International Monetary Fund

Group 1- Sec BPresented by Aabhas RastogiGaurav Tripathi

HistoryPost 1930 Era was impacted by The Great Depression & World War II.

• During the Great Depression the countries were trying to shore up their falling economies by –

1. sharply raising barriers to foreign trade2. devaluing their currencies to compete against each other for export

markets3. curtailing their citizens' freedom to hold foreign exchange

• Countries affected by World War II desperately required• Economic Reconstruction (for well developed nations)• Economic Development (for less developed nations)

• World trade declined sharply (see chart below), and employment and living standards plummeted in many countries. • This breakdown in international monetary cooperation led the IMF's

founders to plan an institution charged with overseeing the international monetary system—the system of exchange rates and international payments that enables countries and their citizens to buy goods and services from each other.

History (contd..)The Bretton Woods agreement

• The IMF was conceived in July 1944,

• Representatives of 45 countries met in the town of Bretton Woods, New Hampshire, in the Northeastern United States, agreed on a framework for international economic cooperation.

• The IMF came into formal existence in December 1945, when its first 29 member countries signed its Articles of Agreement

• It began operations on March 1, 1947. Later that year, France became the first country to borrow from the IMF.

• Par value system (Bretton Woods system)• Initially, member countries agreed to peg their currencies in US Dollar

terms and for US, the value of Dollar in terms of Gold-to correct Fundamental Disequilibrium.

• Keeping track of the global economy and the economies of member countriesSURVEILLANCE

• Lending to countries with balance of payments difficulties

• Financial assistance to countries to meet International Payments

LENDING

• To assist mainly low- and middle-income countries in effectively managing their economies

TECHNICAL ASSISTANCE

Function of IMF

Greatest Loan is on : Mexico and GreeceHighest Loan as % of GDP: Liberia (8.5%) and Iceland (7.4%)Greatest amount to be Paid Back by: Iceland and Ireland

Fast Facts• Membership: 187 countries

• Headquarters: Washington, D.C.

• Executive Board: 24 Directors representing countries or groups of countries

• Staff: Approximately 2,470 from 141 countries

• Total Quotas : US$ 383 billion

• Biggest Borrowers : Greece , Portugal ,Ireland (as of 18/08/2011)

• The members of the IMF are 186 members of the UN (all UN member states but 7) and Republic of Kosovo.

• Apart from Cuba, the other six member states of the UN not belonging to the IMF are: North Korea, Andorra, Monaco, Liechtenstein, Nauru and South Sudan.

• All member states participate directly in the IMF.

• 24-member executive board-

Five executive directors are appointed by the five members with the largest quotas,

Nineteen executive directors are elected by the remaining members.

all members appoint a Governor to the IMF's board of governors.

• The powers of the other countries are represented on a

proportional scale to their population and economic rank in the world.

• The Executive board are the general owners of the IMF and can control major decisions.

• All members of the IMF are also International Bank for Reconstruction and Development (IBRD) members and vice versa

Brief Analysis of Functionality, Importance & Role

•Where does IMF get the money from?

• Most resources for IMF loans are provided by member countries, primarily through their payment of quotas.

• Since early 2009, the IMF has signed a number of new bilateral, Multilateral loan and note purchase agreements to bolster its capacity to support member countries during the global economic crisis.

• Concessional lending and debt relief for low-income countries are

financed through separate contribution-based trust funds.

MANAGEMENT OF FUNDS

•The IMF’s gold holdings amount to about 90.5 million troy ounces (2,814.1 metric tons), making the IMF the third largest official holder of gold in the world.

•The limited sales program covering 403.3 metric tons of gold, to safeguard from market disruption, and Gold sales were at market prices.

•Profits on the sale will fund an endowment as part of the IMF’s new income model, agreed to put the institution’s finances on a sustainable footing.

• The IMF can use its quota-funded holdings of currencies of financially strong economies to finance lending

Special Drawing Rights (SDRs)

•The Special Drawing Right (SDR) is an international reserve asset, created by the IMF in 1969 to supplement the existing official reserves of member countries.

•The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways:

1. Through the arrangement of voluntary exchanges between members2. By the IMF designating members with strong external positions to

purchase SDRs from members with weak external positions.

• SDR also serves as the unit of account of the IMF and some other international organizations.

Bailouts & CriticismIMF has been bailing out several countries from crisis situations over a period of time. However there has been some criticism too regarding its policies. In this section we see the bailouts and the associated criticism.

ASIAN CRISIS •Financial crisis broke out in Asia in 1997

-large declines in currencies, stock markets, and other asset prices

•Affected emerging markets outside of Asia

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

ACTIONS TAKEN BY IMF• Temporary tightening of monetary policy• Correct the weaknesses in the financial system• Remove features of the economy that were impediments to growth• Assist in reopening lines of external financing• Maintaining a sound fiscal policy

Failures of IMFAsian Financial Crisis

• Thailand, Indonesia, South Korea

• The IMF insisted on fiscal restraint – lower spending, higher taxes and privatisation.

• Contractionary fiscal policy caused the economic downturn to exacerbate and the economy plunged into recession.

• Bankruptcies increased

• confidence evaporated causing a flight of investors

Greek Crisis

• Conditions of Loans by IMF

• Austerity Package imposed by IMF

• Reducing government borrowing

• Higher taxes

• lower spending

• To reduce deficit spending

• Higher interest rates to stabilise the currency.

IMF Sank Argentina

• Fixed rate of 1 peso for 1 U.S. dollar (overvalued) , Instructed by IMF.

• country's exports too expensive, and its imports artificially cheap.

• record $400 billion trade deficit.

• Need for large reserves of dollars

• IMF's role arranged massive amounts of loans $40 billion.

Failures of IMF..

“Bailout” Conditionalities on Pakistan

• IMF approved US$7.6 billion loan to Pakistan in 2008

• Conditionalities included- Eliminating all Government subsidies. Slashing government spending Raising Taxes

• Impact • GDP Declined from 7.4 % to 4.2% in 2008-09.

Economists claim that conditionalities (economic performance targets established as a precondition for IMF loans) retard social stability and hence inhibit the stated goals of the IMF.

Problem Of Governance

IMF is driven by collective will of G-7 countries

It is dominated not merely by wealthy, industrialized nations, but also by commercial and financial interest of these nations.

• Capital Market Liberalization

IMF pressures countries that petition for IMF loans to open their markets to outside capital investment.

Investors invest huge sums in a country only to pull those investments at a moment’s notice, causing acute economic crisis.

Destabilizes the economy.

The CRITICISM

Relevance in Today’s time

• Certain policies of IMF are criticized ; however there are more examples of cases of success than failure and clearly the existence of a global economic body is desired.

• The focus should be to make crisis resolution more country specific and keeping in mind the various economic circumstances especially for developing countries.

• The surveillance of trade exchange rates and monitoring of related policies is needed especially since Asian economies like that of China’s and India are growing strong and thus IMF plays an important role keeping a track.

•With the kind of disasters and adversaries being faced by several countries, a body to help such economies out is required and that is where IMF comes into spot light.

References• http://www.imf.org/external/about/ourwork.htm• http://www.imf.org/external/np/exr/facts/sdr.htm• http://en.wikipedia.org/wiki/International_Monetary_Fund• http://ucatlas.ucsc.edu/sap/history.php• http://www.buzzle.com/articles/history-of-imf-international-monetary-fund.h

tml• http://www.imf.org/external/np/exr/chron/chron.asp