MAKING CREDIT AVAILABLE

TO PROMOTE TRADE,
Special Drawing Rights (SDRs)
A Special Drawing Right (SDR) is basically an international
monetary reserve asset. SDRs were created in 1969 by the IMF in
response to the Triffin Paradox. The Triffin Paradox stated that the
more US dollars were used as a base reserve currency, the less
faith that countries had in the ability of the US government to
convert those dollars to gold. The world was still using the Bretton
Woods system, and the initial expectation was that SDRs would
replace the US dollar as the global monetary reserve currency,
thus solving the Triffin Paradox. Bretton Woods collapsed a few
years later, but the concept of an SDR solidified. Today the value
of an SDR consists of the value of four of the IMFs biggest
members currenciesthe US dollar, the British pound, the
Japanese yen, and the eurobut the currencies do not hold equal
weight. SDRs are quoted in terms of US dollars. The basket, or
group of currencies, is reviewed every five years by the IMF
executive board and is based on the currencys role in
international trade and finance. The following chart shows the
current valuation in percentages of the four currencies.
Currency

Weighting

US dollar

44 percent

Euro

34 percent

Japanese
yen

11 percent

British

11 percent

Currency

Weighting

pound
The SDR is not a currency, but some refer to it as a form of IMF
currency. It does not constitute a claim on the IMF, which only
serves to provide a mechanism for buying, selling, and
exchanging SDRs i.e they are negotiable instruments. Countries
are allocated SDRs, which are included in the member countrys
reserves. SDRs can be exchanged between countries along with
currencies. The SDR serves as the unit of account of the IMF and
some other international organizations, and countries borrow from
the IMF in SDRs in times of economic need.
The resulting division of the IMF's membership into borrowers
and non-borrowers has increased the controversy around
conditionality because the borrowers are interested in increasing
loan access while creditors want to maintain reassurance that the
loans will be repaid.

ROLE OF IMF
1. To provide international monetary cooperation through a
permanent institution that provides the machinery for
consultation and collaboration on international monetary
problems.
2. To facilitate the expansion and balanced growth of international
trade, and to contribute thereby to the promotion and
maintenance of high levels of employment and real income and to
the development of the productive resources of all members as
primary objectives of economic policy.
3. To promote exchange stability, to maintain orderly exchange
arrangements among members, and to avoid competitive
exchange depreciation.

4. To assist in the establishment of a multilateral system of

payments in respect of current transactions between members
and in the elimination of foreign exchange restrictions that
hamper the growth of world trade.
5. To give confidence to members by making the Funds resources
available to them under adequate safeguards, thus providing
them with the opportunity to correct maladjustments in the
balances of payments without resorting to measures destructive
of national or international balances of payments of members.
Conditionalities: The central activity undertaken by the IMF is
financial assistance to national treasury departments. Member
countries with balance of payments problems can receive credits
and loans to pay off their obligations and readjust their economic
policies so that they will not face another crisis or near-crisis. To
receive assistance, however, the member-country must agree,
through a "letter of intent," specifying its economic plan and
how it will recover and repay IMF loan. They have to implement
changes in its fiscal and monetary policies that IMF experts have
determined are necessary. All the financial should be true and
fair. These conditions are the cause of some of the most
vociferous resentment toward the IMF because they often involve
very detailed changes in national policies. Nevertheless, IMF
assistance is considered so essential to national economic health
that countries generally agree even when they have strong
reservations.
However countries are discouraged from becoming dependent on
IMF loans, and, in fact, may face extra charges if too much of their
government funding comes from the IMF. Rather, the IMF hopes to
play a role as a catalyst for private banks to lend to governments,
because the extension of an IMF loan is intended to express
confidence that the receiving country is getting its financial house
in order.

Now comparison of balance of payment of data among member

countries of IMF is also possible only when the goods and services
are valued on the basis on common price like Market prices.
There are some cases or transactions, which are necessary to use
some other base for valuing goods and services. The f.o.b (free on
board) and the c.i.f (cost, insurance and freight) are the two basis
available for international trade. IMF recommends the f.o.b
because the c.i.f base includes value of transportation and
insurance in the value of the goods.

BANK FOR INTERNATIONAL SETTLEMENTS

BIS was formally created on January 20, 1930, at the Hague
Conference ("Hague Convention of 1930") with the main purpose
of implementing Germany's reparation (settlement) payments to
victorious Allied nations. It is the worlds oldest international
financial organization. Its head office is in Basel, Switzerland and
it has representative offices in Hong Kong SAR and in Mexico City.
The BISs 623 staff members come from 57 countries. It has 60
member central banks, representing countries from around the
world that together make up about 95% of world GDP. It is owned
and controlled by the central banks.
According to its charter, it is "to promote the co
operation of central banks and to provide additional
facilities for international financial cooperation". The BIS

was originally created to handle the payment of German war

debts. Following Germany's defeat in World War I, the Allies and
the US (which regarded itself as separate from the Allies) said that
Germany had to pay for the war under a system of
"reparations". The repayment system never functioned fully. In
1930, with yet another attempt to get the reparations system
working, the BIS was created to handle what were supposed to be
flows of money from Germany into the Allies and US. When Hitler
came to power in 1933 he stopped the system of repayments
entirely.
Apart from fostering monetary policy cooperation, BIS
has always performed "traditional" banking functions for the
central bank community (for example, gold and foreign exchange
transactions), as well as serving trustee/ agent in international
financial settlements(payment of bill, debt or claim). BIS was the
agent for the EPU between 1950 and 1958, providing assistance
in restoring the convertibility of European currencies after World
War II. Similarly, BIS acted as the agent for various European
exchange rate arrangements, including the European Monetary
System between 1979 and 1994, which preceded the move to a
single currency, the euro.
The governance of BIS is determined by its statutes. These
governing statutes restrict BIS to granting only short-term loans
(typically less than thirty days). Moreover, all loans must be
government-guaranteed, or backed with gold deposited at BIS.
The main duties of BIS include:
To purchase, sell, open accounts and maintain custody in
gold, on its own behalf and/or the central banks' behalf
To loan to or borrow from the central banks
To enter into short-term obligation transactions, such as bills
of exchange, promissory notes, or checks, on its own behalf
and/or the central banks' behalf
To purchase or sell negotiable securities

 To discount and re-discount bills from its own portfolio or the

central banks' portfolios
To create and maintain bank accounts with the central
banks
To accept deposits from the central banks and other parties
To act as agent or correspondent of the central banks
To act as trustee or agent in international settlement
transactions
However, BIS, unlike a central bank, is prohibited from printing
currency; loaning or opening accounts to governments; acquiring
a significant interest in any business transaction; or engaging in
real estate transactions.

INTERNATIONAL MONETARY FUND

The architects of the Bretton Woods Agreement, John Maynard
Keynes and Harry Dexter White, envisioned an institution that
would oversee the international monetary system, exchange
rates, and international payments to enable countries and their
citizens to buy goods and services from each other. They
expected that this new global entity would ensure exchange rate
stability and encourage its member countries to eliminate the
exchange restrictions that hindered trade. Officially, the IMF came
into existence in December 1945 with twenty-nine member
countries.(The Soviets, who were at Bretton Woods, refused to
join the IMF.)
In 1947, the institutions first formal year of operations, the
French became the first nation to borrow from
the IMF. Over the next thirty years, more
countries joined the IMF, including some African
countries in the 1960s. The Soviet bloc nations
remained the exception and were not part of
the IMF until the fall of the Berlin Wall in 1989.
The IMF experienced another large increase in

members in the 1990s with the addition of Russia; Russia was also
placed on the IMFs executive committee. Today, 187 countries
are members of the IMF; twenty-four of those countries or groups
of countries are represented on the executive board.
The IMF's membership is divided along income lines: certain
countries provide the financial resources while others use these
resources. Both developed country "creditors" and developing
country "borrowers" are members of the IMF. The developed
countries provide the financial resources but rarely enter into IMF
loan agreements; they are the creditors. Conversely, the
developing countries use the lending services but contribute little
to the pool of money available to lend because their quotas are
smaller; they are the borrowers. Thus, tension is created around
governance issues because these two groups, creditors and
borrowers, have fundamentally different interests.
Voting power in the IMF is based on a quota system. Each
member has a number of basic votes (each member's number of
basic votes equals 5.502% of the total votes), plus one additional
vote for each Special Drawing Right (SDR) of 100,000 of a
member country's quota. The Special Drawing Right is the unit of
account of the IMF and represents a claim to currency. It is based
on a basket of key international currencies. The basic votes
generate a slight bias in favour of small countries, but the
additional votes determined by SDR outweigh this bias.
Special Drawing Rights (SDRs)
A Special Drawing Right (SDR) is basically an international
monetary reserve asset. SDRs were created in 1969 by the IMF in
response to the Triffin Paradox. The Triffin Paradox stated that the
more US dollars were used as a base reserve currency, the less
faith that countries had in the ability of the US government to
convert those dollars to gold. The world was still using the Bretton

Woods system, and the initial expectation was that SDRs would
replace the US dollar as the global monetary reserve currency,
thus solving the Triffin Paradox. Bretton Woods collapsed a few
years later, but the concept of an SDR solidified. Today the value
of an SDR consists of the value of four of the IMFs biggest
members currenciesthe US dollar, the British pound, the
Japanese yen, and the eurobut the currencies do not hold equal
weight. SDRs are quoted in terms of US dollars. The basket, or
group of currencies, is reviewed every five years by the IMF
executive board and is based on the currencys role in
international trade and finance. The following chart shows the
current valuation in percentages of the four currencies.
Currency

Weighting

US dollar

44 percent

Euro

34 percent

Japanese
yen

11 percent

British
pound

11 percent

The SDR is not a currency, but some refer to it as a form of IMF

currency. It does not constitute a claim on the IMF, which only
serves to provide a mechanism for buying, selling, and
exchanging SDRs i.e they are negotiable instruments. Countries
are allocated SDRs, which are included in the member countrys
reserves. SDRs can be exchanged between countries along with
currencies. The SDR serves as the unit of account of the IMF and
some other international organizations, and countries borrow from
the IMF in SDRs in times of economic need.
The resulting division of the IMF's membership into borrowers
and non-borrowers has increased the controversy around

conditionality because the borrowers are interested in increasing

loan access while creditors want to maintain reassurance that the
loans will be repaid.

ROLE OF IMF
1. To provide international monetary cooperation through a
permanent institution that provides the machinery for
consultation and collaboration on international monetary
problems.
2. To facilitate the expansion and balanced growth of international
trade, and to contribute thereby to the promotion and
maintenance of high levels of employment and real income and to
the development of the productive resources of all members as
primary objectives of economic policy.
3. To promote exchange stability, to maintain orderly exchange
arrangements among members, and to avoid competitive
exchange depreciation.
4. To assist in the establishment of a multilateral system of
payments in respect of current transactions between members
and in the elimination of foreign exchange restrictions that
hamper the growth of world trade.
5. To give confidence to members by making the Funds resources
available to them under adequate safeguards, thus providing
them with the opportunity to correct maladjustments in the
balances of payments without resorting to measures destructive
of national or international balances of payments of members.
Conditionalities: The central activity undertaken by the IMF is
financial assistance to national treasury departments. Member
countries with balance of payments problems can receive credits
and loans to pay off their obligations and readjust their economic
policies so that they will not face another crisis or near-crisis. To
receive assistance, however, the member-country must agree,

through a "letter of intent," specifying its economic plan and

how it will recover and repay IMF loan. They have to implement
changes in its fiscal and monetary policies that IMF experts have
determined are necessary. All the financial should be true and
fair. These conditions are the cause of some of the most
vociferous resentment toward the IMF because they often involve
very detailed changes in national policies. Nevertheless, IMF
assistance is considered so essential to national economic health
that countries generally agree even when they have strong
reservations.
However countries are discouraged from becoming dependent on
IMF loans, and, in fact, may face extra charges if too much of their
government funding comes from the IMF. Rather, the IMF hopes to
play a role as a catalyst for private banks to lend to governments,
because the extension of an IMF loan is intended to express
confidence that the receiving country is getting its financial house
in order.

Now comparison of balance of payment of data among member

countries of IMF is also possible only when the goods and services
are valued on the basis on common price like Market prices.
There are some cases or transactions, which are necessary to use
some other base for valuing goods and
services. The f.o.b (free on board) and
the c.i.f (cost, insurance and freight) are
the two basis available for international
trade. IMF recommends the f.o.b
because the c.i.f base includes value of
transportation and insurance in the
value of the goods.

WORLD BANK

The International Bank for Reconstruction and Development

(IBRD), better known as the World Bank, was established at the
same time as the International Monetary Fund (IMF) to tackle the
problem of international investment. Since the IMF was designed
to provide temporary assistance in correcting the balance of
payments difficulties, an institution was also needed to assist
long-term investment purposes. Thus, IBRD was established for
promoting long-term investment loans on reasonable terms. The
World Bank (IBRD) is an inter-governmental institution, corporate
in form, whose capital stock is entirely owned by its member
governments. Initially, only nations that were members of the IMF
could be members of the World Bank; this restriction on
membership was subsequently relaxed.
The principal functions of the IBRD are set forth in Article 1 of
the agreement as follows:
1. To assist in the reconstruction and development of the
territories of its members by facilitating the investment of capital
for productive purposes.
2. To promote private foreign investment by means of guarantee
of participation in loans and other investments made by private
investors and when private capital is not available on reasonable
terms, to make loans for productive purposes out of its own
resources or from funds borrowed by it.
3. To promote the long-term balanced growth of international
trade and the maintenance of equilibrium in balances of
payments by encouraging international investment for the
development of the productive resources of members.
4. To arrange loans made or guaranteed by it in relation to
international loans through other channels so that more useful
and urgent projects, large and small alike, will be dealt with first.
It appears that the World Bank was created to promote and not to
replace private foreign investment. The Bank considers its role to

be a marginal one, to supplement and assist foreign investment in

the member countries.

A little consideration will show that the objectives of

the IMF and IBRD are complementary. Both aim at increasing the
level of national income and standard of living of the member
nations. Both serve as lending institutions, the IMF for short-term
and the IBRD for long-term capital. Both aim at promoting the
balanced growth of international trade.
The World Bank operates by providing loans in two different ways.
First, investment loans are granted for projects that will produce
goods or services or public works to help economic and social
development. Second, adjustment loans are granted for programs
to support reforms to government policies.
Like IMF loans, World Bank loans are conditioned on the World
Bank's approval of the investment plans and schedule for the
project and repayment of the loans. The World Bank funds its
loans by raising money on the international bond market, issuing
bonds in its name to large institutional international investors,
such as banks and pension funds. As a non-profit institution,
however, the World Bank does not take any profit on the results of
its fundraising. Instead, it uses its profits to subsidize its lending
back to the countries whose projects its finances. Only about half
of the World Bank's funding comes from grants by members, and
the rest comes from the World Bank's own operations.

BALANCE OF PAYMENTS
The balance of payments, also known as Statement of
International Transactions (receipts and payments) and
abbreviated BoP, of a country is the record of all economic
transactions between the residents of the country and the rest of

the world in a particular period (over a quarter of a year or more

commonly over a year).It is the key macroeconomic indicator. It
defines the health of nations.
Theoretically the BOP should be zero, meaning that assets
(credits) and liabilities (debits) should balance, but in practice this
is rarely the case. Thus, the BOP can tell the observer if a country
has a deficit or a surplus and from which part of the economy the
discrepancies are stemming.
COMPONENTS
Current account
Capital account
1. Current Account - The current account is used to mark the
inflow and outflow of goods and services into a country. They are
popularly known as visible and invisible transactions .It comprises
of trade balance which is the difference between trade receipts
and payments of goods and also includes the balance for trade in
services. When anyone refers to a balance of payments deficit
they invariably mean a current account deficit.
Earnings on investments, both public and private, are also put
into the current account.
The last component of the current account is unilateral transfers.
These are credits that are mostly worker's remittances, which are
salaries sent back into the home country of a national working
abroad, as well as foreign aid that are directly received.
Current account is most looked in balance of payment.
2. Capital Account - Capital account includes transfers of
ownership of fixed assets, transfers of funds linked to, or
conditional upon, acquisition or disposal of fixed assets; or
cancellation, without any counter parts being received in return.
According to IMF, another account i.e financial account is a part of
capital
account.
In the financial account, international monetary flows related to

investment in business, real estate, bonds and stocks are

documented. Also included are government-owned assets such as
foreign reserves, gold, special drawing rights (SDRs) held with the
International Monetary Fund (IMF), private assets held abroad and
direct foreign investment. Assets owned by foreigners, private
and official, are also recorded in the financial account.

Balance of payments crisis

A BOP crisis, also called a currency crisis, occurs when a nation is
unable to pay for essential imports and/or service its debt
repayments. Typically, this is accompanied by a rapid decline in
the value of the affected nation's currency. Crises are generally
preceded by large capital inflows, which are associated at first
with rapid economic growth. However a point is reached where
overseas investors become concerned about the level of debt
their inbound capital is generating, and decide to pull out their
funds. The resulting outbound capital flows are associated with a
rapid drop in the value of the affected nation's currency.

Volume I of the Theory of International Economic Policy (Meade,

19515) was entitled The Balance of Payments. Firstly, at the level
of technical analysis, it integrated income effects and price effects
so as to study the balance of payments in a general-equilibrium
framework. In doing so, it extended the theory of the balance of
payments beyond its traditional identification with the current
account to so as to consider the overall balance by including
international capital movements. Secondly, Meade carried out his
tasks in this book using a two-country model rather than merely
developing the analysis for a single open economy.