Lecture 4

Chapter #2
International Financial Management.
MBA(4)
Agencies that facilitate international flows.

• International Monitory Fund (IMF)

• This institution was formed after a meeting of the financial
delegations held in Bretton Woods, new Hampshire, in
July 1944.
• What are major objectives
• Promote cooperation among countries.
• Promote stability in exchange rates.
• Provide temporary funds to member countries to correct
imbalances of international payments.
• Promote free mobility of capital funds across countries.
• Promote free trade.
International Monitory Fund (IMF)

• Corporate structure
• The IMF is composed of board of governors, composed of finance
officers.
• Finance officers are the head of the central banks from each of the
184 countries.
• Executive board composed of 24 executive directors.
• This board is based in Washington DC and meets three times a
week.
• Compensating Financing Facility
• Which attempts to reduce the impact of export instability.
• It is available to all member countries But…………………
• This facility is used by mainly developing countries.
• A country must show that reduction in export is temporary and
beyond its control to get funding from IMF.
International Monitory Fund (IMF)

• Special Drawing rights (SDRs)

• The SDR is not a currency but a unit of account.
• This is an International reserve asset created by the IMF and allocated to
member countries.
• The SDR’s value fluctuates in accordance with the value of the major
currencies.
• The IMF played an active role to reduce the Financial crises in 1997-1998
that were lasted to 2008.
• It provided funding to various countries on bail out packages and with
promises to take specific actions to tackle with these crises.
• It provided 43 Billion dollars to Indonesia.
• It restricted Suharto to Break down monopolies in business by his relatives.
• In May 1998, Suharto discontinued subsidies for gasoline which created riots.
• He blamed the riots on the IMF and the foreign investors.
World Bank

• It is also called International Bank for Reconstruction and

Development.
• It was established in 1944.
• What is Primary objective?????
• To make loans to countries to enhance economic conditions.
• It extended 4 Billion dollars to Mexico over a ten year period for
environmental projects in industrial zone near the US border.
• Main source of funds ???????
• Bond and debt securities to private investors and governments.
• World Bank has profit oriented Philosophy.
• Its loans are not subsidized but are extended at markets rates to
governments.
World Bank
• Structural Adjustments Loans (SAL)
• This scheme was launched in 1980.
• To enhance a country’s long term economic growth.
• They were provided to Turkey and other less developed
countries to improve their balance of trade.
• Co- Financing agreement
• World Bank only provides a small portion of the financing
needed by developing countries.
• It attempts to spread its funds by entering into co-
financing agreement.
Co- Financing agreement

• Co- financing is performed in the following ways.

• 1. Official aid Agencies.
• Development Agencies may join the World Bank in Financing
development projects in low- income countries.
• 2. Export Credit Agencies.
• The World Bank co-finances some capital investment projects that
are also financed through export credit agencies.
• 3. Commercial Banks.
• The World bank has joined with the commercial banks to provide
finance for private sector.
• More than 350 banks have joined hands with the world bank for Co-
financing.
World Bank

• Multilateral Investment Guarantee Agency (MIGA)

• It offers various forms of political risk insurance.
• Through it the World Bank can encourage the development of
international trade and investment.
• IS World Bank a borrower?????????
• Yes, the World Bank is one of the largest borrowers in the world.
• Its borrowing amounted to 70 billion dollars .
• Its loans are well diversified among numerous currencies and
countries.
• It has received the Credit rating of AAA.
3. World Trade Organization
• It was established for trade negotiations that led to the GATT Accord in
1993.
• To provide a forum for multilateral trade negotiations and to settle trade
disputes related to the GATT accord.
• Its operations started in 1995 with 81 countries.
• Member countries are given voting rights.
• 4. International Finance corporations.
• IFC was established in 1956 to promote private enterprise within countries.
• It promotes the private sector rather than the Government sector.
• It not only provides loans to corporations but also purchases stocks.
• So its acts as a owner rather than a creditor.
• It provides 10-15 % funds for the projects.
• The remaining funds for the projects should be financed through other ways.
• It traditionally has obtained financing from the World Bank.
Trade Agreements.
• 1. Free trade pact.
• In January 1998 b/w United States and Canada.
• This reduced the trade barriers & increased the global competition.

• 2. General Agreement on Tariffs and Trade (GATT)

• It was treated in Dec, 1993.
• 117 nations were called for lower Tariffs around the World.

• 3. North American Free Trade Agreement (NAFTA)

• It was an extension of 1989 treaty.
• This was done among Canada, Mexico, and the United States.
• Reduced trade barriers and restrictions on DFI in Mexico.