INTERNATIONAL MONETARY FUND

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INTERNATIONAL MONETARY FUND:

INTERNATIONAL MONETARY FUND

The scenario in 1930:

The scenario in 1930 The depression weakened the industrial economy Increasing restrictions on imports Worse condition in world trade, output and employment Devaluation in currencies Reduction in standard of living

To regulate orderly conduct of international trade: :

To regulate orderly conduct of international trade: Objectives : ( in June 1944 met 44 allied powers) Help remove the restriction on trade Ensure free convertibility of currencies Maintain stability of exchange rates Gave birth to two institutions called Bretton woods twins namely IMF-International monetary fund IBRD- International Bank for Reconstruction And Development ( world bank)

Objectives:

Objectives Consultation and collaboration on international monetary problems Maintenance of high level employment and real income Promote exchange stability and avoid competitive exchange depreciation Establish multilateral system of payments and eliminate foreign exchange restrictions Give confidence to members through fund supplies shorten the disequilibria in balance of payments

Functions :

Functions Reviewing and monitoring global financial developments Lending hard currencies and reform policies to promote sustainable growth Offering wide range of technical assistance and training for government and central bank officials Working with its member governments, international organizations, regulatory bodies and private sector to strengthen financial system Make assessment of member countries to identify actual and potential weakness Improve regulatory standards Preparation of reports Publishing information

Organisational structure:

Organisational structure Central office –in Washington Autonomous body affiliated to UNO Highest authority- Board governors of each member countries- also policy making bodies Meets once a years Day to day decision making –executive board International monetary and financial committee- 24 governors representing group of countries- meet twice a year- discuss key policy issues of IMF Joint committee of IMF & world bank called development committee advises and reports to governors on developmental issues concerning developing countries

Organisational structure:

Organisational structure Central office –in Washington Autonomous body affiliated to UNO Highest authority- Board governors of each member countries- also policy making bodies Meets once a years Day to day decision making –executive board International monetary and financial committee- 24 governors representing group of countries- meet twice a year- discuss key policy issues of IMF Joint committee of IMF & world bank called development committee advises and reports to governors on developmental issues concerning developing countries

Organisational structure:

Organisational structure Staff in executive board are recruited under the leadership of managing director and deputy managing director representing different regions of the world Of the 24 members, 8executive directors represent individual countries like china, France, Germany, Japan, Russia, Saudi Arabia, UK and USA and other 16 representing group of countries. They meet once in three weeks. Take care of conduct of business, changes in exchange rates,lending and appointment of managing directors. Executive directors meet on alternate days

Financial operations:

Financial operations Resources : quota of member countries and supplement borrowings. QUOTAS: subscription by member countries to capital fund -fixed for each country based on economic size -forms the basis for deciding SDRs, voting power,and share in allocation of SDRs -25% of countries quota should be paid in gold/US dollars -75% in own currency -reviewed at intervals of 5years The more powerful the country the larger the quota -member country can draw to meet BOP deficits

Borrowings :

Borrowings GENERAL AGREEMENT TO BORROW (GAB) –1962- 4years Under this agreement 10 indutrialised countries agreed to lend to IMF (Belgium, Italy, Netherlands, France, West Germen, Japan, Sweden, UK, USA) At present the SDR 17 billion and 1.5 billion through associated agreement with Saudi Arabia. NEW AGREEMENT (NAB)-1998: 25 countries agreed to lend. It cannot exceed 34 billion. TRUST AGREEMENT: IMF provides financial assistance at concessional rates under poverty Reduction and Growth facility (PRGF)scheme and debt relief under Heavily Indebted POOR countries (HIPC)

LENDING :

LENDING Temporary Assistance to member countries to tide over the BOP When need for foreign exchange, it render its own currency and renders foreign exchange. On improvement of BOP it has to purchase back its currency and pay foreign exchange TRANCHE POLICIES: (means slice) 25% of countries quota as first tranche. In the first tranche IMF may be liberal. But higher tranche requires great security. LOAN INSTRUMENTS: Diverse loan arrangements are tailored to the specific needs of member countries A.concessional loans: PRGF, HIPC B. Non-concessional loans: stand-by arrangements SBA, Extend Fund Facility EFF, Supplemental Reserve Facility SRF, Contingent Credit Lines CCL,and Compensatory financing Facility CFF. It charges rate of charge at 2.9% Discourages large loans through surcharge

HEAVILY INDEBTED POOR COUNTRIES:

HEAVILY INDEBTED POOR COUNTRIES Designed to reduce external credit burdens of eligible countries enabling them to service their external debt without further credit& compromising growth.multilateral , Paris club and other bilateral creditors took this approach. Countries eligible for PRGF and IDA are eligible for this loan. They maintain a strong track of this policy performance and relief mechanism.

POVERTY REDUCTION AND GROWTH FACILITY:

POVERTY REDUCTION AND GROWTH FACILITY Assistance given to low-income countries through Enhanced Structural Adjustment Facility (ESAP) In 1999, in order to strengthen the poor countries PRGF was evolved. Interest rate is 0.5% for a period of 51/2 to 10 years It is based on Poverty Reduction Strategy Paper (PRSP)which is prepared in cooperation with civil society and development partners of world bank. Concessional lending is provided through PRGF trust which was established in 1987 which borrows at market related rates from central banks governments and institutions. Also maintains a reserves account that provides security

Standby arrangements:

Standby arrangements Member countries draw up to a specific limit with in an agreed period. Negotiated between individual member and IMF 12-18 months length. Normally repayment expected within 21/4- 4 years unless an extension is approved Surcharges apply to high level access. Desist from imposing strict exchange and trade restrictions

EXTENDED FUND FACILITY:

EXTENDED FUND FACILITY Established in 1974 to countries with more protracted BOP Facility available for 3 years also large amounts than allowed in tranche policies Countries with structural maladjustments in production, trade and prices The country should be prepared to implement comprehensive corrective policies over 2-3 years Repayment expected normally within 41/2-7 years Surcharges apply to high level access.

SUPPLEMENTAL RESERVE FACILITY:

SUPPLEMENTAL RESERVE FACILITY SRF was introduced in 1997 to finance very short term loan at large scale. Expected to repay within 1-11/2years & extension up to 1 year All SRF loans carry 3-5% surcharge

CONTINGENT CREDIT LINES:

CONTINGENT CREDIT LINES Established in1999 Designed for countries implementing sound economic policies Subject to all conditions as that of SRF Surcharge21/2- 31/2%

COMPENSATORY FINANCE FACILITY:

COMPENSATORY FINANCE FACILITY Established in 1960 to assist countries experiencing sudden shortfall in export earning or increase in cost of cereal imports caused by world commodity prices All provisions as that of SBA apply No surcharge

EMERGENCY ASSISTANCE:

EMERGENCY ASSISTANCE Given to countries suffering natural disaster Emerging conflict Subjected to basic charge 31/4- 5 years duration

Key features of IMF lending:

Key features of IMF lending Lends to help members to tackle BoP and have sustainable economic growth IMF funds are not provided to finance particular activities or projects Borrowing country must adopt policies that promise to correct BoP The country and IMF should agree on policies and actions needed The assistance ranges between 6 months to 4 years The country that borrow under non concessional loan must pay market rate of interest plus commitment fee Lending by IMF is a signal for country’s progress on right track and added security for additional borrowing

EXCHANGE RATE ARRANGEMENT:

EXCHANGE RATE ARRANGEMENT (original IMF system also known as Bretton Woods System) Each member country should declare its par value of currency (i.e) in terms of gold or US dollars US dollar was fixed at 35 per ounce of fine gold Monetary reserves of member country should be in the form of gold and US dollar. Thus Us dollars are in the position of reserve asset Each country should agree to maintain its value at a margin of 1% of its par value Members were free to devalue but not exceeding 10% of par value Grant only short term assistance

CURRENT SCENARIO:

CURRENT SCENARIO Major change took place with its second amendment to its articles in 1978 Every member is free to choose its own exchange rate system Along with IMF and other member each country should ensure stability in exchange rate Manipulation of exchange should be prohibited IMF can put forward its opinion freely in case of manipulations by members

SURVEILLANCE:

SURVEILLANCE IMF is to over see the international monetary system to ensure: Orderly exchange system Stable exchange rates Avoid manipulation Direct policies Ensure growth with price stability Help single dangers ahead This surveillance is done in three ways. They are

1.COUNTRY SURVEILLANCE:

1.COUNTRY SURVEILLANCE It takes place yearly in consultation with the member country. It is referred as article IV consultation. The review is on fiscal, monetary and exchange rate. Assess the soundness of financial system Examine industrial, social, environmental,labour and other issues Report submitted to the country’s government

2.GLOBAL SURVEILLANCE:

2.GLOBAL SURVEILLANCE Review by the IMF executive board on trends of economic developments Review based on world economic outlook and global financial stability Reports are prepared twice a years before the semi annual meetings of the International Monetary committee

3.REGIONAL SURVEILLANCE:

3.REGIONAL SURVEILLANCE Examine policies under regional agreements. Participate in surveillance discussions with G-7 and APEC( Asia-Pacific Economic Cooperation forum)

Evaluation :

Evaluation ACHIEVEMENTS Stability in exchange rates Growth in world trade Increasing international liquidity Economic cooperation Flexible approach International debt crisis –solved debt problem of Mexico in’95 and Asian crisis in ’97 Newly developing countries

Evaluation :

Evaluation CRITISISM Conditional ties Interference with internal policies Rich country’s club Fixed exchange rate not achieved Failure to take action-1971 dollar crisis Insufficient resources Secondary role Exchange restrictions Cause for currency crisis

INDIA AND IMF :

INDIA AND IMF Status : founder member, has fifth largest quota, having one permanent Director on board. Lost this position in 1970.Now India occupies 13 th place with quota subscription of 4.16 billion Exchange rate policy : When India joined IMF its rupee value was declared equivalent to 0.268601 grams of gold. In 1949, gold content of rupee was reduced to 0.186621 grams. In 1966 rupee value devalued to 0.133333. When USA suspended conversion of Us dollar into gold in 1971 India pegged its currency to US dollar In 1993, the external rupee was made fully dependant on market forces

INDIA AND IMF :

INDIA AND IMF Utilisation of facilities : India has been the major beneficiary. In 1948, it purchased 100million to meet BoP deficit. Between 1957-1975 in 8 occasions borrowed an aggregate sum of R1,764 million. In 1981, it availed 5.6 billion under structural adjustment In 1991, the loan was 551.92 million under standby arrangement for 3 months period. In the same period, the second loan of 1,656million was also availed.

INDIA AND IMF :

INDIA AND IMF Derived benefits : By virtue of being a member in IMF India became member of IBRD and received long term large scale loans for development projects India has been getting advice on economic policies under surveillance . India is getting training to its personnel on monetary fiscal and foreign exchange policies through short term courses

Questions :

Questions What are quotas? What do you mean by reserve tranche? What are general agreements to borrow? How is the executive board constituted? What are the objectives of IMF? What are the sources for IMF?

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