9) impact of imf on economic stability of developing countries (15th _4)

8/7/2019 9) Impact of IMF on economic stability of developing countries (15th _4)

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Presented by:

Group No. 03

Neerav Agarwal (002) Harshit Anjaria (007)Saumya Sethi (048) Bhavik Shah (050)

Vishal Shah (051) Divya Singh (054)


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International Monetary Fundy Conceive in 19 at t e retton Woods Conference

y T en re resented y 5 overnments

y 1 7 members currently

y eadquarters: Was ington, C

SIMSR 2

T e IMF works tofoster global monetarycooperation, secure financial stability,facilitate

international trade,promote igh employmentand sustainable economicgrowth, and reduce

poverty around the world.

3/22/2011


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Membersy 187 countries Former Yugoslav republic ofKosovo became

the latest member in June 200 .

y

Each IMF member is assigned a Quota.y he quota delineates :

Subscriptions

Voting power

Access to Financing SDR allocations

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Objectivesy Provide a forum for cooperation on international monetary

problems .

y

Facilitate the growth ofinternational trade, thuspromoting job creation, economic growth, and povertyreduction.

y Promote exchange rate stability and an open system ofinternational payments.

y Lend countries foreign exchange when needed, on atemporary basis and under adequate safeguards, to helpthem address balance ofpayments problems.

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Role of IMF

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Surveillance Lendingechnical

Assistance


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Surveillance

y Three types: Country surveillance Region surveillance and

Global surveillancey Monitors the financial and economic policies ofthe systemy Keeps the track ofeconomic and monetary development of

member countriesy Advice on macroeconomic and financial policyy Assessment ofrisks and vulnerabilities stemming from

large and volatile capital inflowsy Look towards Institutional and Structural issues after

effects ofrecession

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Technical Assistancey Assist low and middle-income managed countries in

effectively managing their economic policies and financialaffairs

y Provides practical guidance and training on how to

upgrade institutions and design appropriatemacroeconomic,financial, and structural policiesy Advice to countries that have had to reestablish

government institutions following severe civil unrest orwar

y Assistance in mainlyfour areas: Monetary and financial policies Fiscal Policy and management Analysis ofStatistical data gathered Economic and Financial legislation

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Lendingy Loans are meant to help member countries tackle balance

ofpayments problems, stabilize their economies, andrestore sustainable economic growth

yIt DOESNTfinance projects

y Lending to preserve financial stabilityy Helps a member country in avoiding economic adjustment

and sovereign defaulty It will act as a catalyst and will help member countries in

getting investments in their countriesy It can also help in preventing crisis

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Lending Facilities

3/22/2011 SIMSR


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Low-Income Countries-ConcessionalNew Poverty Reduction and Growth Trust ,has threenew lending windows, all under highlyconcessional terms.

The Extended Credit Facility (ECF):y Provides sustained engagement in case ofmedium-term

balance ofpayments needs;y Offers more flexibility than before on program extensions,

the timing ofstructural reforms, and formal povertyreduction strategy document requirements.y Allows significantly higher access to financing and offers

more concessional terms than previously.


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Low-Income Countries-ConcessionalThe Standby Credit Facility (SCF)y Provides flexible support to low-income countries with

short-term financing and adjustment needs caused bydomestic or external shocks, or policy slippages;

y Targets countries that need help from time to timey On a precautionary basis to provide insurance.

The Rapid Credit Facility (RCF)y

Provides rapid financial support in a single, up-front payoutfor low-income countries facing urgent financing needs.y Provides flexible assistance without program-based

conditionality.


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Middle Income Countries

(Non-Concessional) (SBA)Stand-By Arrangementsy To help countries address short-term balance ofpayments

problemsy To respond quickly to countries external financing needsy To support policies designed to help them emerge from

crisis and restore sustainable growth.

1. Eligibility- All member countries facing externalfinancing needs

2. Duration- 12-24 months on average (36 is max)


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(Non-Concessional) (SBA)3. Borrowing Terms

Normal Access

Exceptional Access

Front-Loaded Access

Rapid Access

HAPA- igh access precautionary arrangements is a typeofinsurance facility against very large financing needs. Itis used hen countries do not intend to dra on approvedamounts,but retain the option to do so should they needit.


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(Non-Concessional) (SBA)4. Lending terms

1. Repayment :Repayment ofborrowed resources under the SBAare due within 3-5 years ofdisbursement.

2. Lending rate :The lending rate is tied to the IMFs market-related interest rate, known as the basic rate ofcharge, whichis itselflinked to the Special Drawing Rights (SDR) interestrate.

3. Commitment Fee :Resources committed under all SBAs aresubject to a commitment fee levied at the beginning ofeach 12month period on amounts that could be drawn in the period

4. Service Charge :A service charge of50 basis points is appliedon each amount drawn.


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Countries with Strong Fundamental Policies

1. Countries have the flexibilityto draw at any time withina pre-specified window on the credit line.

2. Works on Renewable credit line, which at the countrysdiscretion could initially be for either one- or two-yearswith a review ofeligibility after the first year.

3. Ifa country decided to draw on the credit line, repaymentshould take place over a 3 to 5 year period.

4. There is no cap on access to IMF resources, and theneed for resources will be assessed on a case-by-case

basis.

Flexible Credit Line- This was designed to meet the increaseddemand for crisis-prevention and crisis-mitigation lending fromcountries with robust policy frameworks and very strong trackrecords in economic performance.


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1. Bridges the gap between the FCL and the HAPA2. The PCL combines a qualification process (similar to that

for the FCL) with focused ex-post conditionality aimed ataddressing vulnerabilities identified during qualification.

3.T

he PCL works as a renewable credit line, with durationbetween one and two years.

P

recautionary Credit Line (P

CL)-I

t was designed to meet theneeds of countries that, despite having sound policies andfundamentals, have some remaining vulnerabilities that precludethem from using the Flexible Credit Line.


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Emergency Assistance

Emergency Natural Disaster Assistance (1962)

a. For BoP needs related to natural disaster.

b. 25 per cent ofquota, may be exceeded in exceptionalcircumstances.

Emergency Post-Conflict Assistance (1995)

a. For BoP needs related to the aftermath of civil unrest,political turmoil or international armed conflict.

b. 25 per cent ofquota, annually but 50 per cent ofquotaover three years.


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3/22/2011 SIMSR 18

Some Examples ofEmergency Assistance:

a. Pakistan received an assistance of$ 451 millionfrom IMF for the devastating floods of2010.

b. Lebanon received Post-conflict EmergencyAssistance of$ 37.6 million in 2008.

Emergency Assistance


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The Reasons For 1991 Crisis

y Large & growing fiscal imbalances over the 1 80s

y High oil imports due to the GulfWar, decrease in exports,

credits drying up & investors taking their money outy High political instability

y Foreign exchange reserves could finance 3 weeks ofimports

y Gross fiscal deficit ofthe govt. increased from % ofGDP

in 1 80-81 to 12.7% in 1 0- 1y India had to increase its foreign reserves by taking a loan

from IMF of$2.2 billion


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Lending by IMF & economic reforms

y India got the IMF lending in progressive stages

y India undertook currency devaluation & fiscal reformspackage

y Main points ofthe fiscal reforms were: abolition ofindustrial and import licensing; removal ofinvestment

caps on large conglomerates; removal ofpublic sectorexclusivity in all but six industries; access to foreigntechnology; and cuts in import duties


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Consequences

y Poverty levels fell from 37% in 1 0- 1 to 26% in 1 -00

y Employment levels increased for urban India during 1 1-2 as compared to 1 0- 1. Rural India showed a decline

y Inflation levels in 1 0 were 13.87% which decreased to11.78% in 1 2

y GDP growth rate in 1 1 was 2.13% & it increased to 4.38%in 1 2


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Financial Crisis 2008-09y Pakistan suffering from inflation, trade deficit, balance

ofpayment,foreign exchange reserves,circular debt,

price shocks (oil and food) poor performance ofbanking sector and Karachi stock exchange politicalinstability

y The war on terror has been a hanging sword overhead

y

GDP growth rate became worse since 2004-05 from.0% to 2.0%in 2008-0


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y

In spite ofeffective policy actions taken by State BankofPakistan , issues such as

sharp depreciation ofexchange rate,

depletion offoreign exchange reserves of$5 billion till

November 2008, foreign direct investment inflows also fell more than 20

percent in calendar year 200

inflation rate ofmore than 25%(jumping from 7.7% in2007 to 20.3% in 2008)

increase in import bill by 35.2% created immensechallenges for the government and State Bank ofPakistan.


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IMF: Solution or More Pain?y On 24 November 2008, the executive board ofthe IMF

agreed to bail Pakistan out by agreeing to a stand-by

arrangement (SBA) valued at $7.6 billiony The two conditions are

a cut in the budgetary shortage from around 7 percent toGDP of4.2 percent ofGDP

an increase in the taxation from 10 percent ofGDP to10.5 percent ofGDP


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Steps taken by Govt.y The government is taking fiscal measures such as

increase in general sales tax by 1%

y

Increase in efforts in tax collectiony Removal ofsubsidies on domestic petroleum products

y Higher electricity tariffs and effective measures tosolve the issue ofcircular debt


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Consequencesy GDP was at 4.1 % in 200 -10 (1.1% last fiscal year)y Inflation was severe but came down to11.5% from last years

22%y

Current account deficit is expected to decline to below3%ofGDPy External current account deficit was contained to 5.6 % of

GDP (US dollars .3 billion) in fiscal 2008-0 ,from a highof8.3 % ofGDP in 2007-08

y

Foreign Exchange Reserves have been rebuilt to nearlydollars 16 billion,from their low ofunder dollar 6 billion inOctober 2008

y International credit rating agencies upgraded Pakistanfrom CCC plus to B Minus by S&P


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9) impact of imf on economic stability of developing countries (15th _4)

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