International Financial System IMF

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International Monetary Fundand International Financial System

An Exposition

Dr. Sukumar Nandi

Indian Institute of Management Lucknow


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6/29/2012 International Financial System 2

Purposes of the IMF and The World Bank

TheInternational Monetary Fund(IMF) maintainsinternational monetary cooperation among its members

The World Bankaids in the development and

reconstruction of it members


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IMF Briefing

Exchange rate stability, balance of paymentsdisequilibrium, and growth of international trade

The IMF describes itself as "an organization of 187

countries (as of July 2010), working to foster globalmonetary cooperation, secure financial stability,facilitate international trade, promote highemployment and sustainable economic growth, andreduce poverty".

By sharing economic policies the system of buyingand selling currencies would be stable


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World Bank Briefing

Made up of 5 different organizations

International Bank for Reconstruction andDevelopment (IBRD)

International Development Association (IDA)

International Finance Corporation (IFC)

Multilateral Investment Guarantee Agency(MIGA)

International Center for the Settlement ofInvestment Disputes (ICSID)


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History behind the IMF and World Bank

After the Great Depression in the 1930s there wasa need for an organization to create a system forexchange rate stability

Uncertainty of the value of paper money (no

longer used the gold standard) Countries faced difficulties in trade related

monetary payments in the absence of stableand well-accepted international currency


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The Interwar Years, 1918-1939

With the eruption of WWI in 1914, the goldstandard was suspended.

The interwar years were marked by severeeconomic instability.

The reparation payments from Germany led toepisodes of hyperinflation in Europe.

The German Hyperinflation

Germanys price index rose from a level of 262in January 1919 [ pre-war =100] to a level of126,160,000,000,000 in December 1923 (afactor of 481.5 billion).


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Bretton Woods Conference

Countries economies affected by WWII

need for reconstruction in well-developed nations need for development in the lesser developed nations

1940s proposals for monetary system by Harry Dexter White(U.S.) and John Keynes (UK)

establish the value of each currency eliminate restrictions and certain practices on trade assistance for post-war reconstruction

Bretton Woods Conference, New Hampshire, July 1944 with

delegates of 44 nations

final negotiations of the IMF and the World Bank tookplace


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International Monetary Fund

IMF

The International Monetary Fund was devised in July

1944 originally with 45 members and came intoexistence in December 1945 when 29 countries signedthe agreement, with a goal to stabilize exchange ratesand assist the reconstruction of the world's internationalpayment system.


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IMF

Goals and Structure of the IMF

The IMF agreement tried to incorporate sufficientflexibility to allow countries to attain externalbalance without sacrificing internal objectives or

fixed exchange rates. Two major features of the IMF Articles of Agreement

helped promote this flexibility in externaladjustment:

IMF lending facilities

IMF conditionality is the name for thesurveillance over the policies of membercounties who are heavy borrowers of Fundresources.

Adjustable parities


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Purposes of the IMF

Articles of Agreement of the IMF

i) promote international monetary cooperation

ii) expansion and balanced growth ofinternational trade

iii) promote exchange rate stability

iv) help establish multilateral system ofpayments and eliminate foreign exchangerestrictions

v) make resources of the Fund available tomembers when in need

vi) Shorten the duration and lessen the degreeof disequilibrium in international balancesof payments


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Wherethe IMF gets its money

Most comes from the quota subscriptions

the money each member contributes when joiningthe IMF

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

banks throughout the world


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Special Drawing Right (SDRs)

SDR is an invented currency [ Robert Triffin,suggestions to augment world liquidity ]

its value is based on the worth of the worlds five

major currenciesUS Dollar, French Franc, Pound Sterling, JapaneseYen, Deutsche Mark [ now four]

Countries add SDRs to their holdings of foreign

currencies keep available for need of payments that must be

made in foreign exchange


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Organization of IMF

Board of Governors

Each member country appoints one Governorand and Alternate Governor

Executive Board

24 Executive Directors which arerepresentatives for the members

Managing Director

the chairman of the Executive Board


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Governors spend most of their time dealing withtheir own countries

report their countries plans to theirrepresentatives

only meet with entire IMF board once a year

Executive Board oversees the economic policiesof the members

holds meetings three times a week

Managing Director heads the IMF staff of about2,600 people

traditionally held by a European


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Power among the members

Size of the quotas determine voting power

IMF decides on the quota for each member

richer countries have larger quota

US having largest economy provides 18% of thetotal quota (about $35 billion)

US has largest voting power (18% or 26,5000)


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Members with largest quotas


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More on quotas

Quotas are reviewed every 5 years by the IMF

Quotas also determine how much each member canborrow from the IMF when in need of aid

On April 28, 2008, the Board of Governors of theInternational Monetary Fund (IMF) adopted far-reachingreforms of the institution's governance structure (IMFResolution 63-2).
http://www.imf.org/external/np/sec/pr/2008/pr0893.htmhttp://www.imf.org/external/np/sec/pr/2008/pr0893.htm


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IMF Resolution 63-2, 2008

The Resolution proposes an amendment of the IMF'sArticles of Agreement, which will enhance the voice andparticipation of low-income countries through(i) a tripling of basic votesthe first such increase sincethe IMF's creation in 1944,

(ii) a mechanism that will keep constant the ratio ofbasic votes to total voting power in the IMF goingforward and

(iii) provisions enabling each of the two Executive

Directors representing African constituencies to appointan additional Alternate Director.
http://www.imf.org/external/pubs/ft/aa/index.htmhttp://www.imf.org/external/pubs/ft/aa/index.htmhttp://www.imf.org/external/pubs/ft/aa/index.htm


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IMF Quota position in 2010 [ percent of total]

United States 17.071Japan 6.118Germany 5.978France 4.935United Kingdom 4.935

China 6/ 3.718Italy 3.242Saudi Arabia 3.210Canada 2.927Russia 2.732

India 1.911Netherlands 2.372Belgium 2.116Brazil 1.395Spain 1.401


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When is a country in need ?

A country in severe balance of payments adjustment forimport-export gap and/or servicing foreign debt

[ e.g. Mexico in 1982, India in 1989]

A country that had not taken in enough foreign currencyto pay the other countries for what they have bought

spends more money than it takes in

IMF will lend foreign exchange to that member hoping to stabilize its currency which will strengthen

its trade


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How much money a member can borrow from theIMF

25% of the countrys quota may be used

If this is not sufficient, then members can borrowup to 3 times the amount of its quota

present plans for reform to Executive Directors

If these plans are sufficient for the ExecutiveDirectors, the IMF grants the member a loan


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World Bank

Made up of 5 different organizations

International Bank for Reconstruction andDevelopment (IBRD)

International Development Association (IDA)

International Finance Corporation (IFC)

Multilateral Investment Guarantee Agency(MIGA)

International Center for the Settlement ofInvestment Disputes (ICSID)


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International Bank for Reconstruction andDevelopment

Founded in 1944 at the Bretton Woods Conference

to finance the reconstruction of countries affectedby WWII

To help with development of impoverished nations

World Banks central institution 181 member countries

Lends to countries with relatively high per capitaincomes

Money is used for:

development projects (i.e. highways, schools) programs to help governments change the way they

manage their economies

Provides technical assistance in projects


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International Development Association

Established in 1960

assist the poorest developing countries

lends to countries with annual per capita incomes of

about $800 or less Its loans are knows as credits

161 members


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International Finance Corporation

Established in 1956, IFC is the largest multilateral source ofloan and equity financing for private sector projects in thedeveloping world. It promotes sustainable private sectordevelopment primarily by:

Financing private sector projects and companies located inthe developing world.

Established also to reduce poverty and improvepeople's lives in an environmentally and sociallyresponsible manner ( 181 UN members and Kosovo)

finances private sector investments, mobilizes capitalin international financial markets, and providestechnical assistance and advice to governments andbusinesses

provides both loan and equity finance for businessventures in developing countries


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Multilateral Investment Guarantee Agency

Established in 1988

helps developing countries attract foreign investment

provides investment marketing services and legal

advisory services to its members

152 members


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International Center for the Settlement ofInvestment Disputes

Established in 1966 to promote increased flow ofinternational investment

Provides facilities for the reconciliation of disputes

between governments and foreign investors

131 members


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Where the IBRD gets its money

through the sale of its bonds in internationalcapital markets

Members subscriptions to its capital stock

only 10% of the subscriptions is used by theBank

Callable Capital

portion of the subscriptions that the Bankborrows

the Bank charges a rate of interest rate on itsloans to pay this back


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Where the IDA gets its money

Mostly from governments voluntary contributions

Replenishments

additional contributions which are needed every few

years


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Differences between the IBRD and the IDA

IBRD charges an interest rate on loans

loans must be repaid within 15-20 years with a5 year grace period

IDA does not charge an interest rate, only a 0.75%service charge

repayment period is 30-45 years with a 10 yeargrace period


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Asian Crisis

Financial crisis broke out in Asia in 1997

large declines in currencies, stock markets, andother asset prices

It affected emerging markets outside of Asia

IMF arranged programs of economic stabilization andreform with Indonesia, Korea, and Thailand


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IMFs Actions

Temporary tightening of monetary policy

correct the weaknesses in the financial system

remove features of the economy that wereimpediments to growth

assist in reopening lines of external financing

maintaining a sound fiscal policy

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