IB ppt on IMF

8/2/2019 IB ppt on IMF

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IB PRESENTATION

ON

:INTERNATIONALMONETARY FUND

By:Ankita Srivastava

Piyush Shukla

MBA(HR & IR)

IInd Semester


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IMFORIGINOF IMF

The International Monetary Fund(IMF) is aninternational monetary institution established by 44nations under the Bretton Woods Agreement of July1944.

The principal aim is to avoid the economic mistakesof 1920s and 1930s.

Thus IMF was established to promote economic andfinancial cooperation among its members in order

to facilitate the expansion and balanced growth ofworld trade.

It started functioning from 1st March.1947. Till 31stJanuary 2008, the Fund has 185 members.


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BRETTON WOODS (1944 - 1973)

44 countries met to design a new system in1944

Established:

International Monetary Fund (IMF) and World

Bank

IMF: maintain order in monetary system

World Bank: promote general economic development

Fixed exchange rates pegged to the US Dollar US Dollar pegged to gold at $35 per ounce

Countries maintained their currencies 1% of the fixed rate;

buy/sell own currency to maintain level


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THE ROLEOFTHE IMF

IMF maintained exchange rate discipline

National governments had to manage inflation through their moneysupply

flexibilityProvides loans to help members states with temporary balance-of-

payment deficit;

Allows time to bring down inflation

Relieves pressures to devalueExcessive drawing from IMF funds came with IMF supervision of

monetary and fiscal policies

Allowed to 10% devaluations and more with IMF approval


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OBJECTIVESOF IMF :1) To promote international monetary cooperation

through a permanent institution which providesmachinery for consultation and collaboration ininternational monetary problems.

2) To facilitate the expansion and balanced growthof international trade and to ensure high level ofemployment.

3) To promote exchange rate stability and to avoid

competitive exchange depreciation.


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4) To assist in the establishment of a multilateral

system of payments in respect of currenttransactions between members.

5) To make the general resources of the Fundtemporarily available to members in order tocorrect maladjustments in their balance ofpayments.

6) In accordance with the above, to shorten theduration and lessen the degree of disequilibriumin the international balances of payments of

members.


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2. Membership and Governance

Article II, Section 2: Membership shall be open to other countriesat such times and in accordance with such terms as may beprescribed by the Board of Governors. These terms, including the

terms for subscription, shall be based on principles consistentwith those applied to other countries that are already members.

Membership in the IMF is not conditional on membership in otherorganizations (e.g., UN, the World Bank)

Terms of membership the policy is that new members shouldnot have permanent rights and obligations that differ from thoseof original members

Membership is open to an applicant who: (a) is a country withinthe attributes of statehood defined by international law, (b) is

willing and able to perform the obligations of membershipcontained in the Articles, and (c) accepts the terms of aMembership Resolution of the Board of Governors.

Domestic legislation is not a valid defense for not observingmembership obligations


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Any member may request an interpretation of the Articles of

Agreement pursuant to the provisions of Article XXIX

Members can voluntarily withdraw from the Fund. Article XXVI:Any member may withdraw from the Fund at any time bytransmitting a notice in writing to the Fund at its principal office.Withdrawal shall become effective on the date such notice isreceived.

Withdrawalcan also be compulsory. Procedures are outlined inArticle XXVI, Section 2: Failure to fulfill obligations may result in ineligibility to use

Fund resources; Suspension of voting rights; Decision by the Board of Governors by a majority having 85

percent of the total voting power on withdrawal frommembership

Upon withdrawal settlements are made between the Fund andthe member upon agreement or as prescribed by the Articles ofAgreement


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IMF OrganizationStructure

International MonetaryInterim Committee

Board of Governors Joint IMF-World BankDevelopment Committee

Executive Board

Managing Director

IMF Secretariat


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Board of Governors

Highest policy making body of the IMF: All powers notconferred directly on the Board of Governors, the Executive

Board or the Managing Director shall be vested in the Boardof Governors (Article XII, 2(a))May delegate to the Executive Board the exercise of any of its

powers, except those directly conferred to it

One governor and one alternate governor appointed by

each memberUsually finance ministers or central bank headsWeighted voting--cast the number of votes allotted to the

member appointing him

Governors elect one of the governors as chairman Not in continuous session; meets once a yearAnnualMeetings May establish committees (e.g., International Monetary and

Financial Committee (IMFC), joint World Bank-IMFDevelopment Committee)


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The Executive Board

Responsible for conducting the business of the IMF and for exercising thepowers delegated to it by the Board of Governors

Sits in continuous session, meeting as often as the business of the IMFmay require It has 21 members at present

5 Executive Directors are appointed by the 5 members with thelargest quotas (currently US, Japan, Germany, UK and France) and

15 Executive Directors are elected at intervals of 2 years by theremaining members.

There is a Managing Director of the Fund who is elected by theExecutive Director.

Board of Governors, by an 85 percent majority of the total votingpower, may increase or decrease the number of Executive Directorsin the second category.

Weighted voting structure - each Executive Director casts the number ofvotes allotted to members that he or she represents. Most decisions of the

Executive Board require only a simple majority of the votes cast; somerequire either 70% or 85% of the total voting power

Voting is rare - most decisions are taken by consensus. The Chairmanascertain the sense of the meeting in lieu of a formal vote. Any ExecutiveDirector may require a formal vote.


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The Managing Director, IMF Secretariat, Interim andDevelopment Committee

Chairman of the Executive Board and chief of theoperating staff

Selected by the Executive BoardMay not be selected from among the governors or the Executive

Directors Term of 5 years, but shall cease to hold office when so decided by

the Executive Board Conducts ordinary business of the IMF under the direction of

the Executive BoardSubject to general control of the Executive Board, responsible for

organization, appointment and dismissal of staff Interim Committee was established to supervise the

management and adaptation of the international monetary

system in order to avoid disturbances that might threaten it. Development Committee advises and reports to the Board of

Governor on all aspects of the transfer of real resources todeveloping countries and make suggestions for theirimplementation.


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3. Financial structure Sources of Fund financing:

(a) members quota subscriptions (currently about $305 billion)

(b) borrowing to supplement the resources available from quotas (e.g.,General Arrangements to Borrow (GAB) since 1962; New Arrangementsto Borrow (NAB) in 1997);

(c) Income from investments (Article XII, Section 6(f)(i)).

Members quotas

Each member of the Fund is assigned a quota which broadly determinedby its economic position relative to other members (economic considerationsinclude the members GDP, volume of current account transactions, andofficial reserves)

Determines a members : (i) maximum financial commitment to the IMF, (ii)voting power in the IMF, (iii) size of its access to financial resources and (iv)

share in any allocation of Special Drawing Rights (SDR)

Quotas are reviewed every 5 years to determine whether any adjustmentsare needed in light of the growth of the world economy and changes inindividual countries economic positions. The Thirteenth general review is tobe completed by January 30, 2008.


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Members must pay subscription equal to their quotas. Up to 25percent must be paid in reserve assets specified by the IMF(foreign currencies acceptable to the IMF or SDRs); thebalance may be paid in the members own currency

Voting power of each memberEach member has 250 votes (referred to as basic votes) plus one

vote per 100,000 SDRs of quota. Significance of the basic voteshave diminished from their original level of 11 percent of total votesto approximately 2 percent because of quota increases

A members quota cannot be changed without its consent(Article III, Section 2(d))

If a member consents to a reduction of its quota, the Fundshall within 60 days pay to the member an amount equal to the

reduction (Article III, Section 3(c))

Over time some members quotas and representation in theFund got out of line with the members relative positions in theworld economy. Thus the need for reform of quota and voice.


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IMF MEMBERSWITHLARGESTQUOTASHARES(ASOF APRIL 2007)

Member Quota share

(%)

Votes (% of

total)United States 17.14 16.83

Japan 6.14 6.04

Germany 6.00 5.90France 4.95 4.87

United Kingdom 4.95 4.87

Italy 3.26 3.21

Saudi Arabia 3.22 3.17

China 3.73 3.67

Canada 2.94 2.89

Russia 2.74 2.70


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4. Functions of the IMF Purposes stated in Article I translate into three main functions:

(a) surveillance,

(b) financial assistance,

(c) technical assistance(a) Surveillance

Article IV, Section 1 requires members to collaborate with the Fund andother members to assure orderly exchange arrangements and topromote a stable system of exchange rates and requires each memberto:

Direct its economic and financial policies toward the objective offostering orderly economic growth

Seek to promote stability by fostering orderly underlying economic andfinancial conditions and an orderly monetary system

Avoid manipulating exchange rates or the international monetarysystem in order to prevent effective balance of payments adjustmentor gain an unfair competitive advantage

Follow exchange policies compatible with the undertaking of the above

The purpose of surveillance is to enable the Fund to oversee (i) theinternational monetary system to ensure its effective operation (multilateralsurveillance, e.g., World Economic Outlook, Global Financial StabilityReport, multilateral consultations) and (ii) members compliance with theobligations specified under Article IV, Section 1 (bilateral surveillance).


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(b) Financing

Article I(v)To give confidence to members by making the generalresources of the Fund temporarily available to them under adequatesafeguards, thus providing them with opportunity to correctmaladjustments in their balance of payments...

IMF financing can only be provided to deal with balance of paymentsproblems; cannot be provided for other purposes or specific projects. Therequested use of the resources must be consistent with the provisions of theArticles and policies adopted under the Articles.

IMF financing from the GRA does not take the form of loans, but rather themember receiving assistance purchases the currencies of other membersthat have strong balances of payments positions or SDRs with its owncurrency. Fund arrangements are not international agreements.

IMFs resources are only meant for temporary use (revolving character) amember is required to repurchase its currency within a specified period oftime.

IMF financing is provided under adequate safeguards

Only if a member is prepared to take the steps necessary to addressits balance of payments difficulties

Achieved through the member implementing a program of economicreform that deals with problem

Member can purchase the reserve tranche subject to representation ofbalance of payments need which cannot be challenged ex-ante by theFund and free from conditionality, charges, or repurchase obligations


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(c) Technical assistance

Services provided under Article V, Section 2(b) shall not impose anyobligation on a member without its consent

Administration of the Poverty Reduction and Growth Facility and ExogenousShocks Facility (PRGF-ESF) Trust (1987) and PRGF-HIPC Trust areexamples of financial services provided under this Article

The PRGF is a concessional lending facility for low-income members (annualinterest rate of 0.5 percent, loan maturity stretching from five-and-a-half to 10years)

Resources from the PRGF-HIPC Trust are used for debt relief operations

Other examples of technical assistance: in fiscal area (drafting of tax orbudget legislation); in statistics (helping to set a framework for collection andanalysis of data); banking sector reform (banking laws, supervision matters,financial sector restructuring); law reform (judicial reform). Mainly in support

of private sector developmentTechnical services are provided by the IMF staff under theauthority of the Managing Director


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THE ROLEOF GOLDIN IMF

Although the Fund dethroned the gold

standard, yet gold continued to play animportant role in the Fund till SecondAmendment to the IMF Charter.

With the Second Amendment, a newinternational currency, SDR, has beenintroduced for all transactions with membercountries. This currency is no longer linked

to gold but to a basket of five majorcountries.

There is no official price of gold and membersare required to make payments in gold to

the Fund.


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SPECIAL DRAWING RIGHT(SDRS)

In early 1970s, the IMF introduced a schemefor the creation and issue of SDR, alsoknown as paper gold. This was createdthrough the First Amendment to the Fund

Articles of Agreement on July 28,1969 .There are three principal uses of the SDR:

a. The first is transactions with designation.

b. SDRs are used in all the transactions withthe Fund.

c. Transactions are held by agreement.


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