex than the AIIB.
• The NDB is principally more outward-oriented while the AIIB is more Asia-centric.
• The Asian Development Bank reflects Japanese and US interests in Asia. The threat to the regional dominance of the ADB is likely to come from the AIIB than the NDB. China has certainly this in mind and so it is more enthusiastic about AIIB than NDB.
• The NDB and the AIIB are distinct from each other regarding the distribution of voting power in the Boards of Governors and Directors. The distribution of voting powers is much simpler and much more egalitarian in the NDB than in the AIIB. The five founding members of the NDB are entitled with the same voting power (20% each) in sync with their subscribed capital and no single member has veto power. Even in the case of future expansion it has been institutionally stipulated that the BRICS group voting power will collectively remain at 55 percent. The case of AIIB is more complicated. In the case of AIIB the member’s voting power reflects the relative size of its subscription is determined mostly on its financial capacity. However, there are provisions in the very institutional agreement of the AIIB which allows the regional (i.e., Asian) members collectively and China singularly to retain their domineering position against non-regional members.

 Major Achievements of the NDB

• Since its inception the NDB has come a long way. It has carved out a niche for itself. Now it has firmly graduated out of its start-up phase and initiated many dynamic projects. Apart from its headquarters in Shanghai, China it has come up with Africa Regional Centre of NDB in Johannesburg, South Africa.
• It has issued its first green bond raising RMB 3 billion in the Chinese bond market exemplifying its commitment to sustainable development ethics.
• It has primarily stayed committed to its core concern of financing infrastructure and sustainable development projects in BRICS countries. It has expressed strong emphasis on renewable energy related projects.
• By implication the formation of the NDB and AIIB has brought to the limelight the urgent need for reforms in WB and IMF. These two Bretton woods institutions need to be reformed in the right earnest if they are to stay relevant in the context of the changing geo-economic realities in the 21^st century world.
• The NDB has laid strong emphasis on developing and deepening of local capital markets in member countries by providing loans denominated in local currency in addition to US dollar loans. This is expected to help borrowing countries to manage and avoid the foreign exchange risks structurally inherent in loans from other banks.
• The NDB needs to learn from the ADB which has kept on modifying its thrust areas in successive decades since its inception to keep pace with the evolving developmental needs of different countries. Hence, in future the NDB should also concentrate on formulating appropriate strategies to deal with the issues of productivity growth and employment generation (which are not directly dealt by other banks).

 Challenges faced by the NDB

• Dealing with expansion of membership issue in future;
• China which is the economic powerhouse in the BRICS grouping is experiencing economic downturn which has been further compounded by China’s trade war with the USA;
• Managing the geopolitical tussle and latent divergences between BRICS members especially China, India and Russia.

Challenges faced by the AIIB
The AIIB has emerged as a very robust bank reflected in “the strength of AIIB’s governance frameworks, including its policies on risk management, capital adequacy and liquidity”. However, it is faced with certain challenges:

• So far the AIIB has funded only hard infrastructure projects like roads, electrical transmission lines, water supply system etc. Now it should also venture into “soft infrastructure” projects like public finance management, urban management, health policy and administrative management etc.
• The projects funded by the AIIB must be socially and environmentally sensitive. The Bank needs to take up eco-friendly projects to help the global community deal with the monstrous threat of climate change.
• Another critical challenge is to make the AIIB more dynamic, robust and independent in its project selection and funding.
• There is also a need to carefully form and manage strategic partnerships with other multilateral institutions, banks, private sector and sovereign governments.
• There is also the challenge of having a lean and thin AIIB bureaucracy with specialised and technical knowledge of banking operations. The AIIB needs to develop its own managerial, financial and legal teams to run the operation of the bank in a robust and efficient manner.

Contingency Reserve Arrangement
The BRICS Contingent Reserve Arrangement (CRA) is a framework for providing protection against global liquidity pressures. The CRA was established in 2015 by the five BRICS countries. The legal basis is formed by the Treaty for the Establishment of a BRICS Contingent Reserve Arrangement, signed at Fortaleza, Brazil on 15 July 2014.

This includes currency issues where members’ national currencies are being adversely affected by global financial pressures. It is found that emerging economies that experienced rapid economic liberalization went through increased economic volatility, bringing uncertain macroeconomic environment.

The CRA is generally seen as a competitor to the International Monetary Fund (IMF) and along with the New Development Bank is viewed as an example of increasing South-South cooperation.

Asian Development Bank
When? 1966
Members: 67 members – 48 from the region including India
HQ: Manila, Philippines
Aim: To accelerate economic and social development in Asia and pacific region

Functions of Asian Development Bank (ADB)

1. To make loans and equity investments for economic and social development of its developing members countries.
2. To provide for technical assistance for the preparation and implementation of development projects and advisory services.
3. To respond to the request for assistance in coordinating developmental policies and plans in developing member countries.
4. This bank constituted Asian Development Fund in 1974, which provides loans to Asian countries on concessional interest rates.

Areas of Focus and Results
ADB operations are designed to support the three complementary agendas of inclusive economic growth, environmentally sustainable growth, and regional integration. ADB uses its scarce resources in the areas of comparative strength.

Its key areas are as follows:

• Infrastructure (water, energy, transport, urban development, information and communications technology)
• Environment
• Regional cooperation and integration
• Finance sector development
• Education
• Health
• Agriculture and natural resources
• Public sector management

India and the ADB
The ADB has played a key role in India’s developmental story. ADB has a robust Country Partnership Strategy. The Country Partnership Strategy (CPS), 2018–2022 for India has the goal of supporting the government’s aim of “faster, inclusive, and sustainable growth accompanied by rapid economic transformation and job creation”.

The CPS is focussed on three strategic pillars:

• Boosting economic competitiveness to create more and better jobs;
• Providing inclusive access to infrastructure networks and services; and
• Addressing climate change and increasing climate resilience.

ADB’s annual lending to India is proposed to be raised to a maximum of $4 billion to support the country’s transformation toward upper middle-income status. Recently in October 2018 the Government of India and the Asian Developmental Bank (ADB) signed a $150 million agreement. It is meant to make improvements to road connectivity and efficiency of the international trade corridor in northern part of West Bengal and north-eastern region of India.

Q. Consider the following statements:
1. India is a member of the International Grains Council.
2. A country needs to be a member of the International Grains Council for exporting or importing rice and wheat. 
Which of the statements given above is/are correct?
(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither 1 nor 2

Q. The term ‘Digital Single Market Strategy’ seen in the news refers to
(a) ASEAN
(b) BRICS
(c) EU
(d) G20

Q. With reference to the International Monetary and Financial Committee (IMFC), consider the following statements:
1. IMFC discusses matters of concern affecting the global economy, and advises the International Monetary Fund (IMF) on the direction of its work.
2. The World Bank participates as observer in MFC’s meetings,
Which of the statements given above is/are correct?

(a) 1 only
(b) 2 only
(c) Both 1 and 2
(d) Neither I nor 2