International Monetary Fund

Presented by:Anju Dony

Anton Boban

Direct exchange of goods and services for other goods and services

Most primitive form of reciprocal exchange Barter involves only two people; each has something

the other wants

Difficulties in barter system:

Lack of double co-incidence of wants. Lack of common measures of values. Difficulties in storing values. Indivisibility of certain goods.

Barter system:

Commodity money is money whose value comes from a commodity of which it is made.

Commodity money consists of objects that have value in themselves as well as value in their use as money

Valued Commodity as means of exchange Early examples – Shells, Food Grains, Cow etc Evolved into Metallic Money – Durable, Fungible and

Portable

Commodity money:

Egypt used gold bars in 400 BC Concept of Standard Coinage was introduced Govt. assertion that value of money lay in the

emblem

Standard coinage

A “double standard” in the sense that both gold and silver were used as money. Some countries were on the gold standard, some on the silver standard, some on both. Both gold and silver were used as international means of payment and the exchange rates among

currencies were determined by either their gold or silver contents.

Gresham’s Law implied that it would be the least valuable metal that would tend to circulate

Bimetallism: Before 1875

1870-1914 Features:

1. Central bank of a nation bought and sold gold at a fixed price

2. Citizens could freely export and import gold

3. Central bank did not interfere with capital flow

4. Facilitated growth of world trade and global prosperity

The Classical Gold Standard

Why did the Classical Gold Standard collapse?

◦ Rise of warfare state◦ Major consequence of WWI: nationalization of

IMS◦ States safeguarded their gold supplies

The gold standard is a monetary standard that pegs currencies to gold; currencies are guaranteed by being convertible to gold.

There were two great objectives to accomplish with the Bretton Woods System:

1) to free more than half the world's population from the British, French, Dutch, Belgian, and Portuguese Empires, and

2) to unleash global economic reconstruction and development, that is, to "reconstruct" shattered Europe's and Japan's economies and to "develop" the former colonial sector, eliminating enforced underdevelopment (this is where the World Bank's name came from).

How the dilemma was solved during the BWS

◦ If a country is suffering temporary BOP disequilibria, IMF would provide medium-term loan to the country

◦ If a country is suffering fundamental BOP disequilibria, the system would permit a country to change its exchange rate

◦ A balance of payments disequilibrium is a situation where the value of a country's imports are greater than its exports,

The key to the system?

◦ Other nations pegged their currencies to the dollar

◦ The US pledged to keep the dollar convertible into gold at $35 per ounce

◦ Dollar was the principal medium of exchange, store of value, and unit of account

But why did the system collapse?

Triffin dilemma◦ soundness of BWS depended on liquidity

and international confidence created by the US economy

◦ Every state wants dollar to rectify their BOP problem

◦ But the US can’t print dollars indefinitely inflationary pressure devalue the worth of dollar

◦ People will lose confidence in dollar and in the system

Role of Central Bank in Issue of Currency maintain certain amount of reserves in the

form of gold and foreign exchange. support the issue of currency and to

maintain its value Liability balanced by asset

Major Principles of note issue

Currency Principle.◦ that paper money is better than the metallic

money but there should be 100% backing of gold reserves.

banking principle ◦ with limited amount of gold and foreign currency

reserves, the Central bank resorts to issue of more currency.

◦ issue keeping in view the need of the business in the country

Fiduciary Systems Fixed Fiduciary System: Notes issue backed by mix of Govt.

Securities & metallic reserves value stability but also provides economic

stability, regulating internal prices and exchange rate unsuitable for modern economy Lock-up of gold Britain, Germany, Norway

Proportional Reserve System: reserve proportion of gold/silver is usually

from 30% to 40%. Introduced in Germany in 1876 Elasticity, safety excessive supply of money decrease the purchasing power of the

currency India Pakistan European countries

 Minimum reserve system Minimum reserve limit for gold/foreign

currency & by Govt. securities Eg. India 200 crores is the minimum

reserve limit Elastic change the fixed minimum reserve at

anytime. excessive note issue bring inflation decrease in the value of currency

Maximum fiduciary system Maximum amount of currency will be issued without

the backing of gold and foreign currency. This system gives maximum powers to Central bank.◦ Eg. France till 1928

note-issuing authority enjoys complete free dom unproductive form can be reduced to a minimum. upper limit is fixed at a very low level the system of

note- issue suffers from inherent inelasticity Inflation:

The World Bank is also called the International Bank for Reconstruction and Development (IBRD)

There are two ways to borrow from the World Bank: 1. under the IBRD scheme, money is raised through bond sales in the international capital market 2. through the International Development Agency

The Role Of The World Bank

International Monetary Fund (IMF)◦ In July 1944, 44 representing countries met in

Bretton Woods, New Hampshire to set up a system of fixed exchange rates.

All currencies had fixed exchange rates against the U.S. dollar and an unvarying dollar price of gold ($35 an ounce).

◦ It intended to provide lending to countries with current account deficits.

◦ It called for currency convertibility.

The Bretton Woods System and the International Monetary Fund

Promote international monetary cooperation, facilitate international trade, foster sustainable economic growth, make resources available to members

experiencing balance of payments difficulties The countries that joined the IMF between

1945 and 1971 agreed to keep their exchange rates secured at rates that could be adjusted only to correct a "fundamental disequilibrium" in the balance of payments, and only with the IMF's agreement.[

IMF:OBJECTIVES

Membership: 189 countries Headquarters: Washington, D.C. Staff: Approximately 2,600 from 147 countries Total quotas: US$327 billion (as of 3/13/15) Executive Board: 24 Directors each representing a single

country or a group of countries Additional pledged or committed resources: US$ 885

billion Committed amounts under current lending

arrangements (as of 3/13/15): US$163 billion, of which US$137 billion have not been drawn

Biggest borrowers (amounts outstanding as of 3/13/15): Portugal, Greece, Ireland, Ukraine

Biggest precautionary loans (amount agreed as of 3/13/15): Mexico, Poland, Colombia, Morocco

QUICK FACTS

ORGANISATIONAL STRUCTURE

Surveillance Gathering data and assessing economic policies of countries.

Monitoring economic and financial developments and policies, in member countries and at the global level, giving policy advance to its members based on its more than fifty years of experience.

Technical Assistance Strengthening human skills and institutional capacity of countries.

Providing the governments and central banks of its member countries with technical assistance and training in its areas of expertise.

Financial Assistance Lending to countries to support reforms Lending to member countries with balance of payments

problems, supporting adjustment and reform policies aimed at correcting the underlying problems.

FUNCTIONS OF IMF

Surveillance Multi-lateral (Macro-

economic)◦ Annual evaluation

process for all member nations based on their financial expert assessments of economic and financial developments.

◦ Reason: To assess vulnerabilities, threats, trends and developments in the whole international economy.

Bi-Lateral (Micro-economic)◦ Economist visit member

states individually to gather information from the nation’s central bank and officials, and conduct meetings pertaining to that nation’s economy.

◦ The Economist then submit formal reports to the Executive Board of the IMF.

◦ The Executive Board makes recommendations to the central bank officers and file a transparent Public Information Notice of the data.

◦ Reason: To ensure compliance with the Articles of Agreement.

The Lending Process1. Any member of the IMF may request funding.

2. Agree to abide by the transparency standards, codes and policies of the facility.

3. Agree to a balance of payment resolution.

4. Submit a repayment strategy including the policy change recommendations in a Letter of Intent to the Executive Board of the IMF for approval.

Lending

FacilitiesFacilities are loan programs set-up by the IMF to address specific needs

of member nations. It should also be noted that IMF funding is disbursed in phases so that adjustments may be made to mitigate risk.Facility Purpose Type Duration Repay Surcharge

Stand By Arrangements(Most lucrative loan.)

BoP Short-term

1 – 2 yrs 2 - 4 yrs Avg 4%

Extended Fund Facility(Recommended Reforms)

BoP Long-Term

3 yrs 5 – 7 yrs

Supplemental Reserve Facility(Developing Nations)

Economic Recovery

Short-term Large-scale financing

1 yr 1 – 1.5 yrs

Avg 4%

Compensatory Financing Facility(Global Commodity Price Issues)

Drop in Export Earnings

Short-term

1 – 2 yrs 2 - 4 yrs

Emergency Assistance Loans(Disasters & Post-War)(Subsidies may be available)

Disaster Recovery

Long-term(Base Rate)

3 - 5 yrs

Technical Assistance The goal is to educate to empower financial leaders in an effort to

sustain and grow a strong international economy.

1/5th of IMF Budget goes to Technical Assistance

Missions can be dispatched from Headquarters to train central bank executives and officials.

Online courses are provided for members to train.

Seminars & Workshops

Seven Regional Training Institutes located worldwide.

Asian Development Bank, African Regional Bank and others provide multi-lateral funding.

Most comes from the quota subscriptions◦ the money each member contributes when joining

the IMF

General Arrangements to Borrow (1962)◦ line of credit set up with several governments and

banks throughout the world

Where the IMF gets its money

Quota subscriptions generate most of the IMF's financial resources.

Each member country of the IMF is assigned a quota, based broadly on its relative size in the world economy.

A member's quota determines its maximum financial commitment to the IMF and its voting power, and has a bearing on its access to IMF financing.

Quotas & subscriptions

A member's quota subscription determines the maximum amount of financial resources the member is obliged to provide to the IMF.

A member must pay its subscription in full upon joining the IMF: up to 25 percent must be paid in the IMF's own currency, called Special Drawing Rights (SDRs) or widely accepted currencies (such as the dollar, the euro, the yen, or pound sterling), while the rest is paid in the member's own currency.

Voting power. The quota largely determines a member's voting power in IMF decisions. Each IMF member has 250 basic votes plus one additional vote for each SDR 100,000 of quota.

A new country is assigned an initial quota in the same range as the quotas of existing members

The quota formula is a weighted average of GDP (weight of 50 percent), openness (30 percent), economic variability (15 percent), and international reserves (5 percent )

GDP is measured as a blend of GDP based on a market exchange rates (weight of 60 percent) and on PPP exchange rates (40 percent).

Quotas are denominated in Special Drawing Rights (SDRs) .

The largest member of the IMF is the United States with a current quota of SDR 82.99 billion (about US$116 billion)

The smallest member is Tuvalu, with a quota of SDR 2.5 million (about US$3.5 million).

Special drawing rights were created by the IMF in 1969 and were intended to be an asset held in foreign exchange reserves.

They were Issued to supplement a shortfall of preferred foreign exchange reserve assets, namely Gold and the US dollar.

They were allocated to participating members in

portion to their Fund quotas. The value of a SDR is defined by a weighted currency

basket of four major currencies: the US dollar, the Euro, the British pound, and the Japanese yen.

As of March 2016, 204.1 billion SDRs (equivalent to about $285 billion) had been created and allocated to members.

Special Drawing Rights (SDR)

Initially its value was fixed1 SDR = 1 US dollar

The value of the SDR is determined by the value of several currencies important to the world’s trading and financial systems. 

The basket of currencies used to value the SDR is ‘weighted’, meaning that the more important currencies have a larger impact on its value.

They can only be exchanged for Euros, Japanese yen, pounds sterling, or US dollars.

Valuation of SDR

A country's IMF quota, the maximum amount of financial resources that it is obligated to contribute to the fund, determines its allotment of SDRs. 

It cannot be used for trading purposes.

Only central governments can hold SDR and no private firm can have its ownership rights.

The Fund facilitates transactions between members seeking to sell or buy SDRs and these counterparties to the voluntary agreements that effectively make a market in SDRs.

SDR or Paper Gold

Criticisms of IMF

Conditions of LoansIMF make the loan conditional on certain policies

◦ Reducing government borrowing – Higher taxes and lower spending

◦ Higher interest rates to stabilise the currency.◦ Structural adjustment. Privatisation, deregulation,

reducing corruption and bureaucracy.

For example, in the Asian crisis of 1997, many countries such as Indonesia, Malaysia and Thailand were required by IMF to pursue tight monetary policy (higher interest rates) and tight fiscal policy to reduce the budget deficit and strengthen exchange rates. However, these policies caused a minor slowdown to turn into a serious recession with mass unemployment.

In 2001, Argentina was forced into a similar policy of fiscal restraint. This led to a decline in investment in public services which arguably damaged the economy.

Exchange rate reforms.IMF failed to understand the dynamics of the country that they were dealing with – insisting on blanket reforms.ExampleWhen the IMF intervened in Kenya in the 1990s, they made the Central bank remove controls over flows of capital. The consensus was that this decision made it easier for corrupt politicians to transfer money out of the economy (known as the Goldenberg scandal.)

The IMF serves wealthy countries and Wall Street◦ Unlike a democratic system in which each member country

would have an equal vote, rich countries dominate decision-making in the IMF because voting power is determined by the amount of money that each country pays into the IMF's quota system. It's a system of one dollar, one vote.

◦ The disproportionate amount of power held by wealthy countries means that the interests of bankers, investors and corporations from industrialized countries are put above the needs of the world's poor majority.

ExampleThe IMF forced Haiti to open its market to imported, highly subsidized US rice at the same time it prohibited Haiti from subsidizing its own farmers. A US corporation called Early Rice now sells nearly 50 percent of the rice consumed in Haiti.

IMF policies promote corporate welfareTo increase exports, countries are encouraged to give tax breaks and subsidies to export industries. Public assets such as forestland and government utilities (phone, water and electricity companies) are sold off to foreign investors at rock bottom prices.Example In Guyana, an Asian owned timber company called Barama received a logging concession that was 1.5 times the total amount of land all the indigenous communities were granted. Barama also received a five-year tax holiday.

IMF Policies hurt the environmentIMF loans and bailout packages are paving the way for natural resource exploitation on a staggering scale. The IMF does not consider the environmental impacts of lending policies, and environmental ministries and groups are not included in policy making. The focus on export growth to earn hard currency to pay back loans has led to an unsustainable liquidation of natural resources. Example the Ivory Coast's increased reliance on cocoa exports has led to a loss of two-thirds of the country's forests

Neo Liberal Criticisms There is also criticism of neo-liberal policies such as privatization. Arguably these free market policies were not always suitable for the situation of the country. Example Privatization can create lead to the creation of private monopolies who exploit consumers.

Lack of transparency and involvementThe IMF have been criticized for imposing policy with little or no consultation with affected countries.

Supporting military dictatorshipsThe IMF have been criticized for supporting military

dictatorships in Brazil and Argentina, such as Castello Branco in 1960s received IMF funds denied to other countries.

IMF and developing countries

IMF a SIGN OF ADVANTAGE AND DISADVANTAGE FOR COUNTRIESIMF loans available for reconstruction and emergencies

 Forces poor countries to adopt bad policies and takes its ‘pound of flesh’ back while the countries sink further into poverty. 

IMF loans are usually short term and given when countries are already in distress and thus ill-equipped to afford belt-tightening or major reforms.

Example -Pakistan is among the most frequent users of IMF loans, having borrowed IMF money 12 times since 1980. However, 10 of these programmes were abandoned midway due to Pakistan’s failure to fully adopt the IMF’s policy recommendations.

problems with Pakistan’s implementation◦ inadequate political will and mismanagement.

problems with the IMF’s programme◦ undue US interference, inadequate political

analysis capacities within the IMF, inappropriate sequencing and over-ambitious agendas given the short loan durations.

Reconstruction of loans

Ecuador Gets $364 Million IMF Loan to Tackle Earthquake Reconstruction

On April 16, Ecuador was hit by a powerful 7.8 magnitude earthquake, the worst since 1979.

The disaster is expected to deepen the country’s recession and recovery efforts will be hobbled by the lack of fiscal buffers. 

Ecuador faces huge economic toll after worst earthquake in decades

Reconstruction to cost $3.3 billion, growth to contract significantly in 2016

IMF ready to continue supporting Ecuador manage economic challenges

The country already received the money under the IMF’s Rapid Financing Instrument, which is intended to help the authorities face an urgent balance of payments need due to the severity of the earthquake. 

The reconstruction will likely span 2 to 3 years.

Sri Lanka to Use IMF Loan to Reform Economy After Conflict $2.6 billion loan granted.

Sri Lanka had been running high budget deficits for several years and had borrowed to finance these deficits internationally on short terms which left the country exposed to a sudden reversal of this borrowing.

When the global financial crisis hit, there was a sudden stop in financing from international markets and the central bank intervened to prevent the exchange rate from depreciating. This, in turn, put pressure on Sri Lanka’s international currency reserves, which still remain at very low levels.

Protection for poor, assisting the most vulnerable are key goals

India and the IMF

India joined the IMF on December 27, 1945, as one of the IMF's original members.

India’s current quota in the IMF is SDR (Special Drawing Rights) 5,821.5 million, making it the 13th largest quota holding country at IMF and giving it shareholdings of 2.44%.

India (together with its constituency countries Viz. Bangladesh, Bhutan and Sri Lanka) is ranked 17th in the list of 24 constituencies at the Executive Board.

India subscribes to the IMF's Special Data Dissemination Standard. Countries belonging to this group make a commitment to observe the standard and to provide information about their data and data dissemination practices.

Benefits to India from International Monetary Fund’s Membership: Financial Assistance While India has not been a frequent user of IMF

resources, IMF credit has been instrumental in helping India respond to emerging balance of payments problems on two occasions.

In 1981-82, India borrowed SDR 3.9 billion under an Extended Fund Facility, the largest arrangement in IMF history at the time.

In 1991-93, India borrowed a total of SDR 2.2 billion under two stand by arrangements, and in 1991 it borrowed SDR 1.4 billion under the Compensatory Financing Facility.

Technical Assistance◦In recent years, the Fund has provided India with technical assistance in a number of areas, including the development of the government securities market, foreign exchange market reform, public expenditure management, tax and customs administration◦Since 1981 the IMF Institute has provided training to Indian officials in national accounts, tax administration, balance of payments compilation, monetary policy, and other areas.

International regulation by IMF in the field of money has certainly contributed towards expansion of international trade and thus prosperity. India has, to that extent, benefitted from these fruitful results.

Aid from World Bank and Other International Financial Agencies. ◦ India wanted large foreign capital for her various

river projects, land reclamation schemes and for the development communications. Since private foreign capital was not forthcoming, the only practicable method of obtaining the necessary capital was to borrow from the International Bank for Reconstruction and Development (i.e. World Bank).

Case-1991 Indian economic crisis

By 1985, India had started having balance of payments problems. By the end of 1990, it was in a serious economic crisis. The government was close to default, its central bank had refused new credit and foreign exchange reserves had been reduced to such a point that India could barely finance three weeks’ worth of imports which led the Indian government to airlift national gold reserves as a pledge to the International Monetary Fund (IMF) in exchange for a loan to cover balance of payment debts.[1]

The economic crisis was primarily due to the large and growing fiscal imbalances over the 1980s. During the mid-eighties, India started having balance of payments problems. Precipitated by the Gulf War, India’s oil import bill swelled, exports slumped, credit dried up, and investors took their money out.

Government of India's immediate response was to secure an emergency loan of $2.2 billion from the International Monetary Fund by pledging 67 tons of India's gold reserves as collateral.

The Reserve Bank of India had to airlift 47 tons of gold to the Bank of England and 20 tons of gold to the Union Bank of Switzerland to raise $600 million

Result A program of economic policy reform 1991 has

since been put in place which has yielded very satisfactory results so far.

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