Role of Imf in Emerging Global Crisis

8/6/2019 Role of Imf in Emerging Global Crisis

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y The International Monetary Fund (IMF) is the intergovernmentalorganization that oversees the global financial system by following themacroeconomic policies of its member countries, in particular thosewith an impact on exchange rate and the balance of payments.

y

The IMF describes itself as "an organization of 187 countries (as of July2010), working to foster global monetary cooperation, secure financialstability, facilitate international trade, promote high employment andsustainable economic growth, and reduce poverty".


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y The depression weakened the industrial economy

y Increasing restrictions on imports

y Worse condition in world trade, output and

employmenty Devaluation in currencies

y Reduction in standard of living


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Objectives: ( in June 1944 met 44 allied powers)

Help remove the restriction on trade

Ensure free convertibility of currenciesMaintain stability of exchange rates

Gave birth to two institutions called Bretton woods twinsnamely

IMF-International monetary fundIBRD- International Bank for Reconstruction And

Development ( world bank)


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y

Consultation and collaboration on international monetaryproblems

y Maintenance of high level employment and real income

y Promote exchange stability and avoid competitive exchange

depreciationy Establish multilateral system of payments and eliminate

foreign exchange restrictions

y Give confidence to members through fund supplies

y shorten the disequilibria in balance of payments


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y Reviewing and monitoring global financial

developmentsy Lending hard currencies and reform policies to promote

sustainable growth

y Offering wide range of technical assistance and training

for government and central bank officialsyWorking with its member governments, international

organizations, regulatory bodies and private sector tostrengthen financial system

y Make assessment of member countries to identify actualand potential weakness

y Improve regulatory standards

y Preparation of reports

y Publishing information


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y Central office in Washington

yAutonomous body affiliated to UNO

y Highest authority- Board governors of each membercountries- also policy making bodies

y

Meets once a yearsy Day to day decision making executive board

y International monetary and financial committee- 24governors representing group of countries- meet twice a

year- discuss key policy issues of IMFyJoint committee of IMF & world bank called

development committee advises and reports togovernors on developmental issues concerningdeveloping countries


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y Staff in executive board are recruited under the leadership of

managing director and deputy managing directorrepresenting different regions of the world

y Of the 24 members, 8executive directors represent individualcountries like china, France, Germany, Japan, Russia, SaudiArabia, UK and USA and other 16 representing group of

countries. They meet once in three weeks. Take care ofconduct of business, changes in exchange rates,lending andappointment of managing directors.

y Executive directors meet on alternate days


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In the beginning 29 membercountries.

Today 186 membercountries.

Staff of about 2689 persons.

Two third are economists inthe developing countries.

Headquarters in WashingtonD.C.


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International organization

Oversees the global financial system

Stabilize international exchange rates and facilitate development

Offers highly leveraged loans mainly to poorer countries.

To create Framework for international economic cooperation

The statutory purposes of the IMF today are the same as when they wereformulated previously


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Monitoring economic & financial development policies.

Giving policy advice to its members.

Lending to member countries with balance of paymentsproblems &supporting adjustments & reform policies.

Providing the governments & the central bank of itsmember countries with technical assistance & training.


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17.6

6.5 6.25.1 5.1

3.36 3.3 3.02 3.02 2.8

(percent of total quotas)


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y Promote international monetary cooperation througha permanent institutiony Provides the machinery for consultation andy collaboration on international monetary problemsy

To facilitate the expansion and balanced growth ofinternational tradey To contribute to the promotion and maintenance of

high levels of employment and real income and to thedevelopment of the productive resources of all

members as primary objectives of economic policyy To promote exchange stabilityy To maintain orderly exchange arrangements among

members, and to avoid competitive exchange

depreciation


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y To assist in the establishment of a multilateralsystem of payments in respect of current

transactions between members and in theelimination of foreign exchange restrictions whichhamper the growth of world trade

y To give confidence to members by making thegeneral resources of the IMF temporarily availableto them under adequate safeguards

y this provides them with an opportunity to correctmaladjustments in their balance of paymentswithout resorting to measures destructive of national or international prosperity

y To shorten the duration and lessen the degree ofdisequilibrium in the international balances ofpayments of members.


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Surveillance (like a doctor)Gathering data and assessing economic policies ofcountries

Technical Assistance (like a teacher)Strengthening human skills and institutional capacity of

countries

Financial Assistance(like a banker

)Lending to countries to support reforms


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y Surveillance

y Surveillance over Members Economic Policies

y countries agree to pursue economic policies that are

consistent with the objectives of the IMF.

y The Articles of Agreement confer on the IMF the

legal authority to oversee compliance by members

with this obligation

y IMF is the only organization that has a mandate to

examine on a regular basis the economic

y circumstances of virtually every country in the

world.


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y Strengthening human skills and institutional capacityof countries

y Helps members in strengthening their policy formulation and implementation, and the legal,

y institutional, and market frameworks within whichthey operate.

y It also constitutes an important complement to IMFsurveillance and lending operations in member

countries.


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y Lending to countries to support reformsy Improving financial sector surveillance.

y Development of standards and codes of

y good practice.

y Enhancement of transparency in the IMF

y and its member countries.

y Involvement of the private sector in crisis resolution


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IMF is accountable to its member countries.

Board of Governors: one governor from each

member country. Meets once a year.

Day to day affairs are guided by the Executive

Board: 24 Executive Directors. Managing Directorof IMF is Chairman of Executive Board.


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International Monetaryand

Financial Committee

Board

of

Directors

Joint IMF WorldBank development

committee

Executive Board IndependentEvaluation Office

Managing Directors


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y Quota subscriptions generate most of the IMF'sfinancial resources.

y Each member country of the IMF is assigned a

quota, based broadly on its relative size in the worldeconomy.

y A member's quota determines its maximum financialcommitment to the IMF and its voting power, and hasa bearing on its access to IMF financing.


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y A new country is assigned an initial quota in the same range

as the quotas of existing members

y 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 )

y

For this purpose, GDP is measured as a blend of GDP basedon a market exchange rates (weight of 60 percent) and on PPP

exchange rates (40 percent).

y Quotas are denominated in Special Drawing Rights (SDRs)

y The formula also includes a compression factor that reduces

the dispersion in calculated quota shares across members.


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y The SDR is an international reserve asset, created by the

IMF in 1969 to supplement its member countries' official

reserves.

y Its value is based on a basket of four key international

currencies, and SDRs can be exchanged for freely usable

currencies.

y

With a general SDR allocation that took effect on August28 and a special allocation on September 9, 2009, the

amount ofSDRs increased from SDR 21.4 billion to SDR

204.1 billion (currently equivalent to about $324 billion).


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y The value of the SDR was initially defined as

equivalent to 0.888671 grams of fine gold.y the SDR was redefined as a basket of

currencies, today consisting of the euro, Japanese

yen, pound sterling, and U.S. dollar.

y The U.S. dollar-value of the SDR is posted daily on

the IMF's website.

y It is calculated as the sum of specific amounts of

the four currencies valued in U.S. dollars, on thebasis of exchange rates quoted at noon each day in

the London market.


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yA member country may request IMF financialassistance if it has a balance of payments needthat is, if it cannot find sufficient financing onaffordable terms to meet its net internationalpayments while maintaining adequate reservebuffers going forward.

yAn IMF loan provides a cushion that eases the

adjustment policies and reforms that a countrymust make to correct its balance of paymentsproblem and restore conditions for strongeconomic growth.


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y the IMF has developed various loan instruments, or

facilities, that are tailored to address the specific

circumstances of its diverse membership.

y IMF financial policies govern the modalities for the use

of its financial resources under existing IMF facilities.

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Role of Imf in Emerging Global Crisis

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