Q1. What are the goals and functions of the World Bank, the IDA and the IFC?
Answer: – The World Bank
The World Bank group is a multinational financial institution established at the end of World War II (1944) to help provide long-term capital for the reconstruction and development of member countries.
The purposes for the setting up of the Bank are
To assist in the reconstruction and development of territories of members by facilitating the investment of capital for productive purposes, including the restoration of economies destroyed or disrupted by war, the reconversion of productive facilities to peacetime needs and encouragement of the development or productive facilities and resources in less developed countries.
– To promote private foreign investment by means of guarantees or participation in loans and other investments made by private investors; and when private capital is not available on reasonable terms, to supplement private investment by providing, on suitable conditions, finance for productive purposes out of its own capital, funds raised by it and its other resources.
– To promote the long-range balanced growth of international trade and the maintenance of equilibrium in balance of payments by encouraging international investment for the development of the productive resources of members, thereby assisting in raising productivity, the standard of living and condition of labour in their territories.
– To arrange the loans made or guaranteed by it in relation to international loans through other channels so that the more useful and urgent projects, large and small alike, can be dealt with first.
-To conduct its operations with due regard to the effect of international investment on business conditions in the territories of members and, in the immediate post-war years, to assist in bringing about a smooth transition from a wartime to a peacetime economy.
The World Bank is the International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA). The IBRD has two affiliates, the International Finance Corporation (IFC) and the Multilateral Investment Guarantee Agency (MIGA). The Bank, the IFC and the MIGA are sometimes referred to as the “World Bank Group”.
International Development Association
The IDA was formed in 1960 as a part of the World Bank Group to provide financial support to LDCs on a more liberal basis than could be offered by the IBRD. The IDA has 137 member countries, although all members of the IBRD are free to join the IDA. IDA’s funds come from subscriptions from its developed members and from the earnings of the IBRD. Credit terms usually are extended to 40 to 50 years with no interest. Repayment begins after a ten-year grace period and can be paid in the local currency, as long as it is convertible. Loans are made only to the poorest countries in the world, those with an annual per capita gross national product of $480 or less. More than 40 countries are eligible for IDA financing.
An example of an IDA project is a $8.3 million loan to Tanzania approved in 1989 to implement the first stage in the longer-term process of rehabilitating the country’s agricultural research system. Cofinancing is expected from several countries as well as other multilateral lending institutions.
Although the IDA’s resources are separate from the IBRD, it has no separate staff. Loans are made for similar projects as those carried out by IBRD, but at easier and more favorable credit terms.
As mentioned earlier, World Bank/IDA assistance historically has been for developing infrastructure. The present emphases seems to be on helping the masses of poor people in the developing countries become more productive and take an active part in the development process. Greater emphasis is being placed on improving urban living conditions and increasing productivity of small industries.
International Finance Corporation
The IFC was established in 1956. There are 133 countries that are members of the IFC and it is legally and financially separate from the IBRD, although IBRD provides some administrative and other services to the IFC. The IFC’s main responsibilities are
(i) To provide risk capital in the form of equity and long-term loans for productive private enterprises in association with private investors and management;
(ii) To encourage the development of local capital markets by carrying out standby and underwriting arrangements; and
(iii) To stimulate the international flow of capital by providing financial and technical assistance to privately controlled finance companies. Loans are made to private firms in the developing member countries and are usually for a period of seven to twelve years.
The key feature of the IFC is that its loans are made to private enterprises and its investments are made in conjunction with private business. In addition to funds contributed by IFC, funds are also contributed to the same projects by local and foreign investors.
IFC investments are for the establishment ne1x enterprises as well as for the expansion and modernization of existing ones. They cover a wide range of projects such as steel, textile production, mining, manufacturing, machinery production, food processing, tourism and local development finance companies
Q2. What is a credit transaction and a debit transaction? Which are the broad categories of international transactions classified as credits and as debits?
Answer: – 1. Credit Transactions (+) are those that involve the receipt of payment from foreigners. The following are some of the important credit transactions:
Q3. Write a note on exchange rate regime and foreign exchange market in India.
Answer:- An exchange-rate regime is the way an authority manages its currency in relation to other currencies and the foreign exchange market. It is closely related to monetary policy and the two are generally dependent on many of the same factors.
Q4. An American firm purchases $4,000 worth of perfume (FF 20,000) from a French firm. The American distributor must make the payment in 90 days in French francs. The following quotation and expectations exist for the FF.
Q5. Define a futures contract. What are the different types of futures contracts? What are the advantages of using stock index futures?
Answer:- A futures contract (more colloquially, futures
Q6. Define Interest Rate Parity. What are the different types of IRP?
Answer: – A theory in which the interest rate differential between
