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Unit 10: International Financial Institutions-II

notes

Notes The IDA has 137 member countries, although all members of the IBRD are free
to join the IDA.

Moreover, there is no exact relationship between the volume of international transactions and
the amount of necessary reserves. In fact, foreign exchange reserves (international liquidity)
are necessary to finance imbalances between international receipts and payments. International
liquidity is needed to service the regular. How of payments among countries, to finance the
shortfall when any particular country’s out payments temporarily exceed its in-payments, and to
meet large withdrawals caused by outflows of capital.
Thus, external or internal liquidity serves the same purpose as domestic liquidity, viz., to provide
a medium of exchange and a store of value. And the primary function of external liquidity is to
meet short-term fluctuations in the balance of payments.

self assessment

Fill in the blanks:
1. ............... tranche position which represents the ‘drawing potential’ of the IMF members.

2. ‘International liquidity’ embraces all those assets which are ............... acceptable without
loss of value in discharge of debts (on external accounts).
3. It is difficult to measure international ............... and assess its adequacy.
4. International liquidity comprises two elements, viz., ............... and borrowing facilities.

5. Although the IDA’s resources are separate from the ..............., it has no separate staff.
Loans are made for similar projects as those carried out by IBRD, but at easier and more
favourable credit terms.

!

Caution Inequality in international receipts and payments are concerned through foreign
exchange reserves. But, reserves cannot identify the volume of international transactions.

10.3 special Drawing rights (sDrs)

With effect from January 1, 1970, for increasing international liquidity IMF created a system
of Special Drawing Rights (SDRs). The SDRs are designed to supplement gold and the reserve
currencies, viz., the pound and the dollar. The SDRs represent entirely a new form of paper
money which will serve as well as gold or dollar, and hence are called “Paper Gold”.
According to the system adopted w.e.f. January 1, 1989. The value of SDR is determined on the
basis of the basket of 5 most widely used currencies of member countries. These include U.S.
Dollar, British Pound, French Franc, German’s Mark and Japanese Yen. Till date, it is defined in
terms of basket of these give currencies. As of now, the determination of value of SDR is based
according to the weightage of the currencies as given in Table 10.1.

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