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International Monetary Fund

In: Business and Management

Submitted By Ankitamishra
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About IMF
The International Monetary Fund (IMF) works to bring up International Monetary Cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth and to reduce the poverty around the world. IMF was created in 1945 and it’s an organization of 187 countries.

Why IMF was created and how it works?
The IMF, also known as the “Fund,” was conceived at a United Nations conference convened in Bretton Woods, New Hampshire, United States, in July 1944. The 44 governments represented at that conference sought to build a framework for economic cooperation that would avoid a repetition of the vicious circle of competitive devaluations that had contributed to the Great Depression of the 1930s. Work of IMF
The primary mission of the IMF is to provide financial assistance to countries those countries who experience financial and economic difficulties and to sought those difficulties they are given financial help by using funds deposited with the IMF from the institution’s 187 member countries. Member of IMF states with balance of payments problems, which often arise from these difficulties, may request loans from IMF to help fill gaps between what countries earn and/or are able to borrow from other official lenders and what countries must spend to operate, including covering the cost of importing basic goods and services. In return, countries are required to launch certain reforms which have often been dubbed the Washington Consensus. These reforms are thought to be beneficial to countries with fixed exchange rate policies that may engage in fiscal, monetary, and political practices that may lead to the crisis itself. For example, nations with severe budget deficits, rampant inflation, strict price controls, or significantly overvalued or undervalued currencies run the risk of facing balance-of-payment crises. Thus, the structural adjustment programs are at least ostensibly intended to ensure that the IMF is actually helping to prevent financial crises rather than merely funding financial recklessness.

Characteristics of IMF * Membership: 187 Countries * Headquarter: Washington, D.C * Executive Board: 24 Directors representing countries or . groups of countries. * Staff: Approximately 2,500 from 160 countries * Total Quota: US $ 376 Billion (as of 25/5/11) * Additional Pledge or committed resources: US $ 600 Billion * Loans committed (as of 25/5/11): US $ 280 Billion, of which US $ 215 Billion . . have not been drawn. * Biggest borrowers (amount agreed as of 25/5/11): Greece, Portugal, Ireland. * Biggest precautionary loans
(amount agreed as of 25/5/11): Mexico, Poland, Colombia. * Surveillance Consultations: Consultations concluded for 120 countries . in FY 2010 and for 88 countries in FY 2011 . as , of 11/2/11. * Technical Assistance: Field delivery in FY 2010 – 192.5 person . years. * Transparency: In 2009, over 90 percent of Article IV and . program related staff report and policy . papers were published.

Aims of IMF
Article I of the Articles of Agreement sets out the IMF’s main goals: * Promoting international monetary cooperation. * Facilitating the expansion and balanced growth of international trade. * Promoting exchange stability. * Assisting in the establishment of a multilateral system of payments and * Making resources available with some adequate safeguards to members experiencing balance of payments difficulties.

Surveillance * To maintain the stability and to prevent crises in the international monetary system. * IMF reviews country policies, as well as national, regional, and global economic and financial developments through a formal system known as surveillance. * The IMF provides advice to its 187 member countries in order to encourage the policies which will foster economic stability, reduce vulnerability to economic and financial crises, and raise living standards of that particular country’s citizens.

Financial Assistance * IMF provides financial help to member countries in order to correct balance of payments problems. * A policy program supported by IMF is designed by the national authorities of a particular country in close cooperation with the IMF, and IMF only continues the financial support when there is a effective implementation of this program. * The IMF strengthened its lending capacity and approved the new mechanisms for providing financial support to the countries in April 2009, and with the further reforms adopted in August 2010. * The countries with the low-income, the IMF doubled loan access limits and are boosting its lending to the world’s poorer countries, with interest rates set at zero until 2012 to foster the economic growth of those countries.

Governance and Organization
The IMF is accountable to the governments of its member countries. * At the top of its organization structure is the Board of Directors, which consists of one Governor and one Alternate Governor from each member country. * The Board of Governors meets once each year at the IMF-World Bank Annual Meetings. Twenty-four of the Governors sit on the International Monetary and Finance Committee (IMFC) and meet at least twice each year.

Role of IMF in Foreign Exchange Management
The IMF’s surveillance function is very important when it comes to exchange rate policies. In a global recession, many countries are tempted to allow or to encourage their exchange rates to depreciate. The problem is that all countries cannot depreciate their currencies at the same time vis-à-vis the currencies of all other countries. Moreover, countries that are successful in doing so in effect export their unemployment.

Financial Resources
IMF’s resources mainly come from two sources Quotas and Loans. The capital of the fund includes quotas of member countries, amount received from the sale of gold, General Arrangements to Borrow (GAB), New Arrangements to Borrow (NAB) and loans from members nations.
Quotas and Loans and their Fixation: The Fund has General Account based on quotas allocated to its members. When a country joins the Fund, it is assigned a Quota that governs the size of its subscription, its voting power, and its drawing rights. The country will be assigned with an initial quota in the same range as the quotas of existing members that are broadly comparable in the economic size and characteristics. At the time of the formation of the IMF, each member is required to pay its subscription in full or on joining the Fund – of which 25 percent of its quota in gold/SDR/widely accepted currencies such as USD/ Euro/Yen/UK Pound and the rest in their own currencies. In order to meet the financial requirements of the Fund, the quotas are reviewed every five years and are raised from time to time. Loans from members and non-members constitute another major source of funds for the IMF. Since 1980 IMF has been authorized to borrow from commercial capital markets too. Quotas are denominated in Special Drawings Right, which is the IMF’S Unit of account. IMF has a weighted voting system. The larger a country’s Quota in the IMF (determined broadly by its economic size) the more the vote the country has, in addition to its basic votes of which each member has an equal number.

Fund Borrowings
Other than performing regulatory and consultative functions, the Fund is an important financial institution. The bulk of its financial resources come from quota subscriptions of member countries of IMF. Besides, it increases its funds by selling gold to members. While Quota subscriptions of member countries are its major source of financing, the IMF can activate supplementary borrowing arrangements if it believes that resources might fall short of the members’ needs. Through the General Arrangements to Borrow (GAB) and the New Arrangements to Borrow (NAB), a number of member countries express their readiness to lend additional funds to the IMF. GAB and NAB are credit arrangements between IMF and group of members and institutions to provide supplementary resources of up to US$54 billion to cope with the impairment of the international monetary system or to deal with the situation that poses threat to the stability of the system. The GAB enables the IMF to borrow specified amount of currencies from 11 developed countries or their Central Banks under certain circumstances at market related interest rates. Whereas the NAB is a set of credit arrangement between the IMF and 26 Members and Institutions. The NAB is the first and principal resource in the event of a need to provide supplementary resources to the IMF.
Commitments from individual participants are based predominantly on relative economic strength as measured by the IMF Quotas. Like other financial institutions IMF also earns income from the interest charges and fees levied on its loans.

Fund Lending
The Fund has a variety of facilities for lending its resources to its member countries. Lending the Fund is the temporary assistance to members in financing disequilibrium in their balance of payments on current account. Reserve tranche and Credit tranche facilities are two facilities available for meeting BOP deficits.

Reserve tranche: Every member country of IMF is entitled to borrow without any conditions a part of its Quota (i.e., the subscription paid by the member country to the IMF). If a member has less currency with the Fund than its quotas, the difference is called Reserve tranche. It can draw up to 25 percent on its reserve tranche automatically upon representation of the Fund for its balance needs. It is not charged on any interest on such drawings, but is required to repay within a period of three to five years.
Credit Tranche: A member can draw further annually from balance quota in 4 installment up to 100% of its quota from credit tranche. Drawings from credit tranches are conditional because the members have to satisfy the Fund adopting a viable programme to ensure financial stability.
Other Credit Facilities: * Buffer Stock Financing Facility (BSFF): It was created in 1969 for financing commodity buffer stock by member countries. This facility is equivalent to 30 percent of the borrowings member’s quota. * Extended Fund Facility (EFF): It is another specialized facility which was created in 1974. Under EFF, the Fund provides credit to member countries to meet their balance of payments deficits for longer periods, and in amounts larger than their quotas under normal credit facilities. * Supplementary Financing /Reserve Facility (SFF/SRF): It was established in 1977 to provide supplementary financing under extended or stand-by arrangements to member countries to meet serious balance of payments deficits that are large in relation to their economies and their quotas. * Structural Adjustment Facility (SAF): The Fund setup SAF in March 1986 to provide concessional adjustment to the poorer developing countries. * Enhanced Structural Adjustment Facility (ESAF): The EASF was created in December 1987 with SDR 6 billion of resources for the medium term financing needs for low income countries. The objectives, eligibility and basic programme features of this facility are similar to those of the SAF. * Compensatory & Contingency Financing Facility (CCFF): The CCFF is created in August 1988 to provide timely compensation for temporary shortfalls or excesses in cereal import costs due to factors beyond the control of the member and contingency financing to help a member to maintain the momentum of Fund-supported adjustment programmes in the face of external shocks on account of factors beyond its control. * Systematic Transformation Facility (STF): In April 1993, the IMF established STF with $6billion to help Russia and other Central Asian Republics to face balance of payments crisis. * Emergency Structural Adjustment LOAN (ESAL): The Fund established ESAL facility in early 1999 to help the Asian and Latin American countries inflicted with the financial crisis. * Contingency Credit Line (CCL): The CCL was created in 1999 to protect fundamentally sound countries from the contagion of financial crisis occurring in other countries, rather than from domestic policy weaknesses. * Poverty Reduction and Growth Facility (PRGF) and Exogenous Shock Facility (ESF): These are concessional lending arrangements to low income countries and are unpinned by comprehensive country –owned strategies, delineated in their Poverty Reduction Strategy Papers (PRSP). In recent years PRGF has accounted for the largest number of IMF loans. The interest levied on these loans is 0.5% only and the repayment period is over 5-10 years.

* Stand- By Agreements (SBA): SBA is designed to help countries having deficit BOP with an extended repayment period of 2 to 4 years. Under Stand-By and Extended Arrangements a member can borrow up to 100% of its quota annually and 300% cumulatively.

Exchange Rate
The original Fund Agreement provided that the par value of each member country has to be expressed in terms of gold of certain weight and fineness or US dollars. The underlining idea was to create a system of stable exchange rates with ordinary cross rates. But the Fund was obliged to agree to changes in exchange rates which did not exceed +/- 1 percent of the initial par value. A further change of +/- 1 percent required the permission of the Fund.
Other Facilities
The IMF advices its member countries on various problems concerning their BOP and exchange rate problems and on monetary and fiscal issues. It sends specialists & experts to help solve BOP and exchange rate problems of member countries.
The Fund has setup three departments to solve banking and fiscal problem of member countries: * There is the Central Banking Service Department which helps member countries with the services of its experts to run and manage their central banks and to formulate banking legislation. * The Fiscal Affairs Department renders advice to member countries concerning their fiscal matters.
The IMF institutes conducts short-term training courses for the officers of member countries relating to monetary, fiscal, banking and BOP policies.
The overall issue seems to be how to ensure the smooth and efficient functioning of financial markets to promote the general well being of the country while protecting taxpayer interests and facilitating business operations without creating a moral hazard. * Bursting of the U.S. housing market bubble and a rise in foreclosures has ballooned into a global financial and economic crisis. Some of the largest and most esteemed banks, investment houses, and insurance companies have either declared bankruptcy or have had to be rescued financially. * In October 2008, credit flows froze, lender confidence dropped, and one after another the economies of countries around the world dipped toward recession. * The crisis exposed fundamental weaknesses in financial systems worldwide, and despite coordinated easing of monetary policy by governments, trillions of dollars in intervention by central banks and governments, and large fiscal stimulus packages, the crisis seems far from over. * The industrialized nations of the world where most of the losses from subprime mortgage debt, excessive leveraging of investments and inadequate capital backing credit default swaps (insurance against defaults and bankruptcy) have occurred. * The second level of the crisis is among emerging market and other economies who may be” innocent bystanders” to the crisis but who also may have less resilient economic systems that can often be whipsawed by actions in global markets.

Four Phases of the Global Financial Crisis
The global financial crisis as it has played out in countries across the globe has been manifest in four overlapping phases. Although each phase has a policy focus, each phase of the crisis affects the others, and, until the crisis has passed, no phase seems to have a clear end point. First Phase: Contain the Contagion and Strengthen Financial Sectors
The first phase has been intervention to contain the contagion and strengthen financial sectors in countries. On a macroeconomic level, this has included policy actions such as lowering interest rates, expanding the money supply, quantitative (monetary) easing, and actions to restart and restore confidence in credit markets. On a microeconomic level, this has entailed actions to resolve immediate problems and effects of the crisis including financial rescue packages for ailing firms, guaranteeing deposits at banks, injections of capital, disposing of toxic assets, and restructuring debt.

Second Phase: Coping with Macroeconomic Effects The financial crisis soon spread to real sectors to negatively affect whole economies, production, firms, investors, and households. Many of these countries, particularly those with emerging and developing markets, have been pulled down by the ever widening flight of capital from their economies and by falling exports and commodity prices. In these cases, governments have turned to traditional monetary and fiscal policies to deal with recessionary economic conditions, declining tax revenues, and rising unemployment.

Following figure shows the effect of the financial crisis on economic growth rates (annualized changes in real GDP by quarter) in selected nations of the world. The figure shows the difference between the 2001 recession that was confined primarily to countries such as the United States, Mexico, and Japan and the current financial crisis that is pulling down growth rates in a variety of countries.

In July-August 2009, there was a growing consensus among forecasters that the world had seen the worst of the global recession and that economies would hit bottom in 2009 and begin a weak recovery as early as the second half of 2009. On June 24, the Organization for Economic Cooperation and Development revised its world economic outlook upwards for the first time in two years. Most of this improved outlook, however, was in higher growth in China (7.7%) and other developing countries and less negative growth in the United States (-2.8%) for 2009. The outlook for the Euro zone (-4.8%) and Japan (-6.8%) for 2009 was slightly worse. The OECD reported that housing prices were falling in all OECD countries except for Switzerland. 49

Regulatory and Financial Market Reform
In this third phase, the immediate issues to be addressed by the United States and other nations centre on “fixing the system” and preventing future crises from occurring. Much of this involves the technicalities of regulation and oversight of financial markets, derivatives, and hedging activity, as well as standards for capital adequacy and a schema for funding and conducting future financial interventions, if necessary. In the November 2008 G-20 Summit, the leaders approved an Action Plan that sets forth a comprehensive work plan.

Dealing with Political, Social and Security Effects
The fourth phase of the financial crisis is in dealing with political, social, and security effects of the financial turmoil. These are secondary impacts that relate to the role of the United States on the world stage, its leadership position relative to other countries, and the political and social impact within countries affected by the crisis. For example, on February 12, 2009, the U.S. Director of National Intelligence, Dennis Blair, told Congress that instability in countries around the world caused by the global economic crisis and its geopolitical implications, rather than terrorism, is the primary near-term security threat to the United States.

Effects of Financial Crisis
Following Figure shows indexes of the value of selected currencies relative to the dollar for countries in which the effects of the financial crisis have been particularly severe.
For much of 2007 and2008, the Euro and other European currencies, including the Hungarian had been appreciating in value relative to the dollar. Then the crisis broke. Other currencies, such as the Korean won, Pakistani rupee, and Icelandic krona had been steadily weakening over the previous year and experienced sharp declines as the crisis evolved. Recently, however, they have recovered slightly.
For a country in crisis, a weak currency increases the local currency equivalents of any debt denominated in dollars and exacerbates the difficulty of servicing that debt. The greater burden of debt servicing usually has combined with a weakening capital base of banks because of declines in stock market values to further add to the financial woes of countries. National governments have had little choice but to take fairly draconian measures to cope with the threat of financial collapse. As a last resort, some have turned to the International Monetary Fund for assistance.

As economies weakened, governments moved from shoring up their financial institutions to coping with rapidly developing recessionary economic conditions. While actions to assist banks, insurance companies, and securities firms recover or stave off bankruptcy continued, stimulus packages became policy priorities. In the fourth quarter of 2008, economic growth rates dropped in some countries at rates not seen in decades.

Impact of Financial Crisis on Greece
IMF Approves € 30 Bn Loan for Greece on Fast Track * Combines € 20 Million available immediately from joint EU-IMF financial support. * IMF Executive Board unanimously approves packages designed to stabilize Greek Economy. * Backs Greece with largest loan and exceptional, fast track access.
The International Monetary Fund (IMF) approved on May 9. A €30 billion three-year loan for Greece as part of a joint European Union-IMF €110 billion financing package to help the country ride out its debt crisis, revive growth, and modernize the economy.
This help by IMF to Greece was done in the context to the broad international effort under way to help bring stability to the Euro area and secure the recovery of the Euro in the global economy.
The program approved by the IMF’S board makes about €5.5 billion immediately available to Greece from the Fund as part of joint financing with the European Union, for a combined €20.0 billion in immediate financial support. In 2010, total IMF financing will amount to about €10 billion and will be partnered with about €30.0 billion committed by the EU. The joint financing means that Greece will not have to tap international financial markets until 2012.
Greece faces a dual challenge. It has a severe fiscal problem with deficits and public debt that are too high; and it has a competitiveness problem. Both need to be addressed for Greece to be placed on a path of recovery and growth.
First, the government’s finances need to be sustainable. That requires reducing the fiscal deficit and placing the debt-to-GDP ratio on a downward trajectory. Since wages and social benefits constitute 75 percent of total government expenditure, this means that the public wage and pension bills have to be reduced. There is hardly any other room for maneuver in terms of fiscal consolidation.
Second, the economy needs to be more competitive. This means pro-growth policies and reforms to modernize the economy and open up opportunities for all. It also means that inflation be reduced below the euro area average, including by keeping wages and labor costs flat, so that Greece can regain price competitiveness.
The program aims to safeguard Greece’s financial sector stability. As the banking system goes through a period of deflation, which is expected to impact profitability and bank balance sheets.
Greece reached agreement with the International Monetary Fund (IMF), the European Commission, and the European Central Bank (ECB) on a focused program to stabilize its economy, become more competitive, and restore market confidence with the support of a €110 billion (about $145 billion) financing package.
Negotiations over the details of the packages, involving budget cuts, a freeze in wages and pensions for three years, and tax increases to address Greece's fiscal and debt problems, along with deep reforms designed to strengthen Greece’s competitiveness and revive stalled economic growth.
IMF support will be provided under a three-year €30 billion (about $40 billion)Stand-By Arrangement (SBA)—the IMF’s standard lending instrument. In addition, euro area members have pledged a total of €80 billion (about $105 billion) in bilateral loans to support Greece’s effort to get its economy back on track. Implementation of the program will be monitored by the IMF through quarterly reviews.
Impact of Global Crisis on Argentina
The Argentine economic crisis was a financial situation that affected Argentina’s economy during the late 1990s and early 2000s. Macroeconomically speaking, the critical period started with the decrease of real GDP in 1999 and ended in 2002 with the return to GDP growth, but the origins of the collapse of Argentina's economy, and their effects on the population, can be found in action before.
During 1976–1983 huge debt was acquired for money that was later lost in unfinished projects, the Falklands War, and the state's takeover of private debts; in this period, a neolibral economic platform was introduced. By the end of the military government the country's industries were severely affected and unemployment, calculated at 18% (though official figures claimed 5%), was at its highest point since the Great Depression.
Following a second bout of hyperinflation, in late 1990 Domingo Cavello was appointed Minister of the Economy. In 1991 he took executive measures that fixed the value of Argentine currency at 10,000 per USD. Furthermore any citizen could go to a bank and convert any amount of domestic currency to dollars. To secure this "convertibility" the Central Bank of Argentina had to keep its U.S. dollar Foreign Exchange Reserves at the same level as the cash in circulation.As a result of the convertibility law inflation dropped sharply, price stability was assured and the value of the currency was preserved.

Role of IMF in Managing Global Financial Crisis IMF has helped in resolving problem by two ways : * Immediate crisis control through balance of payments lending to emerging market and less-developed countries. * Increased surveillance of the global economy through better coordination with the international financial regulatory agencies.

Though the IMF is unlikely to lend to the developed countries most affected by the crisis and must compete with other international financial institutions1 as a source of ideas and global macroeconomic policy coordination, the spill over effects of the crisis on emerging and less-developed economies gives the IMF an opportunity to reassert its role in the international economy on two key dimensions of the global financial crisis: * Immediate crisis management * Long-term systemic reform of the international financial system.

Over the past three decades, floating exchange rates and financial globalization have contributed to, in addition to substantial wealth and high levels of growth for many countries, an international economy marred by exchange rate volatility and semi-frequent financial crises. The IMF adapted to the end of the fixed-exchange rate system by becoming the lender of last resort for countries afflicted by such crises.

Current IMF operations and responsibilities can be grouped into three areas: * Surveillance: involves monitoring economic and financial developments and providing policy advice to member countries. * Lending: Lending entails the provision of financial resources under specified conditions to assist a country experiencing balance of payments difficulties. * Technical: assistance includes help on designing or improving the quality and effectiveness of domestic policy-making.

The IMF’s total financial resources as of August 2008 were $352 billion, of which $257billion were usable resources. The most the IMF ever lent in any one year period (the four quarters through September 1998 at the height of the Asian financial crisis) was $30billion. The most lent during any two-year period was $40 billion between June 2001-2003 during the financial crises in Argentina, Brazil, Uruguay, and Turkey. The IMF is wholly unequipped to provide by itself the necessary liquidity to the United States and affected industrialized countries.
While the IMF has struggled to define its role in the global economy, the global financial crisis has created an opportunity for the IMF to reinvigorate itself and possibly play a constructive role in resolving, or at the least mitigating, the effects of the global downturn, on two fronts:

* Through immediate crisis management, primarily balance of payments support to emerging-market and less-developed countries. * Contributing to long-term systemic reform of the international financial system.

Immediate Crisis Management
IMF rules stipulate that countries are allowed to borrow up to three times their quota over a three-year period, although this requirement has been breached on several occasions where the IMF has lent at much higher multiples of quota. While many emerging market countries, such as Brazil, India, Indonesia, and Mexico, have stronger macroeconomic fundamentals than they did a decade ago, a sustained decrease in U.S. imports resulting from an economic slowdown could have recessionary effects overseas.
On October 29, 2008, the IMF announced that it plans on creating a new three month short-term lending facility aimed at middle income countries such as Mexico, South Korea, and Brazil. The IMF plans to set aside $100 billion for the new Short-Term Liquidity Facility (SLF).

Reforming Global Macroeconomic Surveillance
In addition to revising its emergency lending assistance guidelines to make the IMF’s financial assistance more attractive to potential borrowers, there is a role for the IMF to play in the broader reform of the global financial system. Efforts are underway to expand the IMF’s ability to conduct effective multilateral surveillance of the international economy.
As the global financial system has become increasingly interconnected, the IMF has conducted multilateral surveillance beyond two bi-annual reports it produces: * World Economic Outlook * Global Financial Stability Report

These efforts at multilateral surveillance, however, have been criticized as being less than fully effective, too focused on bilateral issues, and not fully accounting for the risks of contagion that have been seen in the current crisis.
In October2008 IMF panel on the future of the IMF reiterated these concerns, adding that many developed countries have impeded the IMF’s efforts at multilateral surveillance by largely ignoring IMF’s bilateral surveillance of their own economies and not fully embracing the IMF’s first attempt at multilateral consultations on global imbalances in 2006.
Analysts argue, however, that developed countries have long ignored IMF advice on their economic policy, while at the same time pressuring the IMF to use its role in patrolling the exchange rate system to support their own foreign economic goals.

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International Monetary Fund

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