imf overview

1. Role and Place of the International Monetary Fund

2. Principle of Conditioning and Programs of Economic Stabilization: Basic Characteristics and Most Frequent Criticisms

3. Role of the IMF in Solving Some of the Important Problems of the International Community in the Last Two Decades

4. Introducing Improvements into the Work of the IMF

CONTENTS AND PURPOSE

purpose:

present the IMF and basic logic of its activities

1. Role and Place of the International

Monetary Fund

Establishment, Goals and Membership

basic goals of founding the IMF:

establish an international monetary system that would promote

international trade, be based on stable exchange rates and ensure

the needed international liquidity

explicitly expressed tendency of the USA for the new

institution to have a paternalistic role and/or the tendency

to introduce the principle of conditioning into its

administration

Quotas

quota should represent economic power of a country

importance of quotas:

determination of the voting power of a country and funds a country can potentially borrow from the IMF

calculation of the voting power:

principle of the equality of countries

principle of economic power

occasional revisions of quotas:

in principle every 5 years

division of quotas among member countries principle of proportionality and principle of selectivity

payment of quotas:

25 per cent in SDR or any other convertible currency, remaining 75 per cent in its national currency

http://www.imf.org/external/np/sec/memdir/members.htm

Organization

Board of Governors:

the most important body of the IMF, each member country has its

representative

usually meets annually, competent for accepting the most

important decisions for the functioning of the institution

Board of Directors:

operatively manages the functioning of the IMF

24 executive directors who meet at lest twice a week

Organization

International Monetary and Financial Committee:

central bank governors/ministers of finance of the same 24

countries that have a representative in the Board of Executive

Directors

meets twice annually, but has no formal power of accepting

decisions

Director and his deputy:

named by the Board of Directors for the period of 5 years

Civil servants:

formally accountable for their work to the Director of the IMF and

not their country of origin

Sources of Financial Funds

quotas are the main and until the middle of 1960s the only

source of funds of the funds of the IMF

General Arrangement to Borrow (GAB) (1962):

arrangements in the form of credit lines with the governments

and/or central banks of 11 industrialized countries

New Arrangement to Borrow (NAB) (1998):

made with 24 governments and/or central banks of the member

countries

Financial Arrangements, Accessible to Member

Countries – April 1999

Financial Arrangements from General Account Resources:

gold or reserve tranche

first credit tranche – equivalent to 25 per cent of a country’s quota

higher credit tranches (three) – each of them is equivalent to 25 per

cent of a country’s quota:

program of economic stabilization

Extended Fund Facility (EFF)

Financial Arrangements, Accessible to Member

Countries – April 1999

Supplemental Reserve Facility/ Contingent Credit Lines

(SRF/CCL)

Compensatory and Contingency Financing Facility (CCFF)

Buffer Stock Financing Facility (BSFF)

Financial Arrangements from Other Resources:

Enhanced Structural Adjustment Facility (ESAF)

Restrictions of Access to IMF Funds by Financial

Arrangements

access criteria:

size of the balance-of-payments deficit and therefore the need for

its financing

program of the elimination of the balance-of-payments

disequilibrium

a country’s ability to repurchase its currency from the IMF and/or

its ability to service the debt

Size of Financing from the IMF

transfers of financial assets between the IMF and member countries and the size of the total outstanding credit provided by the IMF in 1990 - 1999 (in millions of SRD)

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

A. Total disbursements 5,3 6,8 5,9 5,9 5,9 11,2 12,3 5,6 19,9 22,4

B. Repurchases and

repayments 6,4 5,6 4,8 4,1 4,5 4,2 7,1 7,2 4,4 11,1

C. Net funds inflow from

the IMF (A – B) - 1,1 1,2 1,1 1,8 1,4 7,0 5,2 -1,6 15,5 11,3

D. Total outstanding

credit provided by the

IMF

24,4 25,6 26,7 28,5 29,9 36,8 42,0 40,5 56,0 67,2

Regular Activities of the IMF

until the collapse of the Bretton Woods monetary system in

1971:

“guardian” of the exchange rate stability:

approving bigger changes in par values of given currencies and

securing funds for financing the balance-of-payments deficits

now:

surveillance of the exchange rate policies of member countries

financial assistance to member countries

technical assistance

2. Principle of Conditioning and Programs of

Economic Stabilization: Basic Characteristics

and Most Frequent Criticisms

one of the disputed points at the Bretton Woods conference

operatively implemented in the beginning of 1952

stringency:

stringent use of the concept of conditioning

increasing the share of the IMF funds that member countries utilize

at the high rate of conditioning (assumes the existence of the

program of economic stabilization)

Institutional Basis of the Programs of Economic

Stabilization

most often a Stand-by arrangement, less often EFF and

ESAF

Stand-by Arrangement:

credit line

letter of intent - program of economic stabilization

high rate of conditioning of the utilized funds, depending on the

success of implementing the program of economic stabilization,

contained in the letter of intent

Goals of the Programs of Economic Stabilization

Article I of the Statute of the IMF :

economic growth, reducing unemployment, price stability and

balance-of-payments equilibrium

priority goal of the program of economic stabilization from the

point of view of the IMF is achieving a viable balance-of-payments

deficit, that can be financed with net capital inflow in the long run

Components of the Program of Economic

Stabilization

conditions for the program of economic stabilization:

change in exchange rate, change in interest rates and price policy

measures

monetary approach to balance-of-payments adjustments:

reducing aggregate demand to the level of available aggregate supply - demand-side policy measures

increasing aggregate supply to the level of existing aggregate demand – supply-side policy measures

Components of the Program of Economic

Stabilization

criteria for assessing success of implementing the program

of economic stabilization:

credit ceiling

devaluation/depreciation of the home currency

financial liberalization, especially liberalization of interest rates

Criticisms of the Programs of Economic

Stabilization

mainly by developing countries and countries in transition

principle of conditioning

size of the funds of the IMF and the ratio between the

funds approved at low and at high rate of conditioning

asymmetry of the balance-of-payments adjustment

declaration of causes for the balance-of-payments deficit

concept and short-term orientation of the programs of

economic stabilization

Criticisms of the Programs of Economic

Stabilization

effects of the programs of economic stabilization:

comparison of the economic situation during the program implementation

and prior to it

comparison of the results of the program with the goals

comparison of the results of the program with a hypothetical situation in

the country in the absence of the program of economic stabilization

results of empirical studies:

improvement in a country’s balance-of payments in a prevailing number of

cases

lower growth rates during the implementation of programs of economic

stabilization than prior to them

lower reduction in the rate of inflation than anticipated in the program in most

countries

income redistribution

IMF did not have an important influence on the formation and implementation of the economic policy of industrialized countries

as a rule, the IMF took over a leading role in forming solutions and answering to international community challenges and problems that affected either developing countries or countries in transition and the solution of which required engagement of public as well as private funds in industrialized countries

3. Role of the IMF in Solving Some of the

Important Problems of the International

Community in the Last Two Decades

IMF and the Developing Countries Debt Crisis in

the 1980s

after the debt crisis outbreak in 1982, the IMF took over

the role of the architect for the solution of the crisis

basic mechanism for the solution of the debt crisis:

repeatedly restructuring liabilities of the debtor countries towards

foreign commercial banks and creditor countries

important role also in both official programs for the

solution of the debt crisis:

Baker Program (1985)

Brady Program (1989)

IMF and the Inclusion of the Countries in

Transition into the World Economy

IMF, together with other international financial

institutions, especially the World Bank and EBRD, has a

crucial role in:

designing the macroeconomic policies that would lead these

countries through the transition from centrally planned to market

economies

securing financial funds, needed for financing their balance-of-

payments deficits:

Systemic Transformation Facility (STF) (1993)

The Role of the IMF in Solving Financial Crises of

Developing Countries/Countries in Transition in

the Second Half of the 1990s

active participation of the IMF in solving financial crises:

Mexico (1994), Asia (1997), Russia (1998), Brazil (1999)

not only the “architect” of the solution, also the main financier

formation of SRF and CCL

moral hazard?

4. Introducing Improvements into the

Work of the IMF

Early Warning System

unsuitability of the capital transfer data

General Data Dissemination System:

secure an integral and more timely insight into various kinds of statistical data on a given country to all participants in international financial community

Improved Surveillance of Economic Policies

trend of deepened analysis of the functioning of the

financial system and various structural reforms

more clear reports on the basis of Article IV consultations

Increased Pace of Securing Funds

better qualification for quick intervention

Increasing the Size of the Available Funds

strengthening activities in all areas in which the size of the

available funds can be increased:

agreement of the economically most important countries about a

big issue of SDR

further increases in the funds of the IMF by regular revisions of the

member countries quotas

imf overview

Economy & Finance