role of imfin current financial crisis

8/14/2019 Role of IMFin Current Financial Crisis

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Role of IMF

in Financial CrisisPresented By:Viraj Vikas TanujVed Virag Sweta

Tripti Kode Venkateswara


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VIDEO (Designed by: Viraj Thakker)


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PRE BRETTEN WOODS

Return to the gold standard began and by 1926. Several mistakes in implementing the gold standard Cooperation and reconstruction (194471)

Countries attempted to shore up their failing economies . Attempts proved to be self-defeating. World trade declined sharply, and employment and living standards plummeted in many countries.

Breakdown led founders to plan an institution charged with overseeing the international monetarysystem


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History of IMF

BRETTEN WOODS SYSTEM

The conference was preceded by several years of largely bilateral discussions and conferencesinvolving principally the United States and the United Kingdom. The agreed mechanism was a system in which exchange rates were fixed and internationalpermission was required before they could be adjusted. It was recognized that if a country was going to defend its exchange rate from devaluationpressures associated, for example, with a trade deficit, it would be useful to provideinternational financial assistance, through the IMF to cushion the process of externaladjustment. United States made a proposal for establishment of International Stabilization Fund. It wasknown as White plan UK proposed establishment of International Clearing Union. It was known as Keynes plan. IMF was introduced as there arouse a need for International cooperation in economics, tradeand balance of payment affairs and removal of the exchange controls in order to promote theexpansion of world trade.


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INTERNATIONAL MONETARY FUND

The International Monetary Fund (IMF) is an international organization thatoversees the global financial system by following the macroeconomic policies of itsmember countries, in particular those with an impact on exchange rates and thebalance of payments. It is an organization formed to stabilize international exchange . Formally created in 1944 - United Nations Monetary and Financial Conference Formally organized - Dec 27th 1945, first 29 countries signed its Articles ofAgreement Member states - 185 Headquarters - Washington USA


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PAR VALUE SYSTEM

Joining of countries between 1945 and 1971 . Agreed to keep their exchange rates [the value of their currencies in terms of the U.S.

dollar and, in the case of the United States, the value of the dollar in terms of gold($35 an ounce).] pegged at rates that could be adjusted only to correct a "fundamentaldisequilibrium" in the balance of payments, and only with the IMF's agreement. This par value systemalso known as the Bretton Woods systemprevailed until1971, when the U.S. government suspended the convertibility of the dollar (and dollarreserves held by other governments) into gold.


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OBJECTIVES OF IMF

To avoid the competitive devaluation and exchange control. To establish and maintain currency convertibility. To develop multilateral trade and payments. To promote international monetary co-operation through a permanent institute. To facilitate the expansion of balanced growth of international trade. To provide exchange stability. To maintain orderly exchange arrangements among members and to avoid competitiveexchange depreciation. To assist in the establishment of a multilateral system of payments in respect of currenttransactions. To lend confidence to members by making the funds resources available to them underadequate safeguards. To shorten the duration and lessen the degree of disequilibrium in the international balance of

payments of members.


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FUNCTIONS

Guardian of good conduct in the area of Balance of payments. Reducing tariffs and other trade restrictions. Provides short term financial assistance to its member countries. Provides machinery for orderly adjustment of exchange rates. Reservoir of currencies. Lending institution of foreign currencies. Machinery for altering the par values of the currency of a member country. International consultancy. Conducts research studies and publishes report.


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WORKING

The work of the IMF is of three main types: Surveillance

The IMF oversees the international monetary system and monitors the financial andeconomic policies of its members. It keeps track of economic developments on a national,regional, and global basis .

Lending The IMF provides loans to countries that have trouble meeting their internationalpayments and cannot otherwise find sufficient financing on affordable terms .

Technical Assistance To assist mainly low- and middle-income countries in effectively managing theireconomies, the IMF provides practical guidance and training on how to upgradeinstitutions, and design appropriate macroeconomic, financial, and structural policies.


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GROWTH IN IMF MEMBERSHIP, 1945 - 2005

(NUMBER OF COUNTRIES)


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IMF MEMBERS' QUOTAS AND VOTING POWER

Member QUOTA Governor VOTESMillionsof SDRs Percent of Total Number Percent of TotalUnited States 37,149.3 17.09 Timothy F. Geithner 371,743 16.77

UnitedKingdom

10,738.5 4.94 Alistair Darling 107,635 4.86Japan 13,312.8 6.13 Kaoru Yosano 133,378 6.02

Germany 13,008.2 5.99 Axel A. Weber 130,332 5.88

France 10,738.5 4.94 Christine Lagarde 107,635 4.86

Italy 7,055.5 3.25 Giulio Tremonti 70,805 3.19

China 8,090.1 3.72 ZHOU Xiaochuan 81,151 3.66

India 4,158.2 1.91 P. Chidambaram 41,832 1.89

*Source IMF site May 2009
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IMF STRUCTURE


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BOARD OF GOVERNOR

Autonomous body affiliated to UNO (highest decision making body). One governor and one alternative governor for each member country. Rights:

Approve quota increases, SDR allocation Admittance of new member withdrawal Amendments of AoA and By-laws

The board of Governors of IMF and World Bank meets once a year to disucc thework of their respective institution. IMFC- 24 Governors representing constituencies Also elects or appoints Executive director


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THE EXECUTIVE BOARD 24-member Executive Board representing 186 countries takes care of the daily business ofthe IMF 8 Executive directors represent individual countries China, France, Germany, Japan, Russia,Saudi Arabia, the United Kingdoms & the United States. The 16 other Executive Directors each represent groupings of the remaining countries. Usually meets 3 times a week, more often if required. Decision regarding Lending, changes in exchange rates and appointment of ManagingDirectors Appointed for a renewable period of five year term.MANAGING DIRECTORS Current Managing Director - Dominique Strauss-Kahn Responsible for the organization, appointment, and dismissal of the staff of the Fund


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FUNDING THE IMF

Loan repayment Receives most of its operational-cost Income from the interest payments received.

Gold Reserves Resource from its shareholders

Quotas Borrowing agreements Trusts like (HIPC)


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Gold reserves 103.4 mn ounces (3rd largest in the world) Limits in use by AoA, only if 85% of voting power approves to sell or buy gold

Quotas Denominated in SDR (76.4 INR=1 SDR) (1 USD = 0.639855 SDR) Subscription:

25% in SDR or widely accepted currencies Voting power:

250 basic votes + one additional votes for SDR 1,00,000 of quota Access to Financing:

up to 100% of their Quota annually and 300% cumulative Total quotas: 217431.7 mn SDR-India:1.91% Votes: 2,217,033-India:1.89%


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Borrowing agreements GAB

Between IMF and G-10 countries in 1962 later 11 industrial countries (Renewed 10times) total SDR 34 bn capacity recently signed a GAB with Japan to bolster its lending capacity for SDR 68 bn

NAB Between IMF and 26 countries in 1998 (Renewed twice till date)

IMF concessional Lending and Debt relief Low Interest loans: PRGF-ESF Debt Relief: HIPC-MDRI Resources come from member contribution and IMF itself


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OTHERINSTITUTIONS


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WORLD BANK GROUP

Consists of 5 closely associated institutions, each having a distinct role toplay in the mission to fight poverty and improving the living standardsfor people in developing world. International Bank For Reconstruction & Development (IBRD) International Development Association (IDA) International Financial Corporation (IFC) Multilateral Investment Guarantee Agency (MIGA) International Centre for Settlement of Investment Disputes (ICSID)

INTERNATIONAL BANK FOR RECONSTRUCTION &


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INTERNATIONAL BANK FOR RECONSTRUCTION &

DEVELOPMENT (IBRD)

Offshoot of Bretton wood conference of 1944 The main objectives are:

To assist in reconstruction and development of the territories of its member-governments byfacilitating investment of capital for productive purposes To promote foreign private investment by guarantees of or through participation in loans andother investments of capital for productive purposes. To make loans for productive purposes out of its own resources or out of the funds borrowed by it To promote the long range growth of international trade & the maintenance of equilibrium in theBoP of members by encouraging international investment for the development of the productiveresources of the members.

INTERNATIONAL DEVELOPMENT ASSOCIATION


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INTERNATIONAL DEVELOPMENT ASSOCIATION

(IDA)

It is an affiliate of IBRD. Established in 1960 to provide loans to economically sound projects such as:

Construction of Roads & Bridges Slum Clearances Urban development

All the members of IBRD are eligible to become members of IDA. Currently 168 countries are the members of IDA. Resources mainly comes from contribution from the industrially developed countriescalled as Donor countries. Lending is in the form of assistance to high priority projects in the member countries.


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INTERNATIONAL FINANCE CORPORATION(IFC)

IBRD loans are available only to member-country governments but cant participatein the equity of project finance. IFC was established in 1956 with the objective of financing private enterprises. It is also an affiliate of IBRD. Only members of World Bank can become members of IFC. Currently 181 member countries which determine its policies and investments. The 24 executive directors of the World Bank constitute the Board of Directors of theIFC. The main objective is the economic development by encouraging growth of privateenterprise in member countries mainly in less developed countries. Offers a wide variety of Financial products to private sector projects in developingcountries

MULTILATERAL INVESTMENT GUARANTEE AGENCY


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MULTILATERAL INVESTMENT GUARANTEE AGENCY

(MIGA)

Established in 1988 to encourage foreign investment in developing countries by issuingguarantees against non-commercial risks. Current membership is 173, open to all World Bank members. Provides guarantee to private investors against the risk of transfer restriction,expropriation, war and civil disturbance and breach of contract. Since its inception, has issued more than 500 guarantees for projects in 78 developingcountries. Provides technical assistance and advisory services to help countries attract and retainforeign investment To disseminate information on investment opportunities to the international businesscommunity.


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ASIAN DEVELOPMENT BANK (ADB)

Development bank started in 1966 under the aegis of ECAFE (United NationsEconomic Commission for Asia and Far East) Members consists of countries from Asian region as well as from other regions. Have 66 members out of which 47 are Asia-Pacific countries and 19 from Europe and

North America To promote investment in the ECAFE region of public and private capital fordevelopment purposes. To utilize the resources for financing for the economic development of the region. To provide technical assistance for preparation, financing & execution of developmentprojects and programs The financial resources consists of capital resources, comprising subscribed capitalreserves and funds raised through borrowings and special funds comprisingcontributions made by member countries.


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OBSERVATIONS

The IMF missed the two biggest asset bubbles in the history of world. The IMF is accountable? Developing Countries have no significant say in IMF Decisions. The IMF is at the head of a cartel that has pressurized developing countries to adopt

harmful policies over the last 3 decades.


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IMF CARTEL

IMF

G7WorldBank


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VOTING SHARE


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VOTING SHARE


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Falling oil

prices

Higher world

interest rates

Rising

inflation

Overvalued

peso

Deteriorating

BOP

MEXICO CRISIS OF 1982 & 1995

Current account deficit widened further, to 8 percent of GDP for 1994 Developments tended to weaken the peso International investors moving out of Mexico


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1982: US$4.5 billion

Credit of US$17.8 billion for MexicoUS$20 billion in swaps and guarantees from the U.S. ExchangeStabilization FundUS$10 billion of short-term support from the G-10 central banks

ROLE OF IMF

The IMF arrangement with Mexico is the largest ever approved for a member country


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1982US$3.6 billion

Loan Repayment:1 year

1995US$20 billion

Loan Repayment:3 year

ROLE OF IMF: US TO THE RESCUE


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PoliticalUncertainty

HigherFinancing Costs

DecliningExports

Unemployment Increasing PublicSector Deficit

ARGENTINA CRISIS OF 2001

BANKING SYSTEM CREDIT TO PRIVATE SECTOR


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BANKING SYSTEM CREDIT TO PRIVATE SECTOR:

ESTIMATED SUPPLY AND DEMAND

Credit Crunch


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International Support Package: US$40 billion

US$3 billion of Fund support was made available immediatelyEnvisaged improvements in tax enforcement

Deregulation of key sectors: To Promote Foreign Investment

ROLE OF IMF


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RUSSIAN ECONOMIC CRISIS

$22.6 billion bailout package pledged by the IMF and the World Bank to RussiaCritics Only postpone an inevitable crash Delay devaluation Add to this country's debt Promote inflexibility Distracted attention from the necessary search for self-healing forces

Its impact on confidence was undercut when the IMF withheld $800m because the Russian parliamentrejected many of the package's tax reforms.


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EAST ASIAN CRISIS

The East Asian crisis threatened to halve the rate of world growth in both 1998 and 1999.Thailand Witnessed a decrease in its exports: in 1996 Thailands trade deficit became 8 percent of its GDP an

unprecedented statistic for the nation. The IMF recommended contractionary fiscal policies such as increasing taxes, decreasing governmentspending, decreasing imports to eliminate the existing trade deficit, and transitioning into a floatingexchange rate regime. The foreign borrowers were saved by IMF bailouts whereas Thailands economy as a whole suffered.


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Indonesia In January 1998, the Indonesian currency, the rupiah, depreciated 85 percent from2400 to 15000 per dollar. Having witnessed the Thai crisis, the foreign creditors demanded early repaymentsfrom Indonesian banks and firms. The dollar reserves of the Central Bank of Indonesiadepleted quickly, and as a result the devaluation of rupiah took place. The IMF program required the closing of 16 non-functioning private banks. The rupiah kept falling.


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Korea In 1998, Koreas GDP decreased by 7 percent, wages dropped by 10 percent, and theunemployment rate increased to 10 percent. The IMFs inability to stop the depreciations in Thailand and Indonesia had increasedthe likelihood of the depreciation of the won. The IMF demanded the closing of banks that had lent heavily to the nation's largestbusiness conglomerates at unreasonably low interest rates . Korea agreed decreased top conglomerates credit receiving power, closing thenonworking banks, and forcing large financial institutions to submit audits byinternationally recognized firms.


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IMFs ERRORS

The IMF should have helped the country by converting its short-term foreignliabilities to long-term liabilities. The countries adapted capital flow liberalization as fast as they could and the IMFsupported them in this path. Another mistake of the IMF is the closure of highly indebted banks. It was donewithout underlying policies such as deposit insurance.


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IMF: Current global crisis


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Dimensions of IMF in crisis

Immediate crisis management Long term systematic reform of world financial markets


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Lending

Increase in NAB Increase in SDR Development of new trade finance Selling of gold


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Surveillance

Identification & measurement of systematic risk Public information Monitoring real and financial risk Proper regulation & oversight


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Technical Assistance

Exchange rate maintenance Training Policy advice Comprehensive contingency plan


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IMF - INDIA

IMF has provided India with loans over the years and this has helped the country togrow The loans provided by IMF to India:

SDR 3,260,405,000 in 1992 SDR 3,584,905,000 in 1993 SDR 2,763,180,833 in 1994 SDR 1,966,633,125 in 1995 SDR 1,085,250,003 in 1996 SDR 589,791,667 in 1997 SDR 284,916,664 in 1998 SDR 38,500 in 1999

Total IBRD/IDA Commitments as of end FY08 : US$ 13.8 billion


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IMF - INDIA

The International Monetary Fund (IMF) has won final approval from its board of governorsfor a reform package that gives emerging economies like India a little more say in its running. India to get $4.78 bn in SDRs to battle recession India's share stands increased to 2.34 percent, up by a mere 0.42 percentage points. Indias allocation in SDR 4158.2 Million SDR (1.91%) Redistribution of voting shares toward dynamic emerging market and developing countries. Votes allocated to India - 41,832 votes (1.9%) India is 12th largest in the world (1.1 trillion of GDP) 9.2%


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IMF - INDIA

An important outcome of the G-20 London Summit, held on 2nd April 2009 India to purchase up to US$10 billion worth of IMF notes.


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A Changing IMFResponding to the Crisis

As the world economy has become engulfed in the worst crisis in manygenerations, the IMF has mobilized on many fronts to support its membercountries, increasing its lending, using its cross-country experience toadvise on policy solutions, and introducing reforms to modernize itsoperations and become more responsive to member countries needs


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Stepping up crisis lending. The IMF has responded quickly to the global economic crisis, withlending commitments reaching a record level of $157 billion, including a sharp increase inconcessional lending to the worlds poorest nations. Providing analysis and targeted advice. The Funds monitoring, forecasts, and policy advice,

informed by a global perspective and by experience from previous crises, have been in highdemand and have been extensively used by the Group of Twenty (G-20). Becoming more flexible. The IMF has overhauled its general lending framework to make itbetter suited to country needs and streamlined conditions attached to loans. Creating a financial safety net. The IMF is creating a broad financial safety net to limit thespread of the crisis by garnering pledges for a tripling of IMF resources, as endorsed by theG-20. Drawing lessons from the crisis. The IMF is contributing to the ongoing effort to draw lessonsfrom the crisis for policy, regulation, and reform of the global financial architecture.


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The IMFs new lending framework. Emphasis on social protection. Helping the worlds poorest. Creating a Crisis FirewallTripling of IMF resources. IMF role in shaping post-crisis financial architecture. IMF governance better reflecting the world economy


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role of imfin current financial crisis

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