Imf N World Bank

Role of International economic institutions in global business(with reference to IMF and World Bank)

Presented by: Group 9

Flow of presentation    

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Some international economic institutions IMF History Responsibilities of IMF What IMF does? Economic surveillance Lending by IMF Accountability and Transparency Gold and Borrowings Quotas and SDRs Tackling current challenges India’s relations with IMF The World Bank Criticism of IMF and the World Bank

International Economic Institutions since World War II 1.

The International Monetary Fund (IMF)

3.

The World Bank

5.

Global Agreement on Tariffs and Trade (GATT)

7.

World Trade Organization (WTO)

9.

Organization for Economic Cooperation and Development (OECD)

11.

United Nations (UN) Department of Economic and Social Affairs (DESA)

About IMF International

Monetary Fund (IMF) is an administrative unit that is international in nature and whose objective is to regulate and administer the financial system of the world. The IMF does this by observing the payments balance and exchange rates of the world. It offers technical and financial help to the member nations.  Its head office is in Washington D.C, USA Its MD is Mr. Dominique Strauss Kahn.

History –Cooperation and reconstruction(1944-1971) Why

was IMF created? The Great Depression of 1930s

Institution

of IMFIMF was instituted in Dec.1945 after The Bretton Woods Agreement by its 29 member countries. It began operations on March 1, 1947. France became its first borrower.

Until

1971,the IMF practised The Par Value System which was suspended thereafter.

The end of Bretton Woods System(1972-81) In

1971,the US decided to suspend the dollar’s convertibility into gold temporarily which led to the overall dismissal of the Bretton Woods System. The transition from fixed exchange rates to floating rates was smooth and facilitated adjustments to external shocks such as the oil price shocks of the 1970s. To help oil importers deal with inflation the IMF set up the first of two oil facilities and what we know as the

Debt and painful reforms (1982–89)  The

oil shocks forced oil importing countries to borrow from western commercial banks who lent billions of recycled petrodollars to them.  In 1979,interest rates in developing countries skyrocketed and this led to an international debt crisis.  At the same time, recession in developing countries pushed them to expand their fiscal policies by further borrowings.  The IMF initiatives calmed the panic by engaging commercial banks but a long road of painful reforms lay ahead.  In March 1986, the IMF created a new concessional loan program called the Structural Adjustment Facility. The SAF was succeeded by the Enhanced Structural

The end of communism (19892004) Post

1991, the IMF membership increased from 152 to 172 countries making it a universal institution. The IMF's staff expanded by nearly 30 percent in six years. The Executive Board expanded to accommodate Directors from Russia and Switzerland. The IMF provided policy advice, technical assistance, and financial support to new member countries helping them make the transition from centrally planned to market driven economies.

Continued Globalisation(2005present)  Global

capital flows have risen to 15%of GDP compared to 2-6% in 1980-95.  Originally IMF had lent only to countries facing current account crisis but in recent years capital account crisis have become rampant.  The magnitude of the loans is larger now and response has to be more urgent. Continued globalization has brought new challenges like current financial crisis and Oil price shocks.  The IMF proposed spending cuts of $100 million until 2011 and 380 staff dismissals.  IMF executive board has agreed to sell a part of the gold reserves.

Responsibilities of IMF 

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 its resources available (under adequate safeguards) to members experiencing balance of payments difficulties.

What IMF does?? Economic

Surveillance:a) Country b) Region c) Global

Technical

Assistance Highlights of this section Beneficiaries of Technical Assistance Types of Technical Assistance Working Closely with Donors

Lending by IMF 3

main purposes of lending i) help make adjustments to external shocks ii) act as a catalyst for other lenders iii) prevention of crisis

 Conditions

of lending:a) Loans are disbursed in installments b) Loans are pledged against economic targets c) The IMF loans provide only a small portion to finance BOPs

Lending contd.  Main

lending Facilities:a) Stand-By Arrangement- Most popular with middle income countries b) Short Term Liquidity Facility- for temporary liquidity problems in emerging markets c) Emergency Assistance- for coping with natural disasters or military conflicts d) Extended Fund Facility- for long term structural reforms e) Trade Integration Mechanism- for countries facing multilateral trade liberalization

Lending Contd  Lending

to low income countries:a) Poverty Reduction and Growth Facilitylargest no. of loans made in recent years. Interest rate is 0.5% and period is 5-10 yrs b) Exogenous Shocks Facility- helps deal with economic shocks such as food and fuel price hikes or natural disasters  Debt Relief:a) Heavily Indebted Poor Countries b) Multilateral Debt Relief Initiative- 100% debt was written off for many African nations

Accountability and Transparency 

The IMF’s internal watchdog is called Independent Evaluation Office.  The IMF also has its own Ethics Office  An Integrity Hotline-a 24hour whistleblowing system was launched in 2008.  The IMF is engaged with intergovernmental groups like G7 and G24.  IMF’s executive board has adopted a transparency policy to encourage publication of member countries’ policies and data.

Gold and Borrowings  The

IMF holds 103.4 million ounces(3217 metric tonnes) of gold worth $83 billion.  Gold played an important role in the Bretton Woods era(1944-71).  Until 1970s member countries paid 25% of their subscription in gold.  Today IMF is considering selling some of its gold following a large decline in outstanding credit.

Gold and Borrowings contd.. The

proceeds from selling gold will be retained for investment in HIPC and PRGF. IMF can borrow from 11 industrialized countries. In times of crisis its first resort is NAB and then GAB. It can borrow up to SDR34 billion under these arrangements.

Quotas and SDRs  Quotas

broadly reflect the size of each member's economy- output, trade.  USA, world’s largest economy has the largest quota.  Quotas, together with the equal number of basic votes each member has, determine countries' voting power.  They also help determine how much countries can borrow from the IMF and their share in allocations of special drawing rights or SDRs (the reserve currency created by the IMF in 1969).

Quotas and SDRs contd..  Countries

pay 25% of their quota subscriptions in SDRs or major currencies, such as U.S. dollars, Euros, pounds sterling, or Japanese yen. They pay the remaining 75 percent in their own currencies.  Under a quota and voice reform the quotas of dynamic economies, many of which are emerging market countries, should be increased.  As of end-August 2008, IMF's total quotas stood at SDR 217.4 billion (about $341 billion).

Quotas and SDRs contd..  Today,

the SDR has only limited use as a reserve asset, and its main function is to serve as the unit of account of the IMF.  It is a potential claim on the freely usable currencies of IMF members.  The value of the SDR was initially defined as equivalent to 0.888671 grams of fine gold— which, at the time, was also equivalent to one U.S. dollar.  Today it is calculated as the sum of specific amounts of 4 currencies valued in U.S. dollars, on the basis of exchange rates quoted at noon each day in the London market.

Quotas and SDRs contd.. SDR

interest rate provides basis for calculating interest charged on loans and paid on SDR holdings. An SDR allocation provides each member with a costless asset on which interest is neither earned nor paid. If a member's SDR holdings rise above its allocation, it earns interest on the excess; conversely, if it holds fewer SDRs than allocated, it pays interest on the shortfall.

Tackling current challenges The

IMF was first in drawing attention to growing risks in the U.S. mortgage market in its Global Financial Stability Report. It has tracked the deterioration in the global economy. The IMF is helping low-income countries by encouraging aid effectiveness, promoting social spending, providing policy frameworks for good performers, and expanding regional

Tackling current challenges contd.. Sovereign

wealth funds—getting consensus. IMF is helping to reduce global payments imbalances. IMF is working on exchange rate stability. IMF is analyzing economic impact of global warming IMF is tracking global trendspopulation aging, march of the cities, financial globalization, gender and development.

Data Dissemination systems

In 1995, the International Monetary Fund began work on data dissemination standards with the view of guiding IMF member countries to disseminate their economic and financial data to the public. The International Monetary and Financial Committee (IMFC) endorsed the guidelines for the dissemination standards and they were split into two tiers: The General Data Dissemination System (GDDS) and the Special Data

DDS contd..

IMF members using SDDS IMF members not using any of the DDSystems IMF members using GDDS No interaction with IMF

India's relations with the International Monetary Fund  The

IMF provides financial assistance to India, which helps in boosting the country’s economy.  In 2005, the IMF said that the budget of India is very positive for it points that the economy of the country will grow at the rate of 6.7%.  The IMF said that the reasons behind the economic growth of India are that the RBI has been able to control inflation and has also handled its monetary policies very skillfully.  The IMF has suggested that India can become a financial super power by bringing in more reforms in its economic policies that

The current relationship between IMF and India The

relationship between the IMF and India has grown strong over the years. In fact, the country has turned into a creditor to the IMF and has stopped taking loans from it.

The loans provided by IMF to India: SDR SDR SDR SDR SDR SDR SDR SDR

3,260,405,000 in 1992 3,584,905,000 in 1993 2,763,180,833 in 1994 1,966,633,125 in 1995 1,085,250,003 in 1996 589,791,667 in 1997 284,916,664 in 1998 38,500 in 1999

The World Bank  Established

in 1944  The World Bank is the world's largest source of development assistance.  It provides nearly $16 billion in loans annually to its client countries for social development, institution-building, environmental protection, private business development, stable macroeconomic environment, and poverty reduction.  The Washington, D.C.-based Bank is owned by its 185 member countries, and has 67 country offices around the world.

The World Bank contd Headed

by Robert.B.Zoellick who is the president. World Bank comprises two institutions: -International Bank For Reconstruction and Development (IBRD) -International Development Association (IDA) Issued its first loan of US$250 million to France for post-war reconstruction. The bank obtains its funding through the IBRD’s sale of AAA-rated bonds in world financial markets.

World Bank contd..  Issues

two types of loans: Investment loans- support for economic and social development projects Development policy loans- support policy and institutional reforms  Grants- given by IDA.  Other services include analytical, advisory and educational services.  Current focus is on Millennium Development Goals (MDGs).

World Bank cont. Poverty

Reduction strategies include collaboration with poor people’s organizations such as Slum Dwellers International and obtaining aid through IDA. World Bank is temporarily managing Clean Technology Fund which focuses on developing renewable energy sources. World Bank Institute looks after training of staff and civil servants from member countries. Global Development Learning Network (GDLN) is a network of 120 learning centers across 80 countries facilitating

Criticism of IMF and World Bank  Conditionalities including Structural Adjustment Programs.

The

IMF advocates Keynesian approach of demand-side economics, currency devaluation which is inflationary.

Their

austerity programmes are self contradictory.

International

Monetary Fund Gold Reserve is allegedly undervalued.

Contd  The

Argentinean economic crisis of 2001 due to privatization of vital national resources and maldesigned fiscal federalism.

 Easier

currency movement by Kenyan central bank proposed by SAPs of IMF led to the Goldenberg scandal worth billions of Kenyan shillings.

 Since

1980 over 100 countries have experienced a banking collapse which has reduced GDP by 4% or more.

 In

21 countries of eastern Europe which

contd  The

World Bank is accused of undermining democratic efforts by loaning huge amounts to dictatorships.

 US

effectively has a veto on some constitutional decisions with over 16% shares in the bank and a 2008 WB report which found that biofuels had driven food prices up by 75% was never published.

 The

director of World bank has always been an American and the MD of IMF a European.

 The

Jamaican dollar in 1978 was worth a little more than the US dollar but by 1995 it

References Wikipedia

encyclopedia IMF official website World Bank official website Mapsofindia.com Business line website

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