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ECONOMICS HANDOUT (TOPIC NO. 3) by Jayant Parikshit

MULTIPLE CHOICE QUESTIONS (MCQs)

Question-1: Which of the following agreements were signed in the “Brettonwoods Conference” held from July 1–22, 1944? 1. The International Bank for Reconstruction and Development (IBRD) 2. The International Monetary Fund (IMF) 3. World Trade Organisation (WTO)

Chose the correct option: a. Only1 b. Both 1&2 c. Both 2&3 d. 1,2&3 Question-2: Consider the following statements pertaining to Special Drawing Rights (SDR): 1. SDR acts as supplementary reserve asset. 2. SDR is the unit of account of the IMF and some other international organizations. 3. 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.

Chose the correct option: a. Only2 b. Only3 c. Both 2&3 d. 1,2&3 Question-3: Consider the following statements regarding resources related to IMF: 1. Quotas are the primary source of fund for IMF. 2. New arrangements to borrow (NAB) are considered to be the first line of defence for IMF

resources. 3. Bilateral Borrowing Arrangements (BBAs) are considered to be the third line of defence for IMF

resources.

SYLLABUS: IMPORTANT MULTILATERAL DEVELOPMENT BANKS (MDBs) 1. World Bank Group & World Bank (WBG) 2. International Monetary Fund (IMF) 3. Asian Development Bank (ADB) 4. New Development Bank (NDB) 5. Contingent Reserve Arrangement (CRA) 6. Asian Infrastructure Investment Bank (AIIB)

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Choose the correct answer: a. Only1 b. Only2 c. Both 1&3 d. Both 2&3 e. 1,2&3 Question-4: Which of the following are the components of “Washington Consensus” of IMF? 1. Austerity 2. Devaluation of currencies 3. Trade liberalization 4. Balancing budgets 5. Privatization 6. Improving governance and fighting corruption. Choose the correct option: a. Only1 b. 2,4&5 c. 1,2,3,4&5 d. 1,2,3,4,5&6

Question-5: Which of the following reports are published by IMF? 1. World Economic Outlook Reports 2. Global Financial Stability Report 3. Fiscal Monitor 4. Regional Economic Reports

Choose the correct answer: a. Only1 b. 1&3 c. 2&3 d. 1,2,3&4 Question-6: Which of the following “Reports” are published by World Bank Group? 1. Ease of Doing Business (EoDB) Rank 2. World Development Report 3. Global Economic Prospects 4. Logistics Performance Index (LPI) Choose the correct answer: a. Only1 b. Both2&3 c. 1,2&3 d. 1,2,3&4

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Question-7: Consider the following statements regarding International Monetary and Financial Committee (IMFC) 1. The IMFC advises and reports to the IMF Board of Governors on the supervision and management

of the international monetary and financial system, including on responses to unfolding events that may disrupt the system.

2. The IMFC usually meets twice a year. 3. IMFC has 24 members and monitors developments in global liquidity and the transfer of resources

to developing countries. 4. Although the IMFC has no formal decision-making powers, in practice, it has become a key

instrument for providing strategic direction to the work and policies of the Fund. 5. World Bank acts as observer in the meetings.

Choose the correct answer:

a. Only1 b. 2,3&4 c. 1,2&5 d. 1,2,3,4&5

Question-8: [2019]: With reference to Asian Infrastructure Investment Bank (AIIB), consider the following statements: 1. AIIB has more than 80 member nations. 2. India is the largest shareholder in AIIB. 3. AIIB does not have any members from outside Asia

Choose the correct option: a. 1 only b. 2 and 3 only c. 1 and 3 only d. 1, 2 and 3

Question-9: Which of the following are the components of foreign exchange reserves of India: 1. Foreign Currency Assets 2. Gold 3. Special Drawing Rights (SDRs) 4. Reserve Position with IMF

Choose the correct answer: a. Only1 b. Both1&2 c. 1,2&3 d. 1,2,3&4

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WORLD BANK GROUP & WORLD BANK § WB evolved from the International Bank for Reconstruction and Development (IBRD) as

facilitator of post-war reconstruction and development to the present-day mandate of worldwide poverty alleviation in close coordination with their 5 affiliates.

§ Since inception in 1944, the World Bank has expanded from a single institution to a closely associated group of five development institutions.

Goals of World Bank

§ World Bank Group has set two goals for the world to achieve by 2030: 1. End extreme poverty by decreasing percentage of people living on less than $1.90 a day to no

more than 3% 2. Promote shared prosperity by fostering the income growth of the bottom 40% for every

country The World Bank Group comprises five institutions managed by their member countries:

1. The International Bank for Reconstruction and Development (IBRD) § IBRD was created in 1944 to help Europe rebuild after World War II. § Today, IBRD provides loans & other assistance primarily to governments of middle-income and

creditworthy low-income countries. § IBRD is the original World Bank institution.

Specifically, IBRD: 1. Supports long-term human and social development that private creditors do not finance 2. Preserves borrowers' financial strength by providing support in times of crisis, when poor people

are most adversely affected 3. Promotes key policy and institutional reforms (such as safety net or anti-corruption reforms) 4. Creates a favourable investment climate to catalyze the provision of private capital

2. The International Development Association (IDA)

§ IDA is the part of the World Bank that helps the earth’s poorest countries reduce poverty by providing no-interest loans and grants for programs aimed at boosting economic growth and improving living conditions.

§ IDA’s long-term (stretched over 35 to 40 years), no-interest loans pay for programs that build the policies, institutions, infrastructure and human capital needed for equitable and environmentally sustainable development.

3. International Finance Corporation (IFC)

§ It was established in 1956, which provides various forms of financing, primarily to the private sector.

§ IFC’s offerings have a special focus on infrastructure, manufacturing, agribusiness, services, and financial markets.

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4. The Multilateral Investment Guarantee Agency (MIGA) § MIGA was created in 1988 to promote foreign direct investment into developing countries to

support economic growth, reduce poverty, and improve people’s lives. § MIGA fulfils this mandate by offering political risk insurance (guarantees) to investors and

lenders.

5. The International Centre for Settlement of Investment Disputes (ICSID) § ICSID was established in 1966. § ICSID is the world’s leading institution devoted to international investment dispute

settlement. § States have agreed on ICSID as a forum for investor-State dispute settlement in most

international investment treaties and in numerous investment laws and contracts. REPORTS PUBLISHED BY WBG: 1. Ease of Doing Business (EoDB) 2. World Development Report: Published each year with a new theme relevant for development of

each nation. 3. Global Economic Prospects: Forecast of GDP for the world. 4. Poverty and Shared Prosperity (PSP): provides latest and most accurate estimates on trends in

global poverty and shared prosperity. COVID-19 PANDEMIC, WBG & INDIA WBG has provided financial support to India during Covid. For instance, they provided around $3 bn as emergency lending to India in 2021. Overall, WBG has supported India in three Phases:

1. WB + GoI: provided India’s immediate health needs 2. WB + GoI: Focus upon poor & vulnerable section impacted by Covid 3. WB: Helped in economic stabilisation by supporting MSMEs.

Question: Discuss the relevance of World Bank in today’s context?

(Note: The answer can be used for both WB & WBG related question.)

Answer:

§ World Bank was designed as an institution to help mobilise resources for the reconstruction of countries, esp developing and poor countries which got damaged due to WWII.

§ WB aimed at providing funds and technical know-how to the members. Whereas, the private investors only provide funds.

§ Moreover, during those times, developing and poor countries didn’t have access to global capital market. Infact, the global capital market was not even developed. So, the role of world bank was very crucial.

§ But over time, the global capital market developed and even the developing countries could access funds from there. Moreover, it has also been observed that China has emerged as a major donor to low and middle income countries.

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§ We also observe that there is excessive focus of World Bank on country-specific projects and lending to Middle Income Countries. WB has been criticised on the grounds of relatively less focus on global projects and issues.

§ Recently, WB’s focus has focussed on mega-infrastructure projects across the world. Mostly these projects are very carbon-intensive. And WB lacks a robust framework to align these projects with Paris Climate Agreement.

§ There is also an excess influence of developed countries like USA on WB and it’s policies. § Voting share of some powerful members are: US (15.98%), Japan (6.89%), China (4.45%),

Germany (4.03%), France (3.78%). For India it is 2.93%.

Does it mean an end for World Bank???

Well, No! World Bank is a knowledge bank which provides not only financial resources but also its expertise in project design and implementation. WB engages with middle & income economies. Without these engagements, global problems like poverty can’t be resolved.

INTERNATIONAL MONETARY FUND (IMF)

IMF REPORTS (1). World Economic Outlook Reports § A Survey by the IMF staff usually published twice a year. § It presents IMF staff economists' analyses of global economic developments during the near

and medium term. (2). Global Financial Stability Report § The Global Financial Stability Report provides an assessment of the global financial system and

markets, and addresses emerging market financing in a global context. (3). Fiscal Monitor § With increasing fiscal challenges in the aftermath of the global financial crisis, as a part of

multilateral surveillance of fiscal developments, the Fiscal Monitor was launched in 2009.

Fact Sheet * Membership: 190 countries * Headquarters: Washington, D.C. * Executive Board: 24 Directors each representing a single country or groups of countries * Total amount IMF is able to lend to its member: $1 Trillion

Primary 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 • Make resources available to members experiencing balance-of-payments difficulties

•

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§ Its aim was to survey and analyze the latest public finance developments, update fiscal implications of the crisis and medium-term fiscal projections, and assess policies to put public finances on a sustainable footing.

§ The Fiscal Monitor is prepared twice a year by the IMF’s Fiscal Affairs Department. (4). Regional Economic Reports § These reports discuss recent economic developments and prospects for countries in various

regions. § They also address economic policy developments that have affected economic performance in

the regions, and discuss key challenges faced by policymakers. (5). External Sector Report: § It brings out the external positions of largest economies (30 top economies usually covering 90%

of global GDP). IMF LENDING FACILITIES § IMF has developed facilities or loan instruments that are tailored to address the specific

circumstances of its diverse members. a. Concessional Lending: Low-income countries may borrow on concessional terms at very low

interest rates. They can also access grants.

b. Non-Concessional Lending (NCL): All non-concessional facilities are subject to the IMF’s market-related interest rate, known as the “rate of charge,” and large loans (above certain limits) carry a surcharge.

Types of Non-Concessional Lending

1. Rapid Financing Instrument (RFI)

§ The RFI was introduced to replace and broaden the scope of the earlier emergency assistance policies.

§ The RFI provides rapid financial assistance with limited conditionality to all members facing an urgent balance of payments need.

2. Stand-By Arrangements (SBA)

§ The SBA is designed to help countries address short-term balance of payments problems. § Disbursements are made conditional on achieving these targets (‘conditionality’). § Duration: Upto 3 years, but usually 12-18 months

3. Flexible Credit Line (FCL)

§ The FCL is for countries with very strong fundamentals, policies, and track records of policy implementation.

§ FCL arrangements are approved for countries meeting pre-set qualification criteria. § Duration: 1 0r 2 years

4. Precautionary and Liquidity Line (PLL)

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§ The PLL is for countries with sound fundamentals and policies, and a track record of implementing such policies.

§ PLL-qualifying countries may face moderate vulnerabilities and may not meet the FCL qualification standards.

§ The PLL combines qualification (similar to the FCL but with a lower bar. § Duration: Either 6 months or 1-2 years

5. Extended Fund Facility (EFF)

§ This facility helps countries address medium- and longer-term balance of payments problems reflecting extensive distortions that require fundamental economic reforms.

§ Arrangements under the EFF are typically longer than SBAs—normally not exceeding three years at approval.

§ However, a maximum duration of up to four years is also allowed. Types of Concessional Lending 1. Rapid Credit Facility (RCF): Single upfront payment for urgent need, example BOP needs to fight

Ebola etc. 2. Stand-By Credit Facility (SCF): Flexible support for short term financing. 3. Extended Credit Facility (ECF): Medium term support for BoP issues.

Grants: 1. Highly Indebted Poor Countries (HIPC) Grant 2. Catastrophe & Containment Relief (CCRT) Trust Grant

IMF RESOURCES IMF’s THREE LINE OF DEFENCE:

§ Resources for IMF loans to its members on non-concessional terms are provided by member countries, primarily through their payment of quotas. Multilateral and bilateral borrowing serve as a second and third line of defense, respectively, by providing a temporary supplement to quota resources.

§ These borrowed resources played a critical role in enabling the IMF to support its member countries during the global economic crisis. The IMF’s current total resources amounting to about SDR 973 billion translate into a capacity for lending of about SDR 707 billion (around US$1 trillion

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IMF QUOTAS § Each member of the IMF is assigned a quota, based broadly on its relative size in the world

economy, which determines its maximum contribution to the IMF’s financial resources.

§ Upon joining the IMF, a country normally pays up to one-quarter of its quota in the form of widely accepted foreign currencies (such as the U.S. dollar, euro, yen, or pound sterling) or Special Drawing Rights (SDRs). The remaining three-quarters are paid in the country’s own currency.

§ Quotas are reviewed at least every five years.

§ The IMF uses a quota formula to help assess a member’s relative position.

§ Quotas are denominated in Special Drawing Rights (SDRs)- the IMF’s unit of account.

Role of quotas in IMF

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 Fund.

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 SDR 100,000 of quota.

3. Access to financing: The amount of financing a member can obtain from the IMF (its access limit) is based on its quota.

Special Drawing Right (SDR) § SDR is an international reserve asset, created by the IMF in 1969 to supplement its member

countries’ official reserves. § 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. § Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways:

a. First, through the arrangement of voluntary exchanges between members; and b. Second, by the IMF designating members with strong external positions to purchase SDRs

from members with weak external positions. § Its value is currently based on a basket of five major currencies (U.S. dollar, euro, Chinese

Renminbi, Japanese yen, and pound sterling). § Since October 1, 2016, Chinese currency was added in SDR basket.

QUOTA FORMULA: The current quota formula is a weighted average of:

1. GDP (50 %) 2. Openness (30%) 3. Economic variability (15%) 4. International reserves (5%)

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§ IMF QUOTA REVIEW: § The IMF regularly conducts general reviews of quotas to assess the adequacy of overall quotas

and their distribution among members. § The most recent increase in quotas, to SDR 477 billion (US$ 651 billion), was agreed under the

14th Review (concluded in December 2010, effective from January 2016.) The 15th Review was concluded in February 2020 without a quota increase. In its resolution concluding the 15th Review, the Board of Governors also provided guidance on the 16th Review, expected to be concluded no later than December 15, 2023.

NEW ARRANGEMENTS TO BORROW (NABs) § NAB constitutes a second line of defense to supplement IMF resources to forestall or cope with

an impairment of the international monetary system. § Through the NAB, a number of member countries and institutions stand ready to lend additional

resources to the IMF. § In January 2021, a reform of the NAB took effect following consents from NAB participants,

almost doubling the size of the NAB to SDR 361 billion (US$521 billion) for the period from 2021 to 2025.

§ NAB Activation requires support from 85% of participants eligible to vote.

BILATERAL BORROWING ARRANGEMENTS (BBAs) § Bilateral Borrowing Agreements serve as a third line of defense after quotas and the NAB. § Since the onset of the global financing crisis, the IMF has entered into several rounds of bilateral

borrowing agreements (BBAs) to ensure that it can meet the financing needs of its members. BBAs serve as a third line of defense after quotas and the NAB.

§ In January 2021, a new round of 2020 BBAs, (“2020 BBAs”) became effective, replacing the previous round of BBAs which expired at end-2020. So far, agreements with 40 creditors are effective, for a total amount of SDR 135 billion.

§ Activation of the agreements requires support from 85% of creditors eligible to vote

Sl.No Currency Weight (%) 1 U.S. Dollar 41.73 2 Euro 30.93 3 Chinese Renminbi 10.92 4 Japanese Yen 8.33 5 Pound Sterling 8.09

Criteria for inclusion in the SDR basket 1. Export criterion: Issuer of currency is an IMF member or a monetary union, which includes IMF

members, who is one of the top five exporters of the world. 2. Determined to be “freely usable” currency by the IMF: Currency is widely used to make

payments for international transactions and widely traded in the principal exchange markets

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ASIAN DEVELOPMENT BANK (ADB) § The Asian Development Bank was conceived in the early 1960s as a financial institution that

would be Asian in character and foster economic growth and cooperation in one of the poorest regions in the world.

§ Established: 1966 § HQ: Manila, Philippines § ADB's first President: Takeshi Watanabe § Aim: The Asian Development Bank's primary mission is to foster growth and cooperation among

countries in the Asia-Pacific Region. § Members: 68 members—of which 49 are from within Asia and the Pacific and 19 outside. India

joined in 1966 and China in 1986. § Voting Pattern: The ADB closely resembles the World Bank, and has a similar weighted voting

system where votes are distributed in proportion with members' capital subscriptions. Japan and United States hold the largest proportion of shares at 15.6%. China holds 6.4%, India holds 6.3%, and Australia holds 5.8%.

COUNTRY SUBSCRIBED CAPITAL VOTING % Japan 15.6% 12.7% USA 15.6% 12.7% China 6.4% 5.4% India 6.3% 5.3% Australia 5.8% 4.9%

§ Assistance: The Asian Development Bank provides assistance to its developing member countries, the private sector, and public-private partnerships through: a. Loans b. Technical assistance c. Grants

§ Criticism: Since the ADB's early days, critics have charged that the two major donors, Japan and the United States, have had extensive influence over lending, policy and staffing decisions.

LOANS

ORDINARY CAPITAL RESOURCE (OCR)

(1). MIC @ MKT Rate(2). LIC @ Low Rate

ASIAN DEVELOPMENT FUND (ADF):Poor countries receive grants/very low interest

loans to reduce poverty

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ADB & INDIA § India was a founding member of ADB and is now the fourth-largest shareholder. § ADB has been active in the power sector at both the national and state levels. India was ADB’s

largest borrower for energy projects from 2007 to 2015, accounting for 25% of ADB’s total investments in energy projects in Asia and the Pacific.

§ Example: The Asian Development Bank (ADB) and the Government of India signed a $200 million loan to finance widening and upgrading of about 230 Km State Highways in Bihar to all-weather standards with road safety features.

COVID & ADB: § Provided a loan of $1.5bn in 2020 for immediate priorities like social protection for poor,

women, primary healthcare, education, infrastructure etc.

NEW DEVELOPMENT BANK (NDB) Fortaleza, 2014 Two instruments of special importance were signed at the VI BRICS Summit (Fortaleza, July 2014):

1. The constituent agreements of the New Development Bank (NDB) – aimed at the financing of infrastructure projects and sustainable development in emerging economies and developing countries.

2. The Contingent Reserves Arrangement (CRA) – which has the goal of promoting mutual support amongst the BRICS members in situations of instability in the balance of payments.

Note: § The authorized capital of NDB was $100 billion. § The resources allocated to the CRA, in turn, was $100 billion. PURPOSE & FUNCTION OF BRICS BANK

1. The Bank shall mobilize resources for infrastructure and sustainable development projects in BRICS and other emerging economies and developing countries.

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

3. It shall also cooperate with international organizations and other financial entities, and provide technical assistance for projects to be supported by the Bank.

Headquarters, Organization and Management

§ Bank is headquartered in Shanghai. § The Bank has a Board of Governors, a Board of Directors, a President and Vice-Presidents. § The President of the Bank is elected from one of the founding members on a rotational basis, and

there shall be at least one Vice President from each of the other founding members.

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Membership, Voting, Capital and Shares

§ The membership shall be open to members of the United Nations, in accordance with the

provisions of the Articles of Agreement of the New Development Bank. § It shall be open to borrowing and non-borrowing members. § The New Development Bank has an initial subscribed capital of US$ 50 billion which is equally

distributed amongst the founding members. § Currently, shares held by each five founding member = 20% § Voting Rights of each founding member = 20% § No single country has a veto in any form. § Bank’s Articles of Agreement specify that all members of the United Nations could be members

of the bank, however the share of the BRICS nations can never be less than 55% of voting power.

NDB’s Strategy Paper:

1. Between 2017-2021, Bank will dedicate about two-thirds of financing commitments to Sustainable infrastructure development.

2. Loan Portfolio and Key Areas of Operation: NDB’s key areas of operation will include, but not be limited to: a. Clean energy b. Transport infrastructure c. Irrigation, water resource management and sanitation d. Sustainable urban development e. Economic cooperation and integration among member countries

3. Expansion of Membership: NDB intends to operate at scale, and is now designing criteria and a strategy to expand membership to new countries. NDB plans to expand membership gradually.

4. Regional Offices: § The first regional centre was opened in South Africa in 2017, with the second coming up in

Brazil in 2018 and the third in Russia opening up in 2019. § China hosts the headquarters of the NDB in Shanghai. § India is the last among the five countries in the BRICS grouping to host a regional office of the

NDB in 2021. INDIA & NDB: § NDB has approved 14 Indian Projects for $4.2bn.

The founding members of the Bank are: 1. Brazil 2. Russian 3. India 4. China 5. South Africa

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§ $1 bn covid emergency programme loan with a focus on migrant labour force and increasing productivity in agriculture.

ASIAN INFRASTRUCTURE INVESTMENT BANK (AIIB) ABOUT AIIB:

§ It has been the brainchild of China. Unlike most other multilateral development banks set up by advanced economies, AIIB is the first major multilateral development bank where principal contributors are the borrowing members themselves.

§ Aim: Its main aim is to provide finance to infrastructure projects in the Asia-Pacific. It to date has financed over USD 6 billion worth of 32 projects, over 40 % of which are in the energy sector. Its stated objectives are: a. To foster sustainable economic development, create wealth and improve infrastructure

connectivity in Asia by investing in infrastructure and other productive sectors; and b. To promote regional cooperation and partnership in addressing development challenges by

working in close collaboration with other development institutions.

SOME BASIC FACTS ABOUT AIIB:

§ Estb: Jan. 16, 2016 § Members: 103 (Please update it a month before prelims 2022) § Countries accepted as AIIB founding members include China, India, Malaysia, Indonesia,

Singapore, Saudi Arabia, Brunei, Myanmar, the Philippines, Pakistan, Britain, Australia, Brazil, France, Germany and Spain. Founding members have priority over nations that sign up later because they will have the right to set the rules for the bank.

§ Fourteen of the G-20 nations are AIIB members. The United States is not an AIIB member. Non-Asian regions like Europe, North America, some East African and Latin American countries have also joined the bank as members. Germany is the largest non-Asian shareholder in the AIIB. Membership in AIIB shall be open to members of the WB and the ADB.

§ HQ: Beijing, China.

§ Capital Structure: The AIIB's initial total capital is $100 billion. China is the largest shareholder contributing around $30 billion. India is the second-largest shareholder, contributing $8.4 billion.

§ Voting Rights: Ø The voting shares are based on the size of each member country’s economy (GDP in PPP

terms).

COUNTRY SUBSCRIBED CAPITAL VOTING % China 30.8% 26.6% India 8.6% 7.6% Russia 6.7% 6.0%

Ø China holds around 26.6% voting share, giving it veto power over major decisions at the AIIB.

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§ Lending: AIIB lend to members beyond Asia if the project delivers a clear benefit to the region.

Criticism: § The AIIB was thus initially considered China’s World Bank. § The U.S. has questioned the bank's governing standards and its social and environmental

safeguards. § Chinese President had said that “AIIB is aimed at providing financial support for infrastructure

development in countries along the ‘One Belt, One Road’ and promoting economic cooperation.” Slowly, Chinese officials distanced the AIIB from China’s OBOR initiative

India & AIIB

§ AIIB’s focus in India is on development of rural roads, transmission lines and green projects among others.

§ India has second highest vote share in AIIB. § With the total project portfolios of US$4.4 Billion, India has been the largest borrower of Asian

Infrastructure Investment Bank (AIIB) lending since the time the Bank started its operations. § AIIB has already approved funding for roughly $1 billion worth of projects in India and

considering around $1 billion more. That includes a $200 million investment in India’s National Infrastructure Investment Fund (NIIF).

AIIB & COVID: § AIIB has provided covid relief fund to India to the tune of $750bn (co-financed by ADB) for

informal sector, safety net for needy, strengthen India’s health care system.