International business environment lesson 06

66 International Business Environment LESSON 6 CONVERTIBILITY, EXCHANGE RESTRICTIONS AND INTERNATIONAL MONETARY SYSTEM CONTENTS 6.0 Aims and Objectives 6.1 Introduction 6.2 Exchange

66

International Business Environment LESSON

6

CONVERTIBILITY, EXCHANGE RESTRICTIONS AND INTERNATIONAL MONETARY SYSTEM

CONTENTS

6.0 Aims and Objectives 6.1 Introduction

6.2 Exchange Rate Systems 6.2.1 Fixed Exchange Rate System 6.2.2 Flexible Exchange Rate System 6.3 Exchange Rates and Convertibility of the Rupee 6.3.1 Convertibility of Foreign Exchange 6.3.2 The Three Tasks

6.3.3 A Dozen Combinations 6.3.4 The Darling Pair

6.3.5 Impossible Trinity 6.3.6 Badge of Dishonour 6.3.7 Necessity is Mother 6.4 Convertibility in India 6.4.1 Current Account Convertibility 6.4.2 Capital Account Convertibility 6.4.3 Tarapore Committee on Capital Account Convertibility (CAC) 6.4.4 Exchange Restrictions

6.5 International Monetary Fund 6.5.1 Organization and Purpose 6.5.2 History of IMF 6.5.3 IMF Today 6.5.4 Data Dissemination Systems 6.5.5 Membership Qualifications 6.5.6 Members' Quotas and Voting Power, and Board of Governors 6.5.7 Assistance and Reforms

6.5.8 IMF/World Bank Support of Military Dictatorships 6.6 Let us Sum up

6.7 Lesson End Activity 6.8 Keywords

6.9 Questions for Discussion 6.10 Suggested Readings

67 Convertibility, Exchange Restrictions and International Monetary System

6.0 AIMS AND OBJECTIVES

After studying this lesson, you should be able to:

• Understand the process of convertibility

• Study the functions of International monetary fund

• Know the exchange restrictions

6.1 INTRODUCTION

Exchange control is one of the important means of achieving certain national

objectives like an improvement in the balance of payments position, restriction of

inessential imports and conspicuous consumption, facilitation of import of priority

item, control of outflow of capital and maintains of the external value of the currency

Under the exchange control, the whole foreign exchange resources of the nation,

including those currently occurring to it, are usually brought directly under the control

of the exchange control authority (the Central Bank, treasury or a specially constituted

agency) Exporters have to surrender the foreign exchange earnings in exchange for

home currency and the permission of the exchange control authority, on the basis of

national priorities

The allocation of foreign exchange is made by the exchange control authority, on the

basis of national priorities

Though the exchange control is administered by a central authority like the central

bank, the day-today business of buying and selling foreign exchange is ordinarily

handled by private exchange dealers, largely the exchange departments of commercial

banks For example, in India there are authorized dealers and money changers, entitled

to conduct foreign exchange business

6.2 EXCHANGE RATE SYSTEMS

Broadly, there are two important exchange rate systems, namely the fixed exchange

rate system and flexible exchange rate system

6.2.1 Fixed Exchange Rates System

Countries following the fixed exchange rate (also known as stable exchange rate and

pegged exchange rate) system agree to keep their currencies at a fixed, pegged rate

and to change their value only at fairly infrequent intervals, when the economic

situation forces them to do so

Under the gold standard, the values of currencies were fixed in terms of gold Until

the breakdown of the Bretton Woods System in the early 1970, each member country

of the IMF defined the value of its currency in terms of gold or the US dollar and

agreed to maintain (to peg) the market value of its currency within 1 per cent of the

defined (par) values Following the breakdown of the Bretton wood system, some

countries took to manage floating of their currencies while a number of countries still

embraced the fixed exchanged rate system

6.2.2 Flexible Exchange Rate System

The relative merits and demerits of the fixed and flexible exchange rate system have

long been a topic for debate A number of arguments have been put forward for and

against each system The important arguments supporting the stable exchange rate

system are as follows:

68

International Business Environment 1 Exchange rate stability is necessary for orderly development and growth of

foreign trade If exchange rate stability is not assured Exporters will be uncertain about the amount they will receive and imports will uncertain about the amount they will have to pay Such uncertainties and the associate’s risks

2 Especially the developing countries, which have a persistent balance of payment deficits, should necessarily adopt the stable exchange rate system to prevent continuous depreciation of the external value of their currencies

3 Exchanges rate stability is necessary to attract foreign capital investment, as foreigners will not be interested to invest in a country with an unstable currency Thus, exchange rate stability is necessary to augment resources and foster economic growth

4 Unstable exchange rate stability is necessary to prevent its outflow

5 A stable exchange rate system eliminates speculation in the foreign exchange market

Check Your Progress 1

1 What are the objectives of exchange control?

………

………

2 What do you understand by fixed exchange rate?

………

………

6.3 EXCHANGE RATES AND CONVERTIBILITY OF THE RUPEE

Free convertibility of a currency means that the currency can be exchanged for any other convertible currency, without any restriction, at the market determined exchange rates Convertibility of the rupee, thus means that the rupee can be freely converted into dollar, pound sterling, yen, Deutsche mark, etc and vice versa at the rates of exchange determined by the demand and supply forces

After the collapse of the Bretton Woods System in 1971, the rupee was pegged to pound sterling for four years after which (since September 1975) it was linked to a basket of 14 and later 5 currencies of India’s major trading partners This system continued through the 1980s, though the exchange rate was allowed to fluctuated in a wider margin and to depreciate modestly with a view to maintain competitiveness However, the need for adjusting exchange rate becomes precipitous in the face of the external payments crisis of 1991 As a part of the overall macroeconomic stabilization program, the exchange rate of the rupee was devalued in two stages by 18 per cent in terms of the US dollar in July 1991

As a part of the economic policy reforms, the rupee was made partially convertible since March 1992 The move towards convertibility of the rupee was in line with the worldwide trend towards currency convertibility According to the IMF, 70 countries accepted current account convertibility by 1990 while another 10 joined them in 1991 The opening up of capital account becomes very popular among the developing countries in the 1990s

According to the system of partial convertibility of the rupees (Liberalized Exchange Rate Management System—LERMS) introduction in March 1992, 60 percent of all receipts under current transactions (merchandise exports and invisible receipts) could

be converted at the free market exchange rate quoted by the authorized dealers The rate applicable for the remaining 40 percent was the official rate fixed by the reserve

69 Convertibility, Exchange Restrictions and International Monetary System

bank This 40 per cent of the total foreign exchange receipts under the current account

was exclusively meant to cover government needs and to be made available to meet

40 per cent of the value of the advance licenses and special import licenses

6.3.1 Convertibility of Foreign Exchange

Full convertibility is a necessity that can inject high-octane fuel into the economy It

will secure the autonomy of the RBI in the management of monetary policy and

interest rates The RBI and the Government have an onerous task ahead but it will

vouchsafe India the trinity of equity, enterprise and economic growth, says

G Ramachandran

Full convertibility has become a necessity It is no longer negotiable Managing the

rupee's dirty float within a system of limited convertibility and full interest rate

autonomy has become a nightmare The Reserve Bank of India (RBI) has had a torrid

time balancing capital inflows against the nation's policy on money supply, interest

rates, inflation, price stability and growth

Full convertibility and freely floating exchange rates are not joint policy issues

But a combination of the two will restore India's full autonomy over money supply,

interest rates and growth

6.3.2 The Three Tasks

They have onerous tasks ahead First, full convertibility will require a system of

monitoring and deterrence aimed at flows related to terrorism, crime and money

laundering Second, the roadmap to convertibility will have to address how India will

integrate itself into the global currency markets They will set the spot price of the

rupee after reckoning with its supply and demand They will also set the rupee's

forward price after reckoning with rupee interest rates The road map will have to

address how the price of domestic credit will flow into the global currency markets

Third, the road map to convertibility will have to address how India will put in place a

fair and free market for domestic credit India has come a long way since July 1991

when it deregulated interest rates on corporate debentures But there is some more

distance to go in the context of other borrowers

6.3.3 A Dozen Combinations

Convertibility, interest rate autonomy and exchange rate systems are tightly related

policy issues Convertibility or capital mobility offers two courses of action Interest

rate policy offers two And exchange rate policy three There are in all a dozen

theoretical combinations Many are sustainable; at least one is impossible

First, India can choose to control convertibility or have no control Second, India can

choose autonomous money supply and interest rates or slavishly allow these to be set

by the central bank of a foreign country Third, India can choose to follow one of

three types of exchange rate regimes for the rupee They are freely floating, fixed and

pegged rates Fixed rates are not the same as pegged though many think they are

Though floating and fixed rates appear to be dissimilar, they are members of the same

family Pegged rates are the odd men out

6.3.4 The Darling Pair

Floating and fixed rates are free-market mechanisms for international payments in the

current and capital accounts With a floating rate, the RBI chooses monetary policy,

but cedes control over the exchange rate policy The rupee is on autopilot As a

desirable result, the RBI wholly determines India's monetary base and interest rates

With a fixed rate, the RBI sets the exchange rate but has no monetary policy The

monetary policy is on autopilot The monetary base is determined by the balance of

payments When foreign exchange reserves increase, the monetary base expands

70

International Business Environment Interest rates could fall; inflation could rise When reserves decrease, the monetary

base contracts Interest rates could rise Growth could be undermined

Growth is good for India That is not negotiable Price stability is good for India That too is not negotiable Therefore, it is wholly inadvisable to cede control over monetary policy and interest rates to the central bank of a foreign country So, full interest rate autonomy and freely floating exchange rates are possible, compatible and desirable Full interest rate autonomy and fixed exchange rates are impossible

6.3.5 Impossible Trinity

India's economy and governance style, unlike China's, does not make pegging the

rupee a viable choice (see Business Line, June 4, 2005) India has to work with fully

floating exchange rates But they pose significant problems to exporters and importers

Exporters may be very uncomfortable if the rupee strengthened from Rs 44 to 40 per

US dollar in response to strong inflows of global capital Importers may be wrecked if the rupee weakened from Rs 44 to 48 per dollar in response to strong capital outflows This explains why nations abhor capital mobility They control convertibility in the capital account because capital mobility, freely floating exchange rates and full interest rate autonomy cannot coexist Any two — but not three — can coexist

6.3.6 Badge of Dishonour

India's current account deficit is the result of growth Capital account surplus is necessary to fund this deficit It would be disastrous to staunch capital inflows It would be wholly foolish too because they bring technology and employment with them Hence, India has a seemingly respectable mixture of partial capital account convertibility, managed or dirty float of the rupee and bulging foreign exchange reserves

The RBI creates foreign exchange reserves when capital inflows threaten to strengthen the rupee, say, from Rs 44 to 40 per dollar It involuntarily expands the domestic monetary base by injecting rupee funds to soak up capital inflows Exporters may reap rich rewards but bulging reserves are a badge of dishonour Bulging reserves suppress the purchasing power of ordinary Indians They make the rupee prices of imported crude oil, petrol, diesel, edible oils, metals and fertilisers costly They hurt growth (see

Business Line, April 2, 2004) Hayek would have denounced this

The RBI draws from the foreign exchange reserves when capital outflows threaten to weaken the rupee, say, from Rs 44 to 48 per dollar It involuntarily contracts the domestic monetary base by sucking out rupee funds and raising interest rates These hurt consumption, investments and growth Hayek would have denounced this too

6.3.7 Necessity is Mother

India has been playing a dysfunctional game for long despite its earnest focus on growth This game has its worshippers who consider foreign exchange reserves a

badge of honour and a source of resources (see Business Line, January 21, 2005)

What these worshippers have not disclosed is that reserves are iniquitous and detrimental to future growth

Full convertibility is a necessity that injects high-octane fuel into the economy It secures the autonomy of the RBI in monetary policy and interest rates but only when the rupee can float freely It pushes India into the possible trinity of equity, enterprise and economic growth

6.4 CONVERTIBILITY IN INDIA

Convertibility of a currency implies that a currency can be transferred into another currency without any limitations or any control A currency is said to be fully

71 Convertibility, Exchange Restrictions and International Monetary System

convertible, if it can be converted into some other currency at the market price of that

currency If currency has to be convertible, it shall not be subjected to these

restrictions

6.4.1 Current Account Convertibility

It refers to currency convertibility required in the case of transactions relating to

exchange of goods and services, money transfers and all those transactions that are

classified in the current account

Budget for 1992-93 introduced partial convertibility of rupee Under this system, a

dual exchange rate was fixed under which 40 per cent of foreign exchange earnings

were to be surrendered at the official exchange rate while 60 percent were to be

converted at a market determined rate

Under the unified exchange rate regime adopted in the 1993-94 Budget, the 60:40

ratio was extended to 100 per cent conversion The 1993-94 Budget introduced full

convertibility of on trade account

Current account convertibility was finally achieved in August 1994 when the RBI

further liberalized payments and accepted obligations under Article VIII of the IMF

6.4.2 Capital Account Convertibility

It refers to convertibility required in the transactions of capital flows that are classified

under the capital account of the balance of payments

With growing strength of the balance of payments in the post-1991 reform period, in

August 1994, by accepting obligations under Article VIII of the articles of agreement

of the IMF, India made the Rupee convertible for current account transactions A

Committee headed by Shri S.S.Tarapore in 1997 had chalked out a phased road map

for making the capital account convertible The East Asian crisis intervened soon

thereafter, leading to lack of popular enthusiasm for capital account convertibility

With external sector remaining robust and gaining strength every year and the relative

macro economic stability with high growth provides a conducive environment for

relaxation in capital controls, RBI, in pursuance of the announcement by the Prime

Minister, constituted a Committee (Chairman: S.S Tarapore) on March 20, 2006 for

setting out a roadmap towards fuller capital account convertibility The Committee

submitted its Report to the RBI on July 31,2006

Conscious of the risks in the movement towards fuller convertibility of the Rupee as

emanating from cross country experiences in this regard, the Committee calibrated the

liberalization roadmap to the specific contexts of preparedness – namely, a strong

macroeconomic framework, sound financial systems and markets, and prudential

regulatory and supervisory architecture After reviewing the existing capital controls,

it detailed a broad five-year time frame for movement towards fuller convertibility in

three phases: Phase I (2006-07); Phase II (2007-08 to 2008-09); and Phase III

(2009-10 to 20(2009-10-11) It recommended the meeting of certain indicators/targets as a

concomitant to the movement in: meeting FRBM targets; shifting from the present

measure of fiscal deficit to a measure of the Public Sector Borrowing Requirement

(PSBR); segregating Government debt management and monetary policy operations

through the setting up of the Office of Public Debt independent of the RBI; imparting

greater autonomy and transparency in the conduct of monetary policy; and slew of

reforms in banking sector including a single banking legislation and reduction in the

share 01 Government/RBI in the capital of public sector banks; keeping the current

account deficit to GDP ratio under3 per cent; and evolving appropriate indicators of

adequacy of reserves to cover not only import requirements, but also liquidity risks

associated with present types of capital flows, short-term debt obligations and broader,

measures including solvency

72

International Business Environment Some of the significant measures, to be implemented in a sequenced manner as per the

given roadmap include: raising the overall external commercial borrowing (ECB) ceiling as also the ceiling for automatic approval gradually; keeping ECBs of over 10-year maturity in Phase I and over 7-10-year maturity in Phase II' outside the ceiling and removing end-use restriction in Phase I; monitoring import-linked short-term loans in

a comprehensive manner and reviewing the per transaction limit of US$20 million; raising the limits for outflows on account of corporate investment abroad in phases from 200 per cent of net worth to 400 per cent of net worth; providing Exchange Earners Foreign Currency Account holders access to foreign currency current savings accounts with cheque facility and interest bearing term deposits; prohibiting FIIs from investing fresh money raised through Participatory Notes (PN), after providing existing PN-holders an exit route so as to phase them out completely within one year; allowing non-resident corporates (and non-residents) to invest in the Indian stock markets through SEBI-registered entities including mutual funds and portfolio management schemes who will be individually responsible for fulfilling know your customer (KYC) and Financial Action Task Force (FATF) norms; allowing institutions/corporates other than multilateral ones to raise Rupee bonds (with an option to convert into foreign exchange) subject to an overall ceiling which should be gradually raised; linking the limits for borrowing overseas to paid-up capital and free reserves, and not to unimpaired Tier I capital, as at present, raising it substantially to

50 per cent in Phase-I, 75 per cent in Phase II and 100 per cent in Phase III; abolishing the various stipulations on individual fund limits and the proportion in relation to net asset value; raising the overall ceilings from the present level of US$2 billion to US$3 billion in Phase I, to US$4 billion in Phase II and to US$5 billion in Phase III; raising the annual limit of remittance abroad by individuals from existing US$25,OOO per calendar year to US$50,OOO in Phase I, US$100,OOO in Phase II and US$200,000

in Phase III; allowing non-residents (other than NRls) access to foreign Currency Non-Resident (FCNR(B)) and Non-Resident (External) Rupee Account (NR(E)RA) schemes

6.4.3 Tarapore Committee on Capital Account Convertibility (CAC)

At present, Indian rupee is partly convertible on current account In 1997, the Tarapore Committee on Capital Account Convertibility (CAC), constituted by the Reserve Bank, had indicated the preconditions for Capital Account Convertibility The three crucial preconditions were fiscal consolidation, a mandated inflation target and, strengthening of the financial system

6.4.4 Exchange Restrictions

Convertibility can be related as the extent to which a country's regulations allow free flow of money into and outside the country

For instance, in the case of India till 1990, one had to get permission from the Government or RBI as the case may be to procure foreign currency, say US Dollars, for any purpose Be it import of raw material, travel abroad, procuring books or paying fees for a ward who pursues higher studies abroad Similarly, any exporter who exports goods or services and brings foreign currency into the country has to surrender the foreign exchange to RBI and get it converted at a rate pre-determined by RBI

After liberalization began in 1991, the government eased the movement of foreign currency on trade account, i.e exporters and importers were allowed to buy and sell foreign currency, as long as the items that they are exporting and importing were not

in the banned list They need not get permission on a CASE-TO-CASE basis as was prevalent in the earlier regime This was the first concrete step the economy took towards making our currency convertible on trade account

73 Convertibility, Exchange Restrictions and International Monetary System

In the next two to three years, government liberalized the flow of foreign exchange to

include items like amount of foreign currency that can be procured for purposes like

travel abroad, studying abroad, engaging the services of foreign consultants etc This

set the first step towards getting our currency convertible on the current account What

it means is that people are allowed to have access to foreign currency for buying a

whole range of consumable products and services These relaxations coincided with

the liberalization on the industry and commerce front - which is why we have Honda

City cars, Mars chocolate bars and Bacardi in India

There was also simultaneous relaxation on the restriction on the funds that foreign

investors can bring into India to invest in companies and the stock market in the

country This step led to partial convertibility on the Capital Account

"Capital Account convertibility in its entirety would mean that any individual, be it

Indian or foreigner will be allowed to bring in any amount of foreign currency into the

country and take any amount of foreign currency out of the country without any

restriction."

Indian companies were allowed to raise funds by way of equities (shares) or debts

The fancy terms like Global Depository Receipts (GDRs), Euro Convertible Bonds

(ECBs), Foreign currency syndicated loans became household jargons of Indian

investors Listing in Nasdaq or NYSE became new found status symbols for Indian

companies However, Indian companies or individuals still had to get permission on a

case-to-case basis for investing abroad

In 2000, the forex policy was further relaxed that allowed companies to acquire other

companies abroad without having to go through the rigmarole of getting permission

on a case to case basis Further, Indian debt based mutual funds were also allowed to

invest in AAA rated government/corporate bonds abroad This got further relaxed

with Indians being allowed to hold a portion of their foreign exchange earnings as

foreign currency, subject to a limit in the recent monetary policy in October 2002

In general, restrictions on foreign currency movements are placed by developing

countries which have faced foreign exchange problems in the past is to avoid sudden

erosion of their foreign exchange reserves which are essential to maintain stability of

trade balance and stability in their economy With India's forex reserves increasing

steadily, it has slowly and steadily removed restrictions on movement of capital on

many counts

Forex Policy–2006-07

z Foreign exchange earners may retain up to 100 per cent of their foreign exchange

earnings in their Exchange Earners’ Foreign Currency accounts

z Borrowers eligible for accessing ECBs can avail of an additional US $ 250

million with average maturity of more than 10 years under the approval route

Prepayment of ECB up to US $ 300 million without prior approval of the Reserve

Bank

z The existing limit of US $ 2 billion on investments in Government securities by

Foreign Institutional Investors (FIIS) to be enhanced in phases to US $ 3.2 billion

by March 31, 2007

z The extant ceiling of overseas investment by mutual funds of US $ 2 billion

enhanced to US $ 3 billion

z Importers permitted to book forward contracts for their customs duty component

of imports

z FIIS allowed to rebook a part of the cancelled forward contracts

74

International Business Environment z Forward contracts booked by exporters and importers in excess of 50 per cent of

the eligible limit to be on deliverable basis and cannot be cancelled

z Authorised dealer banks to be permitted to issue guarantees/letters of credit for import of services up to US $100,000 for securing a direct contractual liability arising out of a contract between a resident and a non-resident

z Indian banks having presence outside India and foreign banks to migrate to the Basel II framework effective March 31, 2008 and other scheduled commercial banks to migrate in alignment but not later than March 31, 2009

z Prudential limit on credit and non-credit facilities to Indian Joint Ventures/Wholly Owned Subsidiaries abroad enhanced to 20 per cent of unimpaired capital funds

6.5 INTERNATIONAL MONETARY FUND

International Monetary Fund Headquarters IMF member states in green

Managing Director Washington, D.C., USA

Central Bank of Dominique Strauss-Kahn

Currency Special Drawing Rights

Base borrowing rate 3.49% for SDRs

The International Monetary Fund (IMF) is an international organization that oversees the global financial system by following the macroeconomic policies of its member countries, in particular those with an impact on exchange rates and the balance of payments It also offers financial and technical assistance to its members, making it an international lender of last resort Its headquarters are located in Washington, D.C., USA

6.5.1 Organization and Purpose

Headquarters in Washington D.C

The International Monetary Fund was created in 1944, with a goal to stabilize exchange rates and supervise the reconstruction of the world's international payment system Countries contributed to a pool which could be borrowed from, on a temporary basis, by countries with payment imbalances (Condon, 2007)

The IMF describes itself as "an organization of 185 countries (Montenegro being the 185th, as of January 18, 2007), working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty" With the exception of North Korea, Cuba, Andorra, Monaco, Liechtenstein, Tuvalu, and Nauru, all UN member states participate directly in the IMF Most are represented by other member states on

a 24-member Executive Board but all member countries belong to the IMF's Board of Governors

6.5.2 History of IMF

The International Monetary Fund was formally created in July 1944 during the United Nations Monetary and Financial Conference The representatives of 45 governments met in the Mount Washington Hotel in the area of Bretton Woods, New Hampshire, United States of America, with the delegates to the conference agreeing on a

75 Convertibility, Exchange Restrictions and International Monetary System

framework for international economic cooperation The IMF was formally organized

on December 27, 1945, when the first 29 countries signed its Articles of Agreement

The statutory purposes of the IMF today are the same as when they were formulated

in 1944

6.5.3 IMF Today

From the end of World War II until the late-1970s, the capitalist world experienced

unprecedented growth in real incomes (Since then, the integration of China and

Eastern and Central Europe into the capitalist system has added substantially to the

growth of the system.) Within the capitalist system, the benefits of growth have not

flowed equally to all (either within or among nations) but overall there has been an

increase in accessable material wealth that contrasts with the conditions within

capitalist countries during the interwar period

In the decades since World War II, apart from rising material prosperity, the world

economy and monetary system have undergone other major changes that have

increased the importance and relevance of the purposes served by the IMF, but that

has also required the IMF to adapt and reform Rapid advances in technology and

communications have contributed to the increasing international integration of

markets and to closer linkages among national economies As a result, financial crises,

when they erupt, now tend to spread more rapidly among countries

The IMF's influence in the global economy steadily increased as it accumulated more

members The number of IMF member countries has more than quadrupled from the

44 states involved in its establishment, reflecting in particular the attainment of

political independence by many developing countries and more recently the collapse

of the Soviet bloc The expansion of the IMF's membership, together with the changes

in the world economy, have required the IMF to adapt in a variety of ways to continue

serving its purposes effectively

In an apparent move to curb the sudden rise of gold prices, and to shore up the falling

value of the US Dollar, The International Monetary Fund's executive board approved

a broad financial overhaul plan that could lead to the eventual sale of a little over 400

tons of its substantial gold supplies IMF Managing Director Dominique Strauss-Kahn

welcomed the board's decision April 7, 2008 to propose a new framework for the

fund, designed to close a projected $400 million budget deficit over the next few

years The budget proposal includes sharp spending cuts of $100 million until 2011

that will include up to 380 staff dismissals

Check Your Progress 2

State whether the following statements are true or false:

1 A member's quota in the IMF determines the amount of its subscription, its

voting weight

2 Convertibility of a currency implies that a currency can be transferred into

another currency without any limitations or any control

3 Arguments in favor of the IMF say that economic stability is a precursor to

democracy

4 Capital account convertibility refers to convertibility required in the

transactions of capital flows

5 Current account convertibility does not refer to currency convertibility

required in the case of transactions relating to exchange of goods and

services