International Financial Organisations

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International Financial Organisations:

International Monetary Fund (IMF):

The IMF – International Monetary Fund is a multi-lateral Organization established after the Second World War to foster International Economic Relations and currency stability. In addition to providing mechanism for various kinds of multilateral agreements it is also a facility by which member countries may obtain funds for defense of their exchange rates. The IMF lends needed currencies from other members. Each country has a quota with the fund, which is on the advance commitment to lend its currency up to a limit. The loan is in the form of a deposit claim on the country. In this way countries whose currencies are strong become lenders to those who currencies are weak.

Borrowing of a certain amount based on a country’s quota is almost automatically available and thus countries count as

part of their reserves, their IMF positions. When a country is in debt to the IMF its economic policies come under IMF scrutiny to determine if the country is taking measures to correct its “disequilibrium”. The Euro Currency market entails to such formal scrutiny and some countries prefer it to the IMF for this reason.

The World Bank Group: The IMF is designed to foster the development of multilateral world payment systems. The finds resources were used to enable countries to sustain temporary balance-of-payments deficits without the need to involve exchange controls. In the long run, however the development of a strong system of International Trade requires economic development and growth in many under-developed countries of the world.

This is the function of 3 other International financial organization, which are often referred to collectively as the World Bank Group:

• International Financial organisations for reconstructions and development(IBRD): The IBRD was created along IMF. Although the bank is separate organization from the IMF, they are closely related. They have a common membership which resources derived from contributions from the members made in accordance with their Eco-strength. The IMF engages in short and intermediate term transactions when IBRD makes long term loans.

Economic development always requires some sort of International Financial organisations and much of the machinery and equipment required for industrialization must be imported. Under developed, imports can be expected to rise as well. Even if an under-developed country does not import any consumer’s goods under normal conditions when workers are diverted from production of consumer goods to work on investment projects, the need for imports will raise. To facilitate economic development therefore the country must be able to raise foreign exchange to pay for the necessary imports.

The IBRD is by no means a charitable Institution. It makes loans on specific projects that are expected to pay for themselves. The borrowing countries must repay then loans in “hard” currencies that is foreign exchange rather than in local currency. The bank arms at supplementing rather than replacing private investments in fact the bank will grant loans only when the borrower cannot raise funds from private sources on reasonable terms. The bank charges all the borrowers the same rate – a rate high enough, apparently to cover the entire bank’s costs. It may also aid the flow of private investment by guarantees are backed up by the fact that the bank has not required member countries to pay in their full quotas. These additional funds can be drawn upon if necessary. Much of the funds loaned by the bank has in fact, been raised by the sale of bonds by the bank in world capital markets.

In addition to the need for an international financial institutions to make sound loans to countries trying to speed their rate of economic development there is also a need to provide funds for riskier project. Several Institutional arrangements have developed in recent years. The IFC, which is associated with the IBRD, was established in 1956. It makes investments including certain types of equity claim to private business firms in under developed countries. The loans of the IFC do not require guarantees from the Govt. of the Country in which investment will be made. Rates and means of repayment are subject to negotiation and need not be as hard as those imposed by the IBRD.The IDA was established in 1959 to great loans to underdeveloped countries on easier terms than those of the IBRD were. Loans madeby the IDA carry low interest rates and long maturities and may be repaid in local currency.

Other Institution: In recent years several regional International Financial organisations have been established with flexible lending terms than the IBRD.

• Inter American Developmental Bank: The IADB was established in 1959 to assist the development of Latin American Countries. Its lending terms are softer than those of IBRD

• Asian Development bank: The ADB was established in 1966 to foster Eco-development in Asia. Although the US played a major role in the creation of the ADB, today Japan is the largest contributor to the bank. The ADB has tended to have a more conservative lending policy than the other International Financial Institution.

• The African Development Bank(AFDB): This in 1973 provides soft loans to African Nation. US makes small contribution in the fund since 1976.

In present day dynamic world it is unpredictable as to the no. of new instruments that will come up for financing the MNC. Competition will increasing and the global financing becomes more frequently used depending on the taxes and transaction costs with the Global economies changing fast and countries shifting to market oriented and free competition scenarios the role of International Finance tends to grow. The Risk management techniques and coverage of credit and market risks will undergo fast changes. The inner relations between money, bonds, currency, commodity and equity markets are bound to grow. Similarly the role of derivative markets will grow more in a comprehensive manner. The more the controls on the domestic market the more will be the role of International Markets.

The emergence of Euro Currency commonly used by the European Common Union participants augur well for a possible unification of many more countries and currencies. The fund exchange markets cross currency deals and multi-currency transactions will tend to grow. There will be a re-alignment of currency strengths and the markets for them.

International Finance, in sum, is a dynamic area and frequent changes are bound to take place and the results of financial engineering are bound to be felt. The Domestic markets and International Markets will be increasingly inter-linked and the International finance area will turn out to be wide and deep.