introduction – imf as a financial institution

Economic Surveillance: The IMF considers whether domestic policies promote countries' own stability by examining risks they might pose to domestic and balance of payments stability and a

PART 1 INTRODUCTION – IMF AS A FINANCIAL INSTITUTION

1.1 General Introduction of IMF:

The International Monetary Fund is a cooperative international monetary organization whose members currently include 183 countries of the world It was established together with the World Bank in 1945 as part of the Bretton Woods conference convened in the aftermath of World War II

Source: http://www.imf.org/external/index.htm

The IMF is responsible for the creation and maintenance of the international monetary system, the system by which international payments among countries take place, strives to provide a systematic mechanism for foreign

exchangetransactions in order to foster investment and promote balanced global economic trade

To achieve these goals, the IMF focuses and advises on themacroeconomicpolicies of a country, which affect its exchange rate and its government's budget, money and credit management The IMF will also appraise a country's financial sector and its regulatory policies, as well as structural policies within the macroeconomic that relate to the labor market and employment In addition, as a fund, it may offer financial assistance to nations

in need of correctingbalance of paymentsdiscrepancies The IMF is thus entrusted with nurturing economic growth and maintaining high levels of employment within countries

IMF’s Organization Structure

1.2 IMF’s Financial Resource:

Quota subscriptions generate most of the IMF's financial resources The size of each quota is determined by how much each government can pay according to the size of its economy The quota in turn determines the weight each country has within the IMF - and hence it’s voting rights - as well as how much financing it can receive from the IMF

Twenty-five percent of each country's quota is paid in the form of special drawing rights (SDRs), which are a claim on the freely usable currencies of IMF members Before SDRs, the Bretton Woods system had been based on a fixed exchange rate, and it was feared that there would not be enough reserves

to finance global economic growth Therefore, in 1968, the IMF created the SDRs, which are a kind of international reserve asset

The IMF does all of its accounting in SDRs, and commercial banks accept SDR denominated accounts The value of the SDR is adjusted daily against a basket of currencies, which currently includes the U.S dollar, the Japanese yen, the euro, and the British pound

If called upon by the IMF, a country can pay the rest of its quota in its local currency The IMF may also borrow funds, if necessary, under two separate agreements with member countries

PART 2 THE ROLE OF IMF IN INTERNATIONAL FINANCE

2.1 Economic Surveillance:

The IMF considers whether domestic policies promote countries' own stability by examining risks they might pose to domestic and balance of payments stability and advising on needed policy adjustments It also proposes alternatives if countries' policies promote domestic stability, but could impact global stability

The IMF monitors the international finance through consulting with member states

The IMF monitors members’ economies through regular—usually annual— consultations with each member country During these consultations, IMF staff discusses economic and financial developments and policies with national policymakers, and often with representatives of business, labor unions, and civil society Consultations consider the impact of fiscal, monetary, financial, and exchange rate policies on the member’s domestic and balance of payments stability, as well as on global stability, and assess risks and vulnerabilities The IMF offers advice on policies to promote each country’s macro-financial and balance of payments stability, drawing on experience across its membership The policy framework for these consultations is set in the Integrated Surveillance Decision These consultations are also informed by membership-wide initiatives, including:

- Work to systematically assess countries' vulnerabilities to crises;

- The Financial Sector Assessment Program (FSAP) In collaboration with the World Bank, the FSAP assesses countries’ financial sectors and helps formulate policy responses to risks and vulnerabilities

- The Standards and Codes Initiative This joint IMF-World Bank initiative assesses countries’ observance of a dozen internationally recognized standards and codes of good practice to support the design and implementation of related policies

- The IMF’s periodic reports on the World Economic Outlook, its regional overviews, the Fiscal Monitor, and the Global Financial Stability Report analyze global and regional macroeconomic and financial developments The key instruments of the IMF’s multilateral surveillance are two semi-annual publications produced by the Fund – the World Economic Outlook (WEO) and Global Financial Stability Report (GFSR) The WEO presents IMF staff analyses of global economic developments during the near and medium term The GFSR focuses on current conditions in global financial markets, highlighting issues that could pose a risk to financial market stability

In addition, broad developments in multilateral exchange rates are reviewed periodically by the Executive Board, e.g., through discussions of the WEO and the GFSR and of exchange rate and financial market developments

Finally, the IMF plays an important role in coordinating exit strategies from extraordinary crisis-related measures

For example, at the Pittsburgh, G-20 Summit leaders tasked the IMF and FSB with assisting Finance Ministers in developing a plan for coordinated exit strategies The recent IMF WEO highlights the difficulty of coordinating exits Countries authorities must carefully time exit from accommodative policies so that it is neither premature nor delayed The optimal timing of exit will vary with country circumstances, which could create cross-border spillovers that will affect the global recovery Substantive contributions from the IMF to this difficult analytical problem are importantly needed

2.2 Technical assistance and economic training

The IMF provides technical assistance and economic training in four main areas:

- Monetary and financial policies:

 Regulating the interest rate cap for preference areas: agriculture, export, small and medium enterprises, ancillary industries and the high-tech sector

 The stability of the exchange rate

 Flexible management exchange rate and foreign exchange market according to supply and demand of the market, the development of international balance of payments

 Monetary policy stance

 Flexible management and synchronization tools of monetary policy, reserve management in accordance with the M2 and credit to achieve the monetary targets, controlling credit growth

- Fiscal policy and management:

 Tax and customs policies and administration, budget formulation, expenditure management, design of social safety nets, and management of domestic and foreign debt

 Statistical data processing: Compilation, management, dissemination,

and improvement statistical data

 Advising on economic and financial legislation

 The Fund has undertaken a special responsibility for providing its member countries with technical assistance and training in economic management Over the years, this assistance has become increasingly important In addition to this assistance, significant help has been given to member countries by Fund staff member through training programs, missions and the services of resident representatives

 The types of assistance provided typically in the fields of central banking, fiscal matters and economic and financial statistics reflect this link The stress on technical assistance in central banking matter, for instance, is derived from the prime importance of monetary policy and properly functioning financial systems in economic management

 Similarly, advice on fiscal matters has always been a major activity because, in the Fund’s experience, fiscal imbalances frequently play a large part in balance of payments difficulties, while effective fiscal management contributes significantly to balance of payments equilibrium

 Research, bank supervision, operations and foreign exchange management and policy are at present the main focus of technical assistance provided by the Central Banking Department Other areas include accounting, statistics, organization and training

2.3 Loans to country’s with financial crisis:

2.3.1. Characteristics and purpose of IMF in solve crisis:

2.3.1.1. Some characteristics:

International Monetary Fund (IMF) is the world’s largest organization in the field of finance and monetary has shown its role in nearly half a century and has been active in bringing the crisis out of East Asia countries

Operating fund of this organization is mainly due to the contribution of members However, in case of necessity, it may also borrow from the international financial markets to supply loan fund (typically is the $300 billion

of debt) IMF also has a close collaboration with international banks for reconstruction and development (especially International Bank for Reconstruction and Development – IBRD) which was also established at the Bretton Woods conference IMF has set the lending limits and contributing limits for members

The criteria to determine the level of contribution is the potential of each country’s position in the world economy

2.3.1.2. Purpose:

IMF supports credit for member countries to deployment economic-social development projects; overcome the deficit in international balance of payment; solve the abnormal financial difficulties caused by nature or stabilize the price of strategic materials and fuels; adjust the monetary relationship between member countries

The countries which want to borrow from IMF must prove that they will use the money effectively The borrowers must present to the IMF some

reforms to remove their recent difficulties, such as devalue their currency, encourage exports and reduce government spending

2.3.2. Monetary crisis in Asia in 1997 and some measures of IMF:

2.3.2.1. The summary of the crisis:

- The context:

On July 1997, Thailand launched nearly 24 billion USD to keep the price of Bath without success; Thailand was forced to float the Bath, starting the first stage of crisis This immediately has an impact on the currencies of other countries in the region, from Malaysia, Philippine, Indonesia, Singapore and then spread to Korea, Japan, and Hong Kong, Russia and even causes a serious crisis on financial market of this country The European and American investors have diverted the investments from Asia to other countries with more stable situation (capital pouring into Asia this time fell to 60 billion in 1997), bankrupted a series of companies, the growth is negative and rising unemployment

- The causes:

The causes of this crisis is said to have no flexibility in the implementation of exchange rate regime, so freedom in allowing the external flow entering the investment channel, which makes the difference of exchange rate Also, in the early 90s, due to the difficult of market saturation, the competitiveness is low, the Asia countries in turns declared to debt, especially short-term debt, which needs international helps

Foreign debt and foreign- exchange reserves (end of 1997) Unit: billion USD.

(in total debt)

Foreign-exchange reserves

In addition, the form of economic bubble at this time, the weakness of the banking system with international speculation is also noticeable causes The speculation countries want to devalue the currencies of Asia countries to enhance the value of dollar, creating favorable conditions for them

2.3.2.2 Measures of IMF:

IMF has set a plan to help those countries with some criteria: resolutely prevent the evasion of repaying foreign loans; restore fiscal balance, especially budget balance; curb the increase of inflation; reestablishing and strengthening foreign-exchange reserves; reform and improve the operating efficiency of the banking system; remove the proprietary; declining output control

To accomplish this goal, the IMF has provided a huge loan of 26 billion SDRs, equivalent to 36 billion dollar for pioneering the amount of 77 billion dollar from multilateral and bilateral sources to support this policy

Besides financial assistance, IMF also help the three most affected countries: Indonesia, Korea and Thailand by arranging plans to reform economic to eliminate the cause of payment difficulties, prevent the spread of crisis and find the remedies, preparing the foundation for economic growth According to IMF, the main cause of balance of payment deficits are mostly due to monetary demand, and the cost of production and price of goods and services of countries are not fit together Thus to overcome this, IMF requires countries to implement two methods: the first is to reduce the total demand of

money thanks to monetary-credit policy and budget management The second

is currency devaluation or floating mode

2.3.2.3 Assess the role of IMF in crisis:

IMF paves the way for investment activities and financial aid from financial institution as well as other countries It also plays a mediating role of solving the crisis, standing out for settling solutions to countries which has crisis the ability to borrow the amount of 117 billion dollar

The financial aid of IMF has a role of preventing the spread of crisis and the decline of economy of many Asia countries Signs of recovery appeared in April 1999 showed that the financial crisis which lasted 21 months now has some optimistic views

In addition, IMF also proposed appropriate measures to reform the economy and financial structure for a sustainable development in the future

2.4 SDR mechanism:

2.4.1 Definition:

The Special Drawing Right (SDR) is an interest-bearing international reserve asset created by the IMF in 1969 to supplement other reserve assets of member countries

The SDR is based on a basket of international currencies comprising the U.S dollar, Japanese yen, euro and pound sterling It is not a currency, nor a claim on the IMF, but is potentially a claim on freely usable currencies

of IMF members

The value of the SDR is not directly determined by supply and demand in the market, but is set daily by the IMF on the basis of market exchange rates between the currencies included in the SDR basket

It can be held and used by member countries, the IMF, and certain designated official entities called "prescribed holders"—but it cannot be held, for example, by private entities or individuals The SDR also serves as the unit

of account of the IMF and some other international organizations