WORLD BANK GROUP
With 189 member countries, the World Bank Group is a unique global
partnership: five institutions working for sustainable solutions that reduce
poverty and build shared prosperity in developing countries.
A Group of Institutions Together, the International Bank for
Reconstruction and Development (IBRD) and International Development
Association (IDA) form the World Bank, which provides financing, policy
advice, and technical assistance to governments of developing countries.
The World Bank Group Consists A Group Of Five Development
Institutions
• International Bank for Reconstruction and Development (IBRD)
provides loans, credits, and grants.
• International Development Association (IDA) provides low- or no-
interest loans to low-income countries.
• The International Finance Corporation (IFC) provides investment,
advice, and asset management to companies and governments in
developing countries.
• The Multilateral Guarantee Agency (MIGA) insures lenders and investors
against political risk such as war.
• The International Centre for the Settlement of Investment Disputes
(ICSID) settles investment-disputes between investors and countries (India
is not a party).
Historic Overview
The Bretton Woods Conference, officially known as the United Nations
Monetary and Financial Conference, was a gathering of delegates from 44
nations that met from July 1 to 22, 1944 in Bretton Woods, New Hampshire
(USA), to agree upon a series of new rules for international financial and
monetary order after the conclusion of World War II. The two major
accomplishments of the conference were the creation of the International
Bank for Reconstruction and Development (IBRD) and International Monetary
Fund (IMF).
International Bank for Reconstruction And Development (IBRD) (World
Bank)
• IBRD provides loans and other assistance primarily to middle income and
poor but credit worthy countries (countries which have the capacity to
repay the loan amount with interest) at interest rates slightly lower than
that offered by other financial institutions but with long term
maturity. It has total 188 members.
• Origins: IBRD as the name suggest was created in 1944 to help Europe
reconstruct/ rebuild after World War II. To be a member of IBRD, a country
has join IMF first.
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 favorable investment climate to catalyze 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 consist of the capital and borrowings.
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.
How is IBRD financed?
• Simple as other banks are financed; float bonds in world financial
markets. In fact, in these markets, IBRD is known simply as the World
Bank
• shareholder are member states with governments paying in about $14
billion in capital in proportion to their IMF quota
• IBRD has maintained a triple-A rating since 1959. Its high credit rating
allows it to borrow at low cost and offer middle-income developing
countries access to capital on favourable terms in larger volumes, with
longer maturities
• IBRD earns income every year from the return on its equity and from the
small margin it makes on lending
• This pays for IBRD’s operating expenses, goes into reserves to strengthen
the balance sheet, and provides an annual transfer of funds to IDA, the
fund for the poorest countries
India and the IBRD
• India is the founder-banker of the Bank
• Bank has not been merely a lending institution to India but has also served
as a worthy counsel whom India has approached for advice in difficulties
• India has been the single largest borrower of the Bank
• Main sectors for which IBRD assistance of US$ 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)
• IDA is the part of the World Bank that helps the world’s poorest countries
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)
Structure Of Lending and Credits By IDA
• IDA lends money on concessional terms. This means that IDA credits have
a zero or very low interest charge and repayments are stretched over 25 to
38 years, including a 5- to 10-year grace period
• IDA also provides grants to countries at risk of debt distress <grants are
donations i.e. not to be rapid>
• In addition to concessional loans and grants, IDA provides significant
levels of debt relief through the Heavily Indebted Poor Countries (HIPC)
Initiative and the Multilateral Debt Relief Initiative (MDRI)
• 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
Borrowers of IDA
• 77 countries (plus India) are currently eligible to receive IDA resources
• Eligibility for IDA support depends first and foremost on a country’s
relative poverty, defined as gross national income (GNI) per capita below
$1,215 in fiscal year 2016
• IDA also supports a number of countries, including several small island
economies, which are above the operational cutoff but lack the
creditworthiness needed to borrow from IBRD
• Some countries, such as Vietnam and Pakistan, are IDA-eligible based on
per capita income levels, but are also creditworthy for some IBRD
borrowing. They are referred to as “blend” countries <receive loans from
both IDA and IBRD; India is also one such country>
India and IDA
• India has exceeded IDA’s per capita income threshold of 1260$ and is thus
technically not eligible to tap IDA window but India campaigned to extend
the tenure of India’s concessional loans by several more years (till 2022),
given the country’s high poverty levels and WB decided to continue its IDA
concessional lending in view of 300m people living below poverty line.
• International Finance Corporation (IFC)
Largest global development institution focused exclusively on the private
sector in developing countries
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
Timeline for 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’s committed portfolio in India is nearly $4.7 billion (India has IFC’s
largest portfolio exposure)
• In FY14, IFC committed nearly $1.2 billion across 34 projects in India
• IFC also has a strong advisory program in India with a total portfolio value
of $62 million across 74 projects.
• In FY14, three quarters of IFC’s advisory program had a footprint in India’s
priority states.
• 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.
International Centre for Settlement of Investment Disputes (ICSID)
• ICSID was established in 1966 by the Convention on the Settlement of
Investment Disputes between States and Nationals of Other States (the
ICSID Convention). The ICSID Convention is a multilateral treaty
formulated by the Executive Directors of the World Bank to further the
Bank’s objective of promoting international investment.
• 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.
• Bilateral investment treaties (BITs) are proliferating, many such treaties
contain text that refers present and future investment disputes to the
ICSID.
• ICSID provides for settlement of disputes by conciliation, arbitration or
fact-finding.
• Each case is considered by an independent Conciliation Commission or
Arbitral Tribunal, after hearing evidence and legal arguments from the
parties. A dedicated ICSID case team is assigned to each case and provides
expert assistance throughout the process.
• An ICSID award according to Article 53 of the ICSID Convention is final
and binding and immune from appeal or annulment, other than as
provided in the ICSID Convention.
Multilateral Investment Guarantee Agency (MIGA):
• MIGA is a member of the World Bank Group and its mandate is to promote
cross-border investment in developing countries by providing guarantees
(political risk insurance and credit enhancement) to investors and
lenders.
• MIGA was created to complement public and private sources of
investment insurance against non-commercial risks (currency
inconvertibility and transfer restriction; government expropriation; war,
terrorism, and civil disturbance; breaches of contract; and the non-
honouring of financial obligations) in developing countries.
• MIGA convention that defined its core mission was submitted to the
Board of Governors of the IBRD in 1985 and went into establishing MIGA
as the newest member of the World Bank Group in 1988.
• The Convention can be amended by the Council of Governors of MIGA.
• The agency opened for business as a legally separate and financially
independent entity. Membership was open to all IBRD members.
• MIGA aims to promote foreign direct investment into developing
countries to support economic growth, reduce poverty and improve
people’s lives.
World Bank Group and India
• India was one of the forty-four original signatories to the agreements
reached at Bretton Woods that established the International Bank for
Reconstruction and Development (IBRD) and the International Monetary
Fund (IMF).
• It was also one of the founding members of the IFC in 1956 and the IDA
in 1960. India later became a member of the MIGA in January 1994.
• India is not a member of ICSID. India claimed ICSID Convention is not
fair, convention's rules for arbitration leaned towards the developed
countries. In ICSID, the Chairman of the Centre is the Chairman of the
World Bank. The Chairman appoints the arbitrators. If the arbitration
award is not satisfactory, then the aggrieved party would appeal to a panel,
which will also be constituted by the ICSID. There is no scope for a review
of the award by an Indian court, even if the award is against public
interest.
• IBRD lending to India commenced in 1949 with a loan to the Indian
railways; the first investment by the IFC in India took place in 1959, and
by IDA in 1961 (a highway construction project).
• During the 1950s, the IBRD was India's sole source of World Bank
borrowings.
• By the end of the decade, India's mounting debt problems became an
important factor in the launch of the IDA, the soft loan affiliate of the World
Bank (WB) group.
• By the end of the 1960s, the United States, until then India's largest source
of external resources, sharply cut its bilateral aid program. Since then, the
WB emerged as the most important source of official long-term finance.
• During the 1960s and 1970s, the IDA accounted for nearly three-fourths
of all WB lending to India and, in turn, India was by far the largest recipient
of IDA funds, accounting for more than two-fifths of all its lending.
• The subsequent decade, with China joining the WB in 1980 and
accordingly entering its own claims to limited IDA resources, the worsening
economic fortunes of Africa, and India's better performance, saw a sharp
decline in India's share in IDA.
• Instead, its share of IBRD lending grew sharply in the 1980s, buoyed by
its improving credit-worthiness and the Indian government's waning
inhibitions with regard to non-concessional borrowing.
• During the 1980s, while the WB shifted its emphasis to stress policy
reforms and greater economic liberalization, it continued to lend to
poorly governed public sector institutions in India and was muted in
its criticism of India's closed economy.
• The lending portfolio changed sharply after the 1991 macroeconomic
crisis. In the immediate aftermath, India became one of the last important
WB borrowers to partake of structural adjustment lending, which
supported policy reforms in finance, taxation, and the investment and
trade regime.
• India is currently classified as a “blend” country — defined as one in
transition from lower middle-income to middle-income — and is
creditworthy for lending from both IDA and IBRD.
• India is the largest IBRD client of the World Bank. Between 2015 and 2018,
the World Bank lent around $10.2 billion to India.
• The World Bank Group (WBG) has approved a $25-30 billion commitment
plan for India for the period 2019-22.
INTERNATIONAL MONETARY FUND (IMF)
The International Monetary Fund (IMF) is an organization of 190 member
countries, each of which has representation on the IMF's executive board in
proportion to its financial importance, so that the most powerful countries in
the global economy have the most voting power.
Objective
• Foster global monetary cooperation
• Secure financial stability
• Facilitate international trade
• Promote high employment and sustainable economic growth
• And reduce poverty around the world
History
• The IMF, also known as the Fund, was conceived at a UN conference in
Bretton Woods, New Hampshire, United States, in July 1944.
• The 44 countries at that conference sought to build a framework for
economic cooperation to avoid a repetition of the competitive devaluations
that had contributed to the Great Depression of the 1930s.
• Countries were not eligible for membership in the International Bank
for Reconstruction and Development (IBRD) unless they were members
of the IMF.
• IMF, as per Bretton Woods agreement to encourage international
financial cooperation, introduced a system of convertible currencies at
fixed exchange rates, and replaced gold with the U.S. dollar (gold at $35
per ounce) for official reserve.
• After the Bretton Woods system (system of fixed exchange rates)
collapsed in the 1971, the IMF has promoted the system of floating
exchange rates. Countries are free to choose their exchange arrangement,
meaning that market forces determine the value of currencies relative to
one another. This system continues to be in place today.
• During 1973 oil crisis, IMF estimated that the foreign debts of 100 oil-
importing developing countries increased by 150% between 1973 and
1977, complicated further by a worldwide shift to floating exchange rates.
IMF administered a new lending program during 1974–1976 called the Oil
Facility. Funded by oil-exporting nations and other lenders, it was
available to nations suffering from acute problems with their balance of
trade due to the rise in oil prices.
• IMF was one of the key organisations of the international economic system;
its design allowed the system to balance the rebuilding of international
capitalism with the maximisation of national economic sovereignty and
human welfare, also known as embedded liberalism.
• The IMF played a central role in helping the countries of the former Soviet
bloc transition from central planning to market-driven economies.
• In 1997, a wave of financial crises swept over East Asia, from Thailand
to Indonesia to Korea and beyond. The International Monetary Fund
created a series of bailouts (rescue packages) for the most-affected
economies to enable them to avoid default, tying the packages to currency,
banking and financial system reforms.
• Global Economic Crisis (2008): IMF undertook major initiatives to
strengthen surveillance to respond to a more globalized and interconnected
world. These initiatives included revamping the legal framework for
surveillance to cover spill-overs (when economic policies in one country
can affect others), deepening analysis of risks and financial systems,
stepping up assessments of members’ external positions, and responding
more promptly to concerns of the members.
Functions
• Provides Financial Assistance: To provide financial assistance to member
countries with balance of payments problems, the IMF lends money to
replenish international reserves, stabilize currencies and strengthen
conditions for economic growth. Countries must embark on structural
adjustment policies monitored by the IMF.
• IMF Surveillance: It 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.
• Capacity Development: It provides technical assistance and training to
central banks, finance ministries, tax authorities, and other economic
institutions. This helps countries raise public revenues, modernize
banking systems, develop strong legal frameworks, improve governance,
and enhance the reporting of macroeconomic and financial data. It also
helps countries to make progress towards the Sustainable Development
Goals (SDGs).
Governance
• Board of Governors: It consists of one governor and one alternate governor
for each member country. Each member country appoints its two
governors.
o It is responsible for electing or appointing executive directors to the
Executive Board.
o Approving quota increases, Special Drawing Right allocations,
o Admittance of new members, compulsory withdrawal of member,
o Amendments to the Articles of Agreement and By-Laws.
o Board of Governors is advised by two ministerial committees, the
International Monetary and Financial Committee (IMFC) and the
Development Committee.
o Boards of Governors of the IMF and the World Bank Group normally
meet once a year, during the IMF– World Bank Annual Meetings, to
discuss the work of their respective institutions.
• Ministerial Committees: The Board of Governors is advised by two
ministerial committees,
• International Monetary and Financial Committee (IMFC): IMFC has 24
members, drawn from the pool of 189 governors, and represents all
member countries.
• It discusses the management of the international monetary and financial
system.
• It also discusses proposals by the Executive Board to amend the Articles
of Agreement.
• And any other matters of common concern affecting the global
economy.
• Development Committee: is a joint committee(25 members from Board
of Governors of IMF & World Bank), tasked with advising the Boards of
Governors of the IMF and the World Bank on issues related to economic
development in emerging market and developing countries.
• It serves as a forum for building intergovernmental consensus on critical
development issues.
• Executive Board: It is 24-member Executive Board elected by the Board
of Governors. It conducts the daily business of the IMF and exercises
the powers delegated to it by the Board of Governors & powers conferred
on it by the Articles of Agreement. It discusses all aspects of the Fund’s
work, from the IMF staff's annual health checks of member countries'
economies to policy issues relevant to the global economy. The Board
normally makes decisions based on consensus, but sometimes formal
votes are taken.
• Votes of each member equal the sum of its basic votes (equally distributed
among all members) and quota- based votes. A member’s quota
determines its voting power.
• IMF Management: IMF’s Managing Director is both chairman of the IMF’s
Executive Board and head of IMF staff. The Managing Director is appointed
by the Executive Board by voting or consensus.
• IMF Members: Any other state, whether or not a member of the UN,
may become a member of the IMF in accordance with IMF Articles of
Agreement and terms prescribed by the Board of Governors. But
Membership in the IMF is a prerequisite to membership in the IBRD.
• Pay a quota subscription: On joining the IMF, each member country
contributes a certain sum of money, called a quota subscription, which is
based on the country’s wealth and economic performance (Quota
Formula).
o It is a weighted average of GDP (weight of 50 percent)
o Openness (30 percent),
o Economic variability (15 percent),
o International reserves (5 percent).
o GDP of member country is measured through a blend of GDP—based
on market exchange rates (weight of 60 percent) and on PPP exchange
rates (40 percent).
• Special Drawing Rights (SDRS) is the IMF’s unit of account and not a
currency.
• The currency value of the SDR is determined by summing the values
in U.S. dollars, based on market exchange rates, of a SDR basket of
currencies
• SDR basket of currencies includes the U.S. dollar, Euro, Japanese
yen, pound sterling and the Chinese renminbi (included in 2016).
• The SDR currency value is calculated daily (except on IMF holidays or
whenever the IMF is closed for business) and the valuation basket is
reviewed and adjusted every five years
• Quotas are denominated (expressed) in SDRs.
• SDRs represent a claim to currency held by IMF member
countries for which they may be exchanged.
• Members’ voting power is related directly to their quotas (the amount
of money they contribute to the institution). IMF allows each member
country to choose its own method of determining the exchange value
of its money. The only requirements are that the member no longer
base the value of its currency on gold (which has proved to be too
inflexible) and inform other members about precisely how it is
determining the currency’s value.
