IMF

International Monetary Fund

 What is the IMF?
The IMF is an international
organization of 185 member
countries. It was established to
promote international monetary
cooperation, exchange stability,
and orderly exchange
arrangements; to foster
economic growth and high levels
of employment; and to provide
temporary financial assistance to
countries to help ease balance of
payments adjustments.
 Why was it created?
The IMF was conceived in July
1944, when representatives
of 45 governments meeting
in the town of Bretton
Woods, New Hampshire, in
the northeastern United
States, agreed on a
framework for international
economic cooperation.
• IMF is an international financial organization
comprised of 189 member countries
• Purposes, as stipulated in its Articles of Agreement,
are to
– Promote international monetary cooperation
– Facilitate the expansion of international trade
– Promote exchange stability and a multilateral
system of payments
– Make temporary financial resources available to
members under “adequate safeguards”
– Reduce the duration and degree of international
payments imbalances
 What does it do?
• Surveillance
• Lending
• Technical assistance
 Surveillance
It is an assessment of economic and financial
developments, which provides a framework that
facilitates the exchange of goods, services, and
capital among countries and sustains sound
economic growth. It consists in:
Focusing on assessing whether countries' policies
promote external stability
It is to be remembered that surveillance is a
collaborative, candid, and even handed process
between the Fund and its members
 Lending
- IMF lending enables countries to rebuild their
international reserves; stabilize their currencies;
continue paying for imports; and restore conditions
for strong economic growth.
- IMF does not lend for specific projects.
- It eases the adjustment policies and reforms that a
country must make to correct its balance of
payments problem and restore conditions for strong
economic growth.
 Technical assistance
• It supports the development
of the productive resources
of member countries by
helping them to effectively
manage their economic
policy and financial affairs.
• About 90 percent of IMF
technical assistance goes to
low and lower-middle
income countries,
particularly in sub-Saharan
Africa and Asia.
 The Operation of the IMF
• Major decision-making body is its Board of Governors
– Each member appoints a Governor and an Alternate
Governor
• Day-to-day business rests in the hands of Executive Board
– Composed of 22 Executive Directors plus Managing
Director
• Six of the 22 Executive Directors are appointed by
largest IMF quota holders
• Remainder elected by groups of member countries not
entitled to appoint Executive Directors
• Managing Director is appointed by Executive Board and
is traditionally European (often French)
– Chairs Executive Board and conducts IMF’s business
• Currently three Deputy Managing Directors
• Most important feature of IMF is its quota system
– Determine both the amount members can borrow
from the IMF and their relative voting power
• Higher a member’s quota, the more it can
borrow and the greater its voting power
• Members’ quotas are their subscriptions to the IMF
– Based on their relative sizes in the world economy
– Pays one fourth of its quota in widely-accepted
reserve currencies (US dollar, British pound, euro,
or yen) or in Special Drawing Rights
– Pays remaining three-quarters of quota in its own
national currency
Administrative Structure of the
IMF
 Tranche
• If an IFM member faces balance of payments difficulties
– Can automatically borrow one fourth of its quota in the
form of a reserve tranche
– When the IMF lends to a member country, what actually
happens is domestic country purchases international
reserves from the IMF using its own domestic currency
reserves
• Member country is then obliged to repay IMF by
repurchasing its own domestic currency reserves with
international reserve assets
• IMF lending is known as a “purchase-repurchase”
arrangement
• Credit tranches
– Originally, each were equal to ¼ of the members’
quotas
– In the late 1970s, credit tranches were increased
to 37.5% of quota
– First credit tranche is more or less automatic
– Second credit tranches require that the member
adopt policies (conditionality) that will solve
balance of payments problem at hand
• Effectively limits a member country’s credit to
150 percent of its quota
–As IMF evolved, it created a number of
special credit facilities that extend potential
credit beyond 150% level
• Drawings on IMF by its members have to be repaid
– Five-year limit was established.
 Ideal Role of the Fund
• Development of a country requires an inflow of private
foreign savings
• Inflow would cover a current account deficit often
caused by import of capital goods
• Occasionally, this private foreign savings disappears
– Resulting in a balance of payments crisis
• In these instances IMF steps in
–Member draws on its reserve and credit
tranches
–Repaying credit tranche debts in five years time
»Thus, IMF offers short-term credit, stepping
in to replace private foreign savings on those
rare occasions
 Success of the IMF:
Jamaica
• The IMF praised the government for tackling
its huge debt burden and improving investor
confidence.
• It has also laid out plans to reduce the
country's debt as a percentage of GDP from
its current level of 145% to 100% by 2009.
• economic growth of up to 4% a year was
possible, it said, given a recovery in tourism
and mining sectors.
 Failures: Argentina
• The financial meltdown that reached a climax
in 2001, causing the country to default on
$132 billion of foreign debt, was worsened by
the government's vain attempts to maintain
the Argentine peso's peg against the dollar.
The IMF ploughed money into the country to
help it sustain the peg, pledging an extra $22
billion as late as the end of 2000.
Queries……..?