Let us make an in-depth study of the International Liquidity and the Asian Development Bank:- 1. Introduction to International Liquidity 2. Need of International Liquidity 3. Main Features of International Liquidity 4. I.M.F. and International Liquidity 5. Role of I.M.F. in Increasing World Liquidity 6. The Asian Development Bank 7. The Asian Development Bank 8. The Membership of the Bank and other details.

Introduction to International Liquidity:


The word “International Liquidity” is mostly used as a synonym for international reserve.

Such reserves generally include a country’s official gold stock holdings of its convertible foreign currencies and S.D.R’s. and its net position in the I.M.F.



In simple word the International Liquidity has been defined as the aggregate stock of internationally acceptable assets held by the Central Bank to settle a deficit in a country’s balance of payments. But in wider sense it provides a measure of a country’s ability to finance its deficit in balance of payments without resorting to adjustment measures.

Eminent economists like Heller and Mc. Kinnon has said that International Liquidity should include “International borrowings, commercial credit operation and the international financial structure in a country’s reserves.” This definition includes the liquidity position and the possibility of obtaining credit from financial institutions operating in international financial markets. Thus, the international liquidity includes private as well as official holdings of inter­national liquidity assets. Therefore, both owned and borrowed reserves are the sources of international liquidity.

Need of International Liquidity:

Following are the reasons for the need of international liquidity:


1. The demand of International Liquidity is rising more than the supply-it means shortage of international liquidity.

2. Due to increasing balance of payment deficits of the majority of the countries in the world.

3. Due to international cyclical instability.

4. To L.D.C. (Less Developed Countries) import requirements have been on increase in order to develop.


5. Debt serving and interests on debt have risen and payments of dividends, profits and royalties on private direct foreign investments have grown.

6. High tariff barriers imposed by the developed countries on their exports.

7. Majority of the developed countries have surpluses in their balance of payments and they do not take any interest in the matter to cut international liquidity.

Main Features of International Liquidity:

The important features are as follows:

1. Decline in the relative share of gold holdings among the countries of the world. For example-in 1950 it was 956 million Ounces it came down to 940 million Ounces in 1991.

2. Increase in the share of Foreign Exchange reserves i.e., from $ 14.6 billion dollar in 1950 to 753.0 billion in 1994.

3. Increase in the reserve positions in the I.M.F. through drawing rights.

4. Emergence of Special Drawing Rights (S.D.Rs.) since 1972.

There was tremendous increase in the international liquidity comprising the above four items. No, doubt the international liability has been on the increase but they have not been rising much considering the volume and value of World Trade. The need of international liability of L.D.Cs. is greater and more urgent than that of developed countries.

I.M.F. and International Liquidity:

Before 1960 there was virtually no problem of international liquidity, because under the Bretton Woods Agreement the exchange rates of countries were fixed in terms of gold or dollar or Sterling, Member Countries were not to impose restrictions on payments and trade, except for a temporary or transitional period.


They were allowed to keep monetary reserves partly in gold and partly in dollars and sterling. To keep exchange rate stable the I.M.F put pressure or rather insisted on “Expenditure Reducing Policies” and devaluation to correct deficit in balance of payments.

Further, the growth in liquidity needed to finance the expansion of World Trade and in the expansion, of gold and supply of dollar and sterling. After the Devaluation of Pound in 1967 and the Charter of amendment in 1978 the member countries are not expected to maintain and establish par values with gold or dollars.

The fund has no control over the Exchange Rate Adjustment Policies of the member countries. But it imposes “Surveillance” over the Exchange Rate Policies of its members. The system of flexible exchange rate reduces the need for more reserves.

Role of I.M.F. in Increasing World Liquidity:


As we are aware that the I.M.F. is an international monetary institution. Therefore, it is the Principal Source of Supply of World Liquidity to its member countries. From 1970 I.M.F. introduced a scheme for the creation and issue of Special Drawing Rights (S.D.Rs.) an unconditional Reserve Assets to influence the level of world reserves and to solve the problem of international liquidity.

The funds financial resources come from quota subscriptions of member countries. Next, it increases its funds by selling gold to member. It borrows from governments, central banks or private institutions of industrialised countries. The funds lends its resources to member countries. Lending by the fund is a temporary assistance or help to members in financing dis-equilibrium in their balance of payments on current account.

Suppose, if a member country has less currency with the fund than its quota, the difference is called “Reserve Tranche”. It can draw up to 25 per cent on its reserve tranche automatically upon representation to the fund for its balance of payments needs. No interest will be charged on this drawings within a period of 3 to 5 years.

Further, a member can withdraw from balance of quota in four installments up to sixty eight per cent of its quota from credit tranches annually. For drawing this amount members will have to satisfy the fund of adopting a viable programme to ensure financial stability. To meet the severe balance of payments problems, the fund now has made provisions to draw up to 300 per cent of their New-Quota.


Since 1960 the fund has created survival new credit facilities for its members and under the facility loan can be taken for a longer period.

They are:

1. Buffer Stock Financing Facility (B.S.F.F.):

This facility was created in 1969 for financing commodity buffer stock by member countries. The facility is equivalent to 30% of the borrowing member’s quota.

2. The Extended Fund Facility (E.F.F.):

This was created in 1974. The fund provides credit to member countries to meet their balance of payments deficits for longer period. E.E.F. provides credit (loans) up to 100% of the member’s quota for 10 years.


3. The Supplementary Financing Facility (S.F.F.):

This was established in 1977. This was created to provide supplementary financing under extended arrangements to member countries to meet serious balance of payments deficits. This facility was extended to “Low-income developing member countries” of the fund.

4. Structural Adjustment Facility (S.A.F.):

This fund was set up in March 1986 to provide concessional adjustment to the poorer developing countries. Under it loans are granted to solve balance of payments problems and to carry out medium term Macro Economics and structural adjustment programme.

5. Enhanced Structural Adjustment Facility (E.SA.F.)-1987:

This was created in December 1987 with S.D.R. 6 billion of resources for the medium-term financing needs of low income countries. In this the assistance can be given up to 190% of quota over three years programme period.


6. Compensatory and Contingency Financing Facility (C.C.F.F.):

This was created in August 1988 to provide timely compensation for temporary shortfalls in “Cereal Import Costs” due to factors beyond the control of the member and contingency financing to help a member to maintain the momentum of fund.

These fund schemes have been criticised by many countries for favouring the rich and prosperous nations. This has been called an inequitable scheme. Which had make unfair distribution of International Liability. Here the allocation of S.D.Rs. to Developing Countries in very Low as compared to their needs. Low allocation of S.D.Rs. reduces the borrowing capacity of such countries.

It will be better if we will think that the need for liquidity on the part of developing countries is great “because of their higher costs of adjustment, limited access to private banking and capital markets, greater. Variability of Exchange earnings and higher opportunity cost of holding foreign exchange reserves.” Under the circumstances there is need to create more S.D.Rs. with fair distribution so that more unconditional liquidity is made available for the greater needs of developing countries.

The Asian Development Bank:

How this Bank came into existence?

The Asian Development Bank is the outcome of the Ministerial Conference held at Wellington in March 1965. Where Economic experts submitted report to the U.N. Economic Commission for Asia and Far East (E.C.A.F.E.). In January 1966, 33 countries signed the charter and the Asian Development Bank was set up on 19th December 1966. The headquarters of this Bank is at Manila in the Philippines.


Aim of the Bank:

The aim for the establishment of Asian Development Bank was to supplement the work of the World Bank in Asia.

Objectives of the Bank:

Following are the important objectives of the Bank:

1. To promote public and private investment for economic development in Economic Commission for Asia and Far East (E.C.A.F.E.) region.

2. To utilise the available resources for the financing of economic development, to achieve this, it gives priority to these regional and sub-regional and national projects and programmes which contribute more effectively to the harmonious growth of the entire region especially of the smaller and less developed members of the region.


3. To help the regional members in the co-ordination of their plans and policies for the economic development to enable them to achieve a better utilisation of their resources.

4. To provide technical assistance for the preparation, financing and implementation of projects and programmes for economic development including the formulation of specific projects.

5. To co-operate with the United Nations and its organs and subsidiaries including in particular, the C.E.A.F.E. and other international institutions and organisations and national entities in the investment of development funds in the region.

6. To undertake all such activities and provide such services which may fulfill the above objectives.

The Membership of the Bank:

At present there are 56 countries as member of the Asian Development Bank (A.D.B.). But if two-third members of the Board of Governors cast their vote in favour of any country, he can become member.

Besides the above following can become the member of the Bank:

1. Members of the Economic Commission for Asia and Far East (E.C.A.F.E.).

2. Associate members of E.C.A.F.E.

3. Other countries of the E.C.A.F.E. region which are the members of the United Nations.

4. Developed countries outside the ECAFE region which are members of the United Nation.

Capital and Financial Resources of the Bank:

The Bank started its working with an Authorised Capital of $ 2.9 billion which went to $ 25 billion in 1992. Out of this capital 50% has been contributed by JAPAN and the remaining by the member countries. To get more capital the Bank Issues Debentures and accepts deposits from its special funds. To raise further capital the Bank borrows from capital markets of the world.

Administration and Management of the Bank:

The Asian Development Bank is managed and governed by:

(i) A President, (ii) Vice-president and a Board of Governors along-with an administrative staff.

(i) The President is the administrative head of the Bank. The Vice-president performs the duties of the President in his absence.

(ii) Each member country normally nominates his Governor and an Alternate Governor to the Board of Governors. At least one meeting of the Board of Governors is essential to be held every year.

(iii) The Board of Governors takes all decisions concerning the Bank, passes the annual budget and presents the accounts of the Bank to the Board of Governors for approval.

(iv) Following are the important work of the Bank which only the Board of Governors can perform and they are:

(a) Entry of new members in the Bank;

(b) Change if any in the authorised capital of the Bank;

(c) Election procedure of the President and related administrators;

(d) Amendments in the Charter of the Bank are to be made.

Functions of the Bank:

The important functions of the Asian Development Bank (A.D.B.) are as follows:

1. Financial Assistance to Underdeveloped Member Countries:

The Bank provides financial assistance to under developed member countries in the form of grants and loans. The loan is given out of its Ordinary Funds Reserve and Special Funds Reserve. Loans are given for development projects or specific projects. All direct loans are “Hard Loans” for a period of 20 years repayable over 15 years with a five-year as grace period. The interest rate is determined according to the Lending Rate System for U.S. dollar loans.

The Bank gives three types of loans:

(a) Project loans,

(b) Sector loans, and

(c) Programme loans.

(a) Project Loans are given for specific projects.

(b) Sector Loans are given to a number of related projects in a given sector.

(c) Programme Loans cover more than one sector and relate to the implementation of a policy or programme for bringing about certain changes.

At the time of giving loans the Bank considers their economic, technical and financial feasibility, their effects on the general activity of the concerned country and the capacity to repay the loans.

In the end it can be said that the Asian Development Bank (A.D.B.) allows the following types of loans:

a. To develop finance institutions on the guarantee of the government;

b. It provides help to medium enterprises on the government’s guarantee;

c. It helps private enterprises in the form of equity and loans without government guarantee;

d. It helps and strengthen the financial institutions and capital market;

e. Helps Public Sector enterprises for privatisation without government guarantee.

2. Technical Assistance to Member Countries:

This assistance is given in the form of grants of loans or both. This help is given to implement specific national or regional development of projects. Further help is given in the form of the creation of new institutions on a national and regional basis. The Bank also provides advisory service under its technical assistance programme. It sends its own experts and sometimes hires consultants for re-organising institutions for projects implementation in member countries.

3. It Conducts Surveys and Research to Prepare Future Policies:

It does surveys and research to highlight the achievements, prospects etc. to the economic development of the member countries and to solve the problems if any.

4. The Bank does Work on Poverty Reduction, Social Activities and Conserva­tion of National Environment:

It now pays more attention to human resource development in order to develop skilled and capable manpower in developing member countries.

Progress and Problems of the Bank:


The Bank has been providing assistance to developing member countries in the field of agriculture and agro-based industries, energy, industry and non-fuel minerals, transport and communication, water supply, education, health and population planning. In spite of above mentioned help extended by the bank it suffers from a number of problems.

They are as such:


(1) Financial Problem:

The financial resources of the Bank are limited because the regional member countries are mostly poor. The developed member countries like—Japan, Britain, America and others are not prepared to contribute more.

(2) Negative Transfers to the Bank:

There has been negative transfers to the bank from countries like—Fiji, Malaysia and Philippines.

(3) Loan Sanctions have been increased but less Disbursements:

No doubt, loan sanctions have increased but their disbursements have been less. The bank should undertake such measures where by loan absorption capacity of the recipients may increase. Despite these problems and weaknesses the Asian Development Bank’s contribution to the economic development of the developing member countries of the region has been creditable.