International Monetary Fund

PRESENTED BY

SARATH.K.S & ANEESH P

In brief:
Established at a United Nations conference in Bretton Woods, New Hampshire, in July 1944. Initially composed of 45 governments with the intention of building an economic cooperation that would help avoid economic disasters such as, the Great Depression of the 1930s. and long term direction The IMF is one of several autonomous organizations designated by the United Nations (UN) as Specialized Agencies, with which the UN has established working relationships

Article I sets out the mandate of the IMF as follows:

To promote international monetary cooperation through a permanent institution To facilitate the expansion and balanced growth of international trade To promote exchange stability To assist in the establishment of a multilateral system of payments To give confidence to members by making the general resources of the IMF To shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members

Functions of IMF
Surveillance Conditional Financial Support Technical Assistance

Surveillance
A Definition:
The appraisal of a countrys economic and structural policies and performance from an international standpoint. It is a regulatory or jurisdictional function, which historically has been focused on the assessment of the exchange arrangements, the exchange rates and balance of payments.

Surveillance
The Surveillance process is very complex because of the: Interconnectedness of foreign and domestic economic policy Economic Interdependence among countries Political and social consequences of some of the sensitive economic decisions Why is IMF Surveillance important? Globalized economy; economic and financial policies of one country may affect many others It is important to have an external overseer to advert financial crises, which often spread from one originating country.

What is the IMF Surveillance concerned with today?

Exchange Rates, Monetary and Fiscal Policies: Remain at the centre of IMF surveillance. Structural Policies: Added to IMF surveillance agenda after the 1980s oil price shock. Concerned with the macroeconomic performance of a country, and pay special attention to such issues as international trade and labour market issues. Financial Sector: Added during the early 1990s following a series of international banking crisis's. Institutional Issues: Concerned with such issues as independence of the central bank, financial sector regulation and policy accountability. Beneficial especially for those countries that are making the transition from a planned to market economy. Assessment of Risks and Vulnerability:

IMF Surveillance: How it Works?

Carry out bilateral Article IV Consultations, in which IMF staff meet with a member country to collect information regarding macro-economic policies, national accounts, institutional developments, prices, wages and other similar issues Canada's 2004 Article IV Consultation Upon the collection and analysis of the gathered data, the IMF will review the policies with authorities, regarding the effectiveness of their economic policies, as well as examine the prospective changes in the domestic economy that they foresee. The next step is to create a formal report, which is then submitted to the Executive Board of the IMF, and upon approval the final report is generated and a summary of the discussion is forwarded to the countrys government for review. The final report is published upon the consent of the country.

Conditional Financial Support

A definition:
Provide short term loans (1 to 5 years) to countries experiencing balance of payments problems so that they can restore conditions for sustainable economic growth conditional upon policies and procedures developed by the fund to govern the access to and the use of its resource by member countries.

Which Countries Qualify for Financial Assistance?

IMF lending aims to provide breathing room for countries experiencing some type of short-term economic crisis, so that it can restore conditions which promote strong economic growth. These economic crisis's may be onset by one or a number of the following: - Inflation or Hyperinflation - Drought - Political Unrest The IMF is also working to reduce poverty in poor countries around the world, both by themselves and in cooperation with the World Bank. The IMF provides financial support through its conditional lending facility. A series of adjustment policies and reforms are implemented which is intended to solve their balance of payments crisis. (country is spending more then it is taking in or running a deficit) The policies and reforms implemented will vary; based upon the specific countries needs and requirements

 Where does the IMF get its Money from?

Most loans are provided by member countries, determined by their quota, which is calculated based upon a countrys relative size in the world economy.

 What is the IMFs Lending Capacity?

IMF can only borrow from financially strong economies to finance lending. The IMF Board selects these strong currencies every three months, which make up its usable resources

Technical Assistance
A Definition:
The IMFs goal for its technical support ...is to contribute to the development of the productive resources of member countries by enhancing the effectiveness of economic policy and financial policy.

Technical Assistance
The IMF provides technical assistance in its areas of expertise, which include fiscal policy, monetary policy, and macroeconomic and financial statistics Assistance is normally provided free of charge for its member countries. About three-quarters of IMF technical assistance goes to low and lower-middle income countries. The IMF attaches great importance to country ownership. The recipient country is fully involved in the entire process of technical assistance, from identification of need, to implementation, monitoring, and evaluation.

Types of Assistance:
The IMF delivers technical assistance in a number of different ways. The two primary types of support offered are through: Staff missions which are often very limited in duration provided through Placement of experts for periods ranging from a few weeks to a few years. Depending on the length of the visit by the expert the IMF may ask the country to make a voluntary donation to cover the expenses of the visiting expert(s). The IMF also provides assistance by offering its member countries: Technical and diagnostic reports Training courses Seminars and workshops On-line advice and support

Lending schemes :
The new concessional facilities for LICs:
were established in January 2010 under the Poverty Reduction and Growth Trust (PRGT) as part of a broader reform to make the Funds financial support more flexible and better tailored to the diverse needs of LICs. Access limits and norms have been approximately doubled compared to pre-crisis levels. Financing terms have been made more concessional, and the interest rate is reviewed every two years. All facilities support country-owned programs aimed at achieving a sustainable macroeconomic position consistent with strong and durable poverty reduction and growth.

 The Extended Credit Facility (ECF):

succeeds the Poverty Reduction and Growth Facility (PRGF) as the Funds main tool for providing mediumterm support to LICs with protracted balance of payments problems. Financing under the ECF currently carries a zero interest rate, with a grace period of 5 years, and a final maturity of 10 years.

 The Standby Credit Facility (SCF):

provides financial assistance to LICs with short-term balance of payments needs. The SCF replaces the HighAccess Component of the Exogenous Shocks Facility (ESF), and can be used in a wide range of circumstances, including on a precautionary basis. Financing under the SCF currently carries a zero interest rate, with a grace period of 4 years, and a final maturity of 8 years

 The Rapid Credit Facility (RCF) provides rapid financial assistance with limited conditionality to LICs facing an urgent balance of payments need. The RCF streamlines the Funds emergency assistance for LICs, and can be used flexibly in a wide range of circumstances. Financing under the RCF currently carries a zero interest rate, has a grace period of 5 years, and a final maturity of 10 years.

 Stand-By Arrangements (SBA). The bulk of nonconcessional Fund assistance is provided through SBAs. The SBA is designed to help countries address shortterm balance of payments problems. Program targets are designed to address these problems and Fund disbursements are made conditional on achieving these targets ('conditionality'). The length of a SBA is typically 1224 months, and repayment is due within 3-5 years of disbursement.

 Flexible Credit Line (FCL). The FCL is for

countries with very strong fundamentals, policies, and track records of policy implementation and is particularly useful for crisis prevention purposes, although it can also be used for responding to a crisis. FCL arrangements are approved, at the member countrys request, for countries meeting pre-set qualification criteria. The length of the FCL is one or two years and the repayment period the same as for the SBA.

 Precautionary Credit Line (PCL). The PCL can only be used

for crisis prevention purposes by countries with sound fundamentals and policies, and a track record of implementing such policies. The PCL combines qualifications (similar to the FCL) with focused ex post conditions that aim at addressing the identified vulnerabilities in the context of semi-annual monitoring. It can have the length of between one and two years. Access can be front-loaded, with up to 500 percent of quota made available on approval and up to a total of 1000 percent of quota after 12 months subject to satisfactory progress in reducing vulnerabilities. While there may be no actual balance of payments need at the time of approval, the PCL can be drawn upon should such a need arise unexpectedly.

 Extended Fund Facility (EFF). This facility was

established in 1974 to help countries address longerterm balance of payments problems reflecting extensive distortions that require fundamental economic reforms. Arrangements under the EFF are thus longer than SBAsusually 3 years. Repayment is due within 4 10 years from the date of disbursement.

 Emergency assistance. The IMF provides

emergency assistance to countries that have experienced a natural disaster or are emerging from conflict. Emergency loans are subject to the basic rate of charge Loans must be repaid within 35 years.

Conditionality's of IMF lending

Conditionality in its broad sense covers both the design of IMF-supported programs and the specific tools used to monitor progress toward the goals outlined by the country in cooperation with the IMF. Conditionality helps countries solve balance of payments problems without resorting to measures that are harmful to national or international prosperity

Conditionality's of IMF lending

Program reviews provide a framework for the IMFs Executive Board to assess periodically whether the IMF-supported program is on track and whether modifications are necessary for achieving the programs objectives. Reviews combine a backward-looking assessment (were the program conditions met according to the agreed timetable?) with a forward-looking perspective (does the program need to be modified in light of new developments?). Disbursements under an IMFsupported program can take place only upon its approval, or completion of reviews, by the IMF Executive Board.

 Program approval or reviews are based on various policy commitments agreed with the country authorities. These can take different forms
Prior actions are measures that a country agrees to take before the IMFs Executive Board approves financing or completes a review. They ensure that the program has the necessary foundation to succeed, or is put back on track following deviations from agreed policies

 Quantitative performance criteria(QPCs) are specific and measurable conditions that have to be met to complete a review. QPCs always relate to macroeconomic variables under the control of the authorities, such as monetary and credit aggregates, international reserves, fiscal balances, and external borrowing. For example, a program might include a minimum level of net international reserves, a maximum level of central bank net domestic assets, or a maximum level of government borrowing

 Indicative targets are used to supplement QPCs for assessing progress. Sometimes they are also set when QPCs cannot because of data uncertainty about economic trends As uncertainty is reduced, these targets are normally turned into QPCs, with appropriate modifications.

 Structural benchmarks are reform measures that are critical to achieve program goals and are intended as markers to assess program implementation during a review. They vary across programs: examples are measures to improve financial sector operations, build up social safety nets, or strengthen public financial management

International Liquidity
International liquidity is generally used as a term for international reserves. Such reserves include a country's official gold stock, holdings of its convertible foreign currencies, SDRs and its net position in the IMF. It is the aggregate stock of inter-nationally acceptable assets held by the central bank to settle a deficit in the balance of payments of a country. In other words international liquidity provides a measure of a country's ability to finance its deficit in the balance of payments without resorting to adjustment measures.

 The sources of international liquidity include

owned reserves and borrowed reserves. Borrowed reserves were constituted by Capital imports in the form of borrowing from abroad and direct investments by foreign countries. The demand for international liquidity was increasing more than its supply due to which the problem of international liquidity arose. The shortage of international liquidity was due to the increasing deficits in the balance of payments of the majority of countries in the world.

 Too much dependence on exports exposed these economies to international fluctuations in the prices of their products. IMF in 1970 introduced a scheme for the creation and issue of Special Drawing Rights (SDRs) as unconditional reserve asset to remove all the related problems of international liquidity. Now SDR is the principal source of international liquidity to its members.

 As one of the main objectives of establishing the IMF was to bring the stability in exchange rates by stopping the competitive devaluation of currencies of the member nations, so that they could get foreign exchange easily, to get this objective done IMF accepted gold as a medium to determining the exchange rate.

 The currency value of every country was fixed in 'gold and American dollar. At that time American dollar was the most powerful international currency so it 'was fixed as IMF's 'Money of Account'. The value of one unit of dollar was equal to 0888671 gm. of gold. But due to the regular fluctuation's in the value of dollar and irregular supply, IMP gave up dollar and introduced SDR.

 SDR is like a fiat money behind which there is no reserve but it is the medium Of international payments. It is only the 'Money of Account'. It is intangible money which is written only in account and is used as gold in international payments. Therefore, it is also called 'Paper Gold'. It is an easy and important source of increasing the international liquidity.