INTERNATIONAL FINANCIAL SYSTEM (INTERNATIONAL MONETARY FUND)

INRODUCTION The term international financial system implies a

mechanism of interrelated parts, functioning for some clearly defined goals according to known laws. The major attributes of international financial system are knowledge, certainity and predictability.

The concept of international financial system arises mainly from two sources-1) Structure of wider relationship- within this structure

international financial system is concerned with-2) Flows of current and capital funds3) Relationships between national currencies4) Monetary systems5) Central bank2. parallelism- this system is the apparent parallelism

between money’s role in a domestic closed economy and its role in world of many countries. There is a parallelism in the institutions also and their relations in both national and international systems. This parallelism is, however, limited.

ELEMENTS OF INTERNATIONAL FINANCIAL SYSTEMS INTERNATIONAL MONEY: a certain form of internationally

acceptable money which is to be used for clearing residual payments, balances with other countries and for holding reserves to meet external defects.

Institutional arrangements: these can be in the form of international banking system, money market, foreign exchange markets.

Mechanism for distribution of international money: it should have a proper mechanism whereby the distribution of international money can be adjusted by acting upon the balance of payments.

Central power: this system should also include a central power to control the working of international financial arrangements.

HISTORICAL PERSPECTIVE

There are four period that correspond to four different international financial systems . These four different systems are:

1. International exchange standard

2. Gold exchange standard

3. Bretton woods system

4. Floating exchange rate

INTERNATIONAL GOLD STANDARD This period ended with the beginning of first world war,

although its beginning was not agreed upon by the scholars. By international gold standard is meant an international financial system where all participating countries have legally:

Defined the unit of account( rupee, dollar pound etc. monetary unit of the country ) in terms of gold.

Established a mechanism whereby their local currencies are kept equal in value to gold and to each other.

Fixed the external value of other currencies through the medium of gold

Their monetary authorities are willing to buy and sell gold at a fixed price in unlimited amounts.

Gold exchange standard With the cessation of the war and restoration of peace,

monetary authorities of all countries planned to revive the gold standard .but with paper currency having become popular in many countries it was thought that the gold standard of the past could not be revived. Instead , the gold exchange standard was prescribed at Geneva conference in 1920. The counties which had adopted gold exchange standard chose london , new york or paris to keep their reserves. They announced convertability of their domestic currrencies into pounds, dollars and francs and tries to secure excahange stability.

Bretton woods system The Bretton Woods system of monetary management established the

rules for commercial and financial relations among the world's major industrial states in the mid-20th century. The chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate by tying its currency to gold and the ability of the IMF to bridge temporary imbalances of payments. Also, there was a need to address the lack of cooperation among other countries and to prevent competitive devaluation of the currencies as well. Preparing to rebuild the international economic system while World War II was still raging, 730 delegates from all 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods, New Hampshire, United States, for the United Nations Monetary and Financial Conference, also known as the Bretton Woods Conference. Setting up a system of rules, institutions, and procedures to regulate the international monetary system, these accords established IMF AND IBRD.

FLOATING EXCHANGE RATE A floating exchange rate or fluctuating exchange

rate is a type of exchange-rate regime in which a currency's value is allowed to fluctuate in response to market mechanisms of the foreign-exchange markEt. A currency that uses a floating exchange rate is known as a floating currency. A floating currency is contrasted with a fixed currency.

INTERNATIONAL MONETARY FUND The International Monetary Fund (IMF) is

an international organization headquartered in Washington, D.C. in the United States, of 188 countries working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. Formed in 1944 at the Bretton Woods Conference, it came into formal existence in 1945 with 29 member countries and the goal of reconstructing the international payment system. Countries contribute funds to a pool through a quota system from which countries with payment imbalances can borrow. As of 2010, the fund had SDR476.8 billion, about US$755.7 billion at then-current exchange rates

OBJECTIVES OF THE IMF To promote international monetary cooperation through a

permanent institution which provides for consultation and collaboration on international monetary problems.

To determine the primary objectives of economic policy of all member countries

to establish and maintain currency convertibility by promoting exchange stability, maintaining orderly exchange arrangements among members.

To help in the widest extension of multilateral trade and payments

To shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members.

.

Functions of IMF The imf functions as a short term credit institution .

It provides a machinery for the orderly adjustment of exchange rates.

It is a sort of lending institution in foreign exchange

It provides a machinery for altering sometimes the par value of the currency of a member country

It also provides a machinery for international consultations .

The fund contributes to the promotion and maintenance of high levels of employment and to the development of productive resources of all member countries.

Structure of the fund Under the fund structure adopted at bretton woods,

there is a board of governors , there being a governor for every member country, appointed by the government concerned. Generally the representatives of the countries are their finance ministers. The board normally meets only annually and exercises its powers in the following matters:

Admission of new members

Revision of quotas

Election of directors etc..

Operations of the IMF Provisions relating to lending operations. : any

member country short of foreign currency may buy the required currency from the fund, paying for it with its own currency. For this purpose , the fund receives resources from member countries in the form of gold and specific quantities of the currencies of the individual member countries known as “quotas ”. The purpose of the fund is to make temporary and short term loans within 3 to 5 years.

Provisions relating to exchange stability AT the time of fund started functioning , members

countries were required to declare the par value of their currencies in terms of u.s dollars.

If at any time a member country feels that there is a “fundamental disequilibrium’’ in its balance of payments , it may propose a change in the par value of the currency i.e. its devaluation.

The fund has also laid down that the member countries should not adopt a system of multiple exchange rates.

It was also laid down that a member country should not purchase or sell gold internationally at prices other than those indicated by the par value.

Provisions relating to exchange control operations The fund allows the exchange controls and other

restrictions to be used at all times to control capital flights(The movement of money from one investment to another in search of greater stability or increased returns).

Exchange controls are permitted in the case of currencies which may be declared ‘scarce’ by the fund.

Provisions relating to the fund’s banking functions It collects the resources of the various central banks in

the same way in which a country’s central bank collects cash reserves of all its commercial banks and assist them in times of emergency

The fund cannot control the domestic and monetary policies of the member countries, it only seeks to maintain a multiple payment systems through an orderly adjustment of the exchange rates.

facilities The fund has developed a number of outlets for

lending. These are known as facilities and are the following:

Gold tranche

Second credit tranche

Third credit tranche

Fourth credit tranche standby arrangements

Extended facility

standby facility

Trust fund loan facility

Gold tranche= member’s gold subscription + credit extended by the member through the fund to other members.

Credit tranches- the drawing of the first credit tranche can be upto 25% according to the imf’s policy . the requests for drawing beyond first credit tranche requires substantial justification.

Standby facilities: under this , members are given assurance that following a review of country’s financial position, the members can purchase from fund the fund, the currencies of other members, upto an agreed amount and during a stated period.

Trust fund loan facility : the trust funds loans are made by the fund out of the profits it has made by its gold rate operations.

Extended facility: under it, the fund assists those countries whose economies suffer from balance of payments difficulties resulting from structural imbalances in production, trade , prices etc….

Special drawing rights Special drawing rights (SDR) are supplementary foreign

exchange reserve assets defined and maintained by the International Monetary Fund (IMF). Their value is based on a basket of key international currencies reviewed by IMF every five years. Based on the latest review conducted on December 30, 2010, the XDR basket consists of the following four currencies: U.S. dollars ($) 41.9 percent (compared with 44 percent at the 2005 review), euro(€) 37.4 percent (compared with 34 percent at the 2005 review),pounds sterling (£) 11.3 percent (compared with 11 percent at the 2005 review), and the Japanese yen(¥) 9.4 percent (compared with 11 percent at the 2005 review).The weights assigned to each currency in the XDR basket are adjusted to take into account their current prominence in terms of international trade and national foreign exchange reserves.

allocation Special drawing rights are allocated to member

countries by the IMF. A country's IMF quota, the maximum amount of financial resources that it is obligated to contribute to the fund, determines its allotment of XDRs. Any new allocations must be voted on in the XDR Department of the IMF and pass with an 85% majority. All IMF member countries are represented in the XDR Department, but this is not a one country, one vote system; voting power is determined by a member country's IMF quota. For example, the United States has 16.7% of the vote as of March 2, 2011

Role of imf in the growth of developing countries.

The fund has already been providing financial assistance to its members in past but now its activity is substantially widened to meet the challenges.

Since 1964, the fund has organised a fiscal affairs dept. whose officers member countries on matters of tax policy, tax systems etc.

The fund also has organised the central banking advisory service to provide technical advice to newly developing countries.

To solve the current international liquidity problem, the imf has succeeded in establishing the sdr scheme

Achievements of imf Exchange rate stability : the primary goal of the fund was to

promote stability in exchange rates. The measures of exchange stability the world has witnessed in the imf era is remarkably superior to what was seen during the inter-war period or gold standard regime.

Export consultations and guidance : the imf has also served as an expert institution for consultations and guidance in international monetary matters.

Multilateral system of payments: the fund has been instrumental in ensuring steady progress in the establishment of a multilateral system of payments in respect current transactions.

Liberal credit policy : lately the fund has changed its attitude of a conservative credit policy by accepting a more liberal credit policy.

Reconstruction of European countries: the fund has helped a lot in the rehabilitation of war devastated European countries.

The fund has been particularly interested in the newly developing countries of the world and has been liberally assisting them to maintain a healthy balance of payments and monetary stability at home

Shortcomings of the imf The fund’s choice of the par values in terms of gold or u.s. dollar

was ill advised; since the original members fixed their exchange rates at a time when over valuation of currencies was most common.

The fund has failed in its main objective of exchange stability. It succeeded till 1971 thereafter it became variable once again.

The fund has failed to prevent dollar shortages. The fund has also been blamed for granting purchasing rights to

certain members without taking into account their credit worthiness…

The fund also has failed to bring stability in the process of gold despite many efforts made by it.

Critics say that the imf is a fund of some rich countries. It works at he behest of rich countries like USA…..

CONCLUSION Despites its various shortcomings, the fund has

achieved striking success in the field of international monetary cooperation. If it has not proved more successful than it did, it is because of the various inherent difficulties faced by the fund in solving the various problems.

THANK YOU