Day-648 | Daily MCQs | UPSC Prelims | ECONOMY

Answer: C
The International Monetary Fund has several lending instruments to meet the different needs and specific circumstances of its members.
Some of the Financing instruments of IMF are:
The Short-term Liquidity Line
● It is a liquidity backstop for members with very strong policy frameworks and fundamentals, who face potential, moderate, short-term liquidity needs because of external shocks that generate balance of payment difficulties. It aims to minimize the risk of shocks evolving into deeper crises and spilling over to other countries.
The Stand-by Arrangement
● It provides short-term financial assistance to countries facing balance of payments problems.
The Resilience and Sustainability Facility
● It provides affordable long-term financing to countries undertaking reforms to reduce risks to prospective balance of payments stability, including those related to climate change and pandemic preparedness.
The Stand-by Credit Facility
● It provides financial assistance to low-income countries (LICs) with short-term balance of payments needs. The SCF is one of the facilities under the Poverty Reduction and Growth Trust.
The Extended Fund Facility
● It provides financial assistance to countries facing serious medium-term balance of payments problems because of structural weaknesses that require time to address. It has a longer repayment period. Sri Lanka has been given financial support under EFF.
The Extended Credit Facility
● It provides medium-term financial assistance to low-income countries (LICs) with protracted balance of payments problems. This instrument also comes under the Poverty Reduction and Growth Trust.

Development Policy Financing is an instrument of the World Bank not IMF. It provides credits, loans, grants or guarantees to a borrowing country through ‘fungible’ (i.e. non-earmarked) budget support. It is issued by the International Development Association (IDA), the Bank’s low-income country arm, and the International Bank for Reconstruction and Development (IBRD), the Bank’s middle-income country arm.

Answer: C
Explanation
Capital account convertibility means the freedom to conduct investment transactions without any constraints. Typically, it would mean no restrictions on the amount of rupees you can convert into foreign currency to enable you, an Indian resident, to acquire any foreign asset. In India, the move towards full capital account liberalisation has been approached with extreme caution.
● The Report of the Committee on Capital Account Convertibility, 1997 (Tarapore committee), taking into account lessons from international experience, suggested a number of signposts, the attainment of which are a necessary concomitant in the move towards capital account convertibility.
Recommendations:
● Fiscal consolidation, that includes reduction in fiscal deficit as percentage of GDP.
● Lower inflation
● Stronger financial system, that includes best practices for forex risk management, lower non-performing assets, adoption of international accounting disclosure norms, etc.
● Adequate forex reserves
● Reduction in debt service ratio
Rationalisation of subsidies has not been included as part of recommendations of Tarapore Committee.
India has come a long way in liberating the capital account transactions in the last three decades and currently has partial capital account convertibility.

Answer: B
Explanation:
A bad bank is a corporate entity that alienates illiquid and risky assets held by banks and financial institutions or a group of banks. It is created to help banks clean their balance sheets by transferring their bad loans so that the banks can focus on their core business of taking deposits and lending money.
● The first bad bank in the world was created in 1988 by US-based Mellon Bank to hold its stressed assets.
● The Finance Minister, in the Union Budget of 2021-22, had announced setting up of a bad bank— National Asset Reconstruction Company Limited (NARCL).
● The Finance Ministry is targeting stressed assets transfer of ₹1 lakh crore to the National Asset Reconstruction Company Ltd (NARCL).
● However, banks have been reluctant to transfer stressed assets to the bad bank in the wake of a price expectation mismatch between them and NARCL and seemingly low offers made by the latter.

Answer: B
Explanation:
The Global Risks Report, by the World Economic Forum, is an annual publication.
● It explores some of the most severe risks we may face over the next decade, against a backdrop of rapid technological change, economic uncertainty, a warming planet and conflict.
● Its 2024 version has highlighted various risks threatening the world — misinformation and disinformation; environmental risks, rise of unregulated AI, etc.
Other important publications of the World Economic Forum:
● Global Competitiveness Report
● Global Gender Gap Report
● Energy Transition Index
● Global Travel and Tourism Report
● Global IT Report (WEF along with INSEAD, and Cornell University)

Answer: D
Explanation:
Statement-I is incorrect: A transaction involving a non-resident Indian sending $10000 to his family in India is a form of unilateral transfer or remittances. They are part of the current account of the balance of payment.
Statement-II is correct: The capital account is a record of the inflows and outflows of capital that directly affect a nation’s foreign assets and liabilities. It is concerned with all international trade transactions between citizens of one country and those in other countries.
The components of the capital account include foreign investment and loans, banking, and other forms of capital, as well as monetary movements or changes in the foreign exchange reserve.