International Financial System

Prof. Medha Mehta

CURRENT NEWS
IMF
Multilateral Organsiations

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International Monetary System
 IMF
• It is an international organization created for the
purpose of standardizing global financial relations
and exchange rates
1. Promoting global monetary and exchange
stability.
2. Facilitating the expansion and balanced growth
of international trade.
3. Assisting in the establishment of a multilateral
system of payments for current transactions.
• Gold Standard
• Bretton Woods System (1944)
• Floating Exchange Rate (1971)
• The exchange rates established by the IMF allow
countries to better manage economic growth and trade
relations. These exchange rates are set in order to
prevent economic collapse
 History of the IMF
• The IMF has completely reshaped the global economy and
redefined the ways in which countries trade with and take
loans from other countries.
• UN conference in 1944, among the 44 attending countries,
before it was officially created in 1945
• These countries wanted to globally stabilize exchange rates
and financial communication between countries, especially
following the disastrous Great Depression and World War II.
• Goals included international cooperation and trade, the
reduction of poverty and financial crises, and economic
growth
• The IMF played a large role in the
economic restructuration of the post-World War II world.
 IMF today
• Currently, there are 188 member countries in the IMF, which is based out of
Washington, D.C.
• Each country or region is represented by a member on the Fund's Executive Board
and numerous staff members. The ratio of board members from each country is
based on the country's global financial position, so that the most powerful
countries in the global economy have the heaviest representation. The United
States has the highest voting power, followed by Asian countries such as Japan and
China and Western European countries such as Britain, Germany, France, and Italy.
• While the IMF sets standards for the global economy and monitors the financial
communications between countries, it also helps those countries in need by
lending them the money necessary to turn their economy around and rebuild their
financial structure. Countries contribute to a pool from which countries in need
can borrow as a short-term loan. The IMF also assists countries in developing
sustainable financial policies, provides economic advice, helps countries maximize
their financial effectiveness, and works to help developing countries stabilize and
sustain themselves in the global economy.
 Role of IMF
• Increasing international monetary cooperation
• Promoting the growth trade
• Promoting exchange rate stability
• Building a reserve base
• Establishing a system of multilateral
payments, eliminating exchange restriction
which hamper the growth of world trade and
encouraging progress towards convertibility of
member currencies
• Lending
• Surveillance
– Country surveillance
– Multilateral surveillance.
• Technical Assistance
– Helps countries strengthen their economic policy,
tax policy, monetary policy, exchange rate system
and financial system stability.
 Special Drawing Rights
• The SDR was created by the IMF in 1969 as a
supplementary international reserve asset, in the
context of the Bretton Woods fixed exchange rate
system
• 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: first, through the arrangement of voluntary
exchanges between members; and second, by the IMF
designating members with strong external positions to
purchase SDRs from members with weak external
positions.
 Value of the SDR
• The value of the SDR was initially defined as
equivalent to 0.888671 grams of fine gold
• Effective October 1, 2016 the SDR basket
consists of the US dollar, euro, the Chinese
renminbi, Japanese yen, and British pound
sterling
• It is calculated as the sum of specific amounts
of each basket currency valued in US dollars,
based on the spot exchange rates observed at
around noon London time.
 Percent change in
Currency amount under exchange rate against
Currency Exchange rate 1 U.S. dollar equivalent
Rule O-1 U.S. dollar from
previous calculation

1.0174 6.62410 0.153591 0.294

Chinese Yuan
Euro 0.38671 1.18455 0.458077 1.036
11.900 112.72500 0.105567 0.825
Japanese Yen

0.085946 1.31690 0.113182 0.442

U.K. Pound Sterling
U.S. Dollar 0.58252
1.412937
U.S.$1.00 = SDR 0.707746 2 -0.461 3
SDR1 = US$ 1.412940 4
 SDR Interest Rate
• The SDR interest rate is determined weekly and is based on a
weighted average of representative interest rates on short-term
debt instruments in the money markets of the SDR basket
currencies
• SDR Interest Rate is 0.696
• Interest rate on the financial instrument of each component
currency in the SDR basket, expressed as an equivalent annual bond
yield:
– Three-month benchmark yield for China Treasury bonds as published
by China Central Depository and Clearing Co
– Three-month spot rate for euro area central government bonds
– Three-month Japanese Treasury Discount bills
– three-month UK Treasury bills
– Three-month US Treasury bills.
Advantages of special drawing rights
• If a country purchases SDRs and its holdings rise above its
allocation, it earns interest on the excess. A country can
exchange its SDRs back to hard currency such as the Yen,
Euro, USD, Pound, or Renminbi by trading them with other
countries.
Limitations of special drawing rights
• SDRs cannot be used to purchase goods and services
directly but countries can exchange them among
themselves. There are no notes or coins denominated in
SDRs.
• If a country sells SDRs and holds fewer SDRs than originally
allocated, it pays interest on the shortfall.
 Methods of Payment
• Open Account
• Consignment
• Advance Payment
• Documentary draft
• Letters of Credit
 IMF Financial Facilities & Policies
• Reserve Tranche
• Credit Tranche
Regular Lending Facilities:
• Stand-By Arrangement (SBAs)
• Deal with short term BOP problems
• Must Repaid within 3 to 5 years
• Extended Fund Facility (EFF)
• Longer repayment period 4 to10 years
• Precautionary arrangements
• To assist members interested in boosting confidence in their
economic management
• IMF borrows money at 0.05% and lends at
1.05%
• if India want’s to (according to Quota) deposit
$ 1 billion then it can keep 25% in it’s Forex
reserve which is freely tradable. This is
called RTP. (Reverse Tranche position)
Special Lending Facilities & Policies:
• Supplemental Reserve facility(SRF)
• Introduced in 1997
• IMF provides financial assistance to the member countries who are
experiencing exceptional balance of payments problems arising from a sudden
loss of market confidence in their currencies
• Repayment Period 2.5 years
• Contingent Credit Lines (CCL)
• To provide assistance to a country to overcome the impending crises on capital
account. The repayment period for the loan taken is also 2.5 years
• Poverty Reduction and Growth Facility (PRGF)
• Interest charged on the loans is only 0.5 per cent per annum
• Repayment period is of 10 years
• Compensatory Financing Facility (CFF)
• Emergency Financing Mechanism (EFM)
IMF role during Greece Crisis & Jordon
crisis