International Monetary Fund

1
International Monetary Fund

• IMF do solve many problems
• Group 5
• -------------------
• C.J. Metsgar
• Hyung Namgung
• Vijay Gopalareddy

2
Historical background

• Great depression of 1930s created lack of
  confidence in paper money which in turn created
  increased demand for Gold
• Gold standard collapsed. The amount and frequency
  of monetary transactions between nations
  contracted because
• The uncertainty about the value of money that no
  longer bore a fixed relation to gold
• Nations hoarded gold and money that could be
  converted into gold
• Reverted to barter exchange.
• Gold standard collapsed 1929 and 1932 resulted in
• prices of goods fell by 48 percent worldwide, and
• the value of international trade fell by 63
  percent

3
Historical background

• Competitive devaluation
• Other governments, desperate to find foreign
  buyers for domestic agricultural products, made
  these products appear cheaper by selling their
  national money below its real value so as to
  undercut the trade of other nations selling the
  same products.
• Evoked retaliation through similar devaluation by
  trading rivals

4
Historical background

• Dexter and Keynes proposed to establish a
  monetary system monitored by international
  institute
• The system aims at
• encouraging the unrestricted conversion of one
  currency into another,
• establishing a clear and unequivocal value for
  each currency, and
• eliminating restrictions and practices, such as
  competitive devaluation

5
Historical background

• Need for international monetary system gave birth
  to IMF
• In July 1944, 44 nations discussed to shape the
  IMF at Bretton Woods, New Hampshire, USA
• On December 27, 1945 the articles of Agreement
  enter into force upon signature by 29 governments

6
Role of IMF

• Promote international monetary cooperation
• Facilitate the expansion of international trade
  and thus contribute to high employment and real
  income growth
• Promote exchange stability
• Assist in the establishment of multilateral
  system of current payments and in the elimination
  of foreign exchange restrictions
• Help reduce balance of payments disequilibria

7
Membership

• IMF has 183 member countries which conducts its
  own foreign policy and willing to adhere to IMF
  charter of rights and obligations
• Quotas is the primary means of financing in which
  the member country subscribes sum of money called
  its quota
• Voting Each member has 250 basic voting plus one
  additional vote for each SDR 100,000 of quota
• Special Drawing right (SDR) is allocated to its
  members to supplement existing reserve assets

8
Areas of Activity

• Surveillance
• Examine all aspects of the member's economy that
  cause the exchange value to be what it is and
  evaluates the economys performance
• Example Mexico and Asian financial crises
• to evaluate the economy's performance candidly
  for the entire membership.
• Supervision is based on the conviction that
  strong and consistent domestic economic policies
  will lead to stable exchange rates and a growing
  and prosperous world economy

9
Areas of Activity

• Lending
• Short term BP
• Longer term Structural adjustments
• Low-income countries
• Amount

10
Areas of Activity..

• Technical Assistance
• Is provided in design and implementation of
  fiscal and monetary policies, institution
  building, drafting and review of economic and
  financial legislation.
• Support is often provided through short staff
  missions of limited duration sent from
  headquarters
• Example Ghana poverty reduction strategy

11
Conditionality

• Conditionality seeks to ensure
• that the members policies are adequate to
  achieve a viable balance of payments position and
  sustainable economic growth over a reasonable
  period
• that steps are taken toward structural
  adjustment, as necessary and
• that, in addressing balance of payments and
  structural problems, financing and adjustment
  work in tandem.

12
Performance Criteria

• The conditionality guidelines specify that
  performance criteria should be limited to those
  economic variables necessary to ensure that the
  objectives of IMF-supported programs are met.
• normally confined to macroeconomic variables and
  to those necessary to implement specific
  provisions of the IMFs Articles or policies
  adopted under them.
• may also relate to other (microeconomic)
  variables when these have a bearing on the
  effectiveness of the members adjustment program
  because of their macroeconomic impact.

13
IMF Statistics
The General Resources Account (GRA) contains
IMF's holdings of members' currencies, SDRs,
gold, and other assets. These holdings are
principally derived from quota subscription
payments plus any activated borrowing
14
IMF Statistics
The Poverty Reduction and Growth Facility (PRGF)
provides loans at a concessional interest rate to
eligible, low-income members.
15
IMF Statistics
Assistance provided to eligible countries under
the Heavily Indebted Poor Countries (HIPC)
Initiative
16
IMF Success Georgia

• 1991 Georgia declaration of independence form the
  Soviet Union
• 1994 Georgia was at the brink of collapse
• Output had dropped sharply
• Hyperinflation eroded public finances
• Incomes international reserves depleted
• Revenue-to-GDP ration was 2
• 1995 IMF Approved Stand-By Credit with SDR 72.15M
  (about 113M)
• IMF Reform Program
• Reduction of the fiscal deficit
• 6 percent of GDP in 1995 and 5.6 percent of GDP
  in 1996, from nearly 17 percent in 1994
• Tax revenue is projected to rise to 4 percent of
  GDP in 1995 and 6 percent in 1996, from 3 percent
  in 1994
• Monetary policy
• Redesigned to maintain price stability
• introduction of a new currency, the lari
• safeguard the value of the new national currency
• Structural Reforms
• Government to establish the legal structure that
  will support the transition to a market-based
  economy
• Laws regarding property rights, contracts,
  bankruptcy, banking, competition policy, and
  foreign investment
• Downsizing of state institutions

17
IMF Success Georgia

• Close collaboration between IMF and Georgian
  authorities resulted in the following program
  results
• Increase of real GDP
• Lead by agriculture, trade, export and
  construction
• Exchange rate stabilized
• Inflation declined (62 in 1994 to 1.8 in 1996)
• Introduction of the lari resulted in reversal of
  the rampant currency substitution
• Central bank boosted International reserves
• Georgia authorities have continued to solicit
  policy advise from the IMF
• 1996 IMF Approves Three-Year Loan for the
  Republic of Georgia
• 1997 Georgia Accepts Article VIII Obligations
• 1999 Georgia Letter of Intent
• describes the policies Georgia intends to
  implement in the context of its request for
  financial support from the IMF
• 2001 IMF Approves US141 Million PRGF Loan for
  Georgia
• Lay the foundation for faster growth and poverty
  reduction, while addressing the problem of the
  country's large external debts

18
IMF Success Georgia

• June 2004 the Executive Board of the IMF approved
  a three-year arrangement under the PRGF in an
  amount equivalent to SDR 98M (144M)
• Sustained outward-looking growth in a
  low-inflation environment
• Improve living standards and basic service
  delivery
• Attack corruption
• Government to eliminate domestic expenditure
  arrears
• Increase spending on core social and
  infrastructure projects
• Energy sector reforms to ensure stable power
  supplies
• 2005 First IMF visit to Georgia
• Review recent developments
• Continue discussions for IMF-supported economic
  program
• Mr. Rodrigo de Rato, Managing Director IMF
  addressed issued the following statement The
  government's strong program ownership is a key
  pillar of this effort. . .

19
IMF Success Georgia
20
IMF Success Georgia
21
IMF Failure in Asian Currency Crisis

• A condition for the bailing out
• 1) raising domestic interest rates
• 2) curtailing government expenditures
• Problems
• 1) Contractionary gt long-lasting recession
• Did IMF impose a set of austerity measures?

22
IMF Failure in Asian Currency Crisis

• Failure case by case
• 1) Russia
• 2) Indonesia
• 3) Korea

23
Russia and IMF failure

• July 20 1998 The IMF approved a 22.6 billion
• international bailout
• August 24 1998 Russias Prime Minister
  announced
• - The ruble to be devalued by 34 by the end
  of the
• year
• - a 90- day foreign debt moratorium

24
Russia and IMF failure

• The fault of the IMF ?
• - provided successive bailouts
  regardless of whether they
• achieve the desired results?
• Main Reason
• Russia government refused to reform
• - backpedal on budgetary cut
• - increase domestic spending stead of
  paying foreign debt
• - nationalize the dollar-denominated
  debt of Russian banks

25
Indonesia and IMF failure

• Indonesia
• Main reasons
• - Strong resistance to reform and political
  constraints
• - The lack of a comprehensive bank
  restructuring
• strategy
• (Poor risk management of banks and
  financial
• institutions)
• gt resulted in the loss of monetary control

26
Korea and IMF failure

• Korea
• - The IMF was optimistic until the last
  minute while international banks review their
  lending to Korea
• gt The IMF failed to recognize the
  vulnerabilities ?
• Main reasons
• 1) the uneven sequence of capital account
  liberalization
• 2) the risk that a change in investor
  sentiment could
• cause a severe foreign reserve
  outflow
• 3) Available data on short-term debt and
  financial market
• indicators were not fully used

27
IMF Criticisms and IMF Response

• The Austerity Myth
• Confuses correlation with causation
• Countries seek IMF loans when in deep financial
  difficulties
• IMF financial support prevents
• Outright default
• Far more precipitous fall in the values of their
  currencies
• Battlefield medicine is never perfect
• IMF advice in crisis situations is not cast in
  stone but revised frequently in light of
  circumstances
• IMF programs make provision for social safety
  nets

Source www.imf.org
28
IMF Criticisms and IMF Response

• IMF favors Bankers and Elite
• Cutting off financing would worsen the situation
• Advise the country on what the appropriate
  policies should be
• Provide resources to the country to tide it over
  its difficulties
• Restore investor confidence
• Capital will once again flow into the country
• Capital inflows and sustained foreign investment
  benefit the country as a whole by
• Generating growth
• Creating jobs

Source www.imf.org
29
IMF Criticisms and IMF Response

• IMF encourage Moral hazard
• IMF lending does raise moral hazard concerns
  (typical of any insurance)
• Extent of moral hazard induced by the existence
  of IMF lending is small
• Does not outweigh the benefits to countries from
  having a financial safety net in place
• Highly unlikely that countries would ever want to
  find themselves in a crisis situation
• Markets see IMF support as limited and/or
  dependent on uncertain developments.

Source www.imf.org
30
IMF Criticisms and IMF Response

• IMF obstructs poor countries on debt reduction
• The IMF has supported initiatives to reduce the
  outstanding external debt of 26 countries
• Uganda school enrollment has tripled
• Mozambique half a million children have been
  vaccinated against deadly and preventable
  diseases
• Honduras children have 3 extra years of free
  primary education

Source www.imf.org
31
IMF favors G-7 ? No

• - Even though G-7 provide the bulk of the
  IMFs
• financial resources, the voting power is
  based on
• their quotas
• - 184 member countries
• - Most decisions are made by a consensus
• - General issue a simple majority (51)
• Important issue 70 85 majority

32
IMF favors G-7 ? No

• Even though G-7 provide the bulk of the IMFs
• financial resources, the voting power is
  based on
• their quotas
• 184 member countries
• Most decisions are made by a consensus
• General issue a simple majority (51)
• Important issue 70 85 majority

33
IMF favors G-7 ? No

• Voting power (as of June 06, 2005)
• The Executive Board is composed of 24 directors,
  who are appointed or elected by member countries
  or groups of countries, and Managing Director

34
IMF favors G-7 ? No

• Appointed

35
IMF favors G-7 ? No

• Elected

36
IMF UNACCOUNTABLE ? No

• The annual meetings for the world economy
• IMF cannot interfere in the domestic political
  matters, an active dialogue with civil society
  groups, labor groups
• Encouraging the low-income countries to
  participate in economic policies
• Transparency by opening information through
  web-site and IEO (Independent Evaluation Office)

37
IMF prejudice on trade-barriers on developing
countries? No

• IMF and World Bank have estimated global welfare
  gains of 250 mil to 680 mil from the elimination
  of tariff and quota restrictions
• China and India good example
• Most of the trade in the world occurs among
  industrial countries

38
Conclusion

• What would have happened had the IMF not
  intervened?. The situation might have been even
  worse without IMF intervention.
• Acording to many studies, Large-scale bail-out
  financing typically works better when debt levels
  are low and the countrys commitment to reform is
  credible.
• Typically the decisions within each of 1) the
  debtor country 2) private sector creditors and
  3) IMF are endogenous to actions in other groups.
  Therefore supporting role of each party is
  necessary for the participation of the others.
• Large loans to countries with large debt levels
  are unlikely to be repaid quickly.
• Therefore, We think that IMF is trying to solve
  many problems. Note that Battlefield medicine is
  never perfect . It requires support from the
  debtor country 2) private sector creditors to
  ensure it success.

39
References

• www.imf.org
• http//www.nuff.ox.ac.uk/users/Shin/PDF/catalytic9
  .pdf
• Other articles on UTA Online Library.