Chapter 12

UNIVERSITY OF LJUBLJANA
FACULTY OF ECONOMICS
International Finance Mojmir Mrak
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CONTENTS AND PURPOSE

1. Role and Place of the International Monetary Fund 2. Principle of Conditioning and Programs of Economic Stabilization: Basic Characteristics and Most Frequent Criticisms 3. Role of the IMF in Solving Some of the Important Problems of the International Community in the Last Two Decades 4. Introducing Improvements into the Work of the IMF " purpose:
present the IMF and basic logic of its activities
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1. Role and Place of the International Monetary Fund Establishment, Goals and Membership
" basic goals of founding the IMF:
establish an international monetary system that would promote international trade, be based on stable exchange rates and ensure the needed international liquidity
" explicitly expressed tendency of the USA for the new institution to have a paternalistic role and/or the tendency to introduce the principle of conditioning into its administration
International Finance Mojmir Mrak Page 3
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Quotas
" quota should represent economic power of a country " importance of quotas:
determination of the voting power of a country and funds a country can potentially borrow from the IMF calculation of the voting power:
principle of the equality of countries principle of economic power
" occasional revisions of quotas:

in principle every 5 years division of quotas among member countries principle of proportionality and principle of selectivity
" payment of quotas:

25 per cent in SDR or any other convertible currency, remaining 75 per cent in its national currency
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Organization
" Board of Governors:
the most important body of the IMF, each member country has its representative usually meets annually, competent for accepting the most important decisions for the functioning of the institution
" Board of Directors:

operatively manages the functioning of the IMF 24 executive directors who meet at lest twice a week
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Organization
" International Monetary and Financial Committee:
central bank governors/ministers of finance of the same 24 countries that have a representative in the Board of Executive Directors meets twice annually, but has no formal power of accepting decisions
" Director and his deputy:

named by the Board of Directors for the period of 5 years
" Civil servants:

formally accountable for their work to the Director of the IMF and not their country of origin
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Sources of Financial Funds

" quotas are the main and until the middle of 1960s the only source of funds of the funds of the IMF " General Arrangement to Borrow (GAB) (1962):
arrangements in the form of credit lines with the governments and/or central banks of 11 industrialized countries
" New Arrangement to Borrow (NAB) (1998):

made with 24 governments and/or central banks of the member countries
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Financial Arrangements, Accessible to Member Countries April 1999

" Financial Arrangements from General Account Resources:
gold or reserve tranche first credit tranche equivalent to 25 per cent of a countrys quota higher credit tranches (three) each of them is equivalent to 25 per cent of a countrys quota:
program of economic stabilization
Extended Fund Facility (EFF)
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Financial Arrangements, Accessible to Member Countries April 1999

Supplemental Reserve Facility/ Contingent Credit Lines (SRF/CCL) Compensatory and Contingency Financing Facility (CCFF) Buffer Stock Financing Facility (BSFF)
" Financial Arrangements from Other Resources:

Enhanced Structural Adjustment Facility (ESAF)
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Restrictions of Access to IMF Funds by Financial Arrangements

" access criteria:
size of the balance-of-payments deficit and therefore the need for its financing program of the elimination of the balance-of-payments disequilibrium a countrys ability to repurchase its currency from the IMF and/or its ability to service the debt
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Size of Financing from the IMF

" transfers of financial assets between the IMF and member countries and the size of the total outstanding credit provided by the IMF in 1990 - 1999 (in millions of SRD)
1990 5,3 6,4 - 1,1 24,4 1991 6,8 5,6 1,2 25,6 1992 5,9 4,8 1,1 26,7 1993 5,9 4,1 1,8 28,5 1994 5,9 4,5 1,4 29,9 1995 11,2 4,2 7,0 36,8 1996 12,3 7,1 5,2 42,0 1997 5,6 7,2 -1,6 40,5 1998 19,9 4,4 15,5 56,0 1999 22,4 11,1 11,3 67,2
A. B. C. D.
Total disbursements Re purchases and repayments Net funds inflow from the IMF (A B) Total outstandi ng credit pr ovided by the IMF
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Regular Activities of the IMF

" until the collapse of the Bretton Woods monetary system in 1971:
guardian of the exchange rate stability:
approving bigger changes in par values of given currencies and securing funds for financing the balance-of-payments deficits
" now:
surveillance of the exchange rate policies of member countries financial assistance to member countries technical assistance
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2. Principle of Conditioning and Programs of Economic Stabilization: Basic Characteristics and Most Frequent Criticisms
" one of the disputed points at the Bretton Woods conference " operatively implemented in the beginning of 1952 " stringency:
stringent use of the concept of conditioning increasing the share of the IMF funds that member countries utilize at the high rate of conditioning (assumes the existence of the program of economic stabilization)
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Institutional Basis of the Programs of Economic Stabilization

" most often a Stand-by arrangement, less often EFF and ESAF " Stand-by Arrangement:
credit line letter of intent - program of economic stabilization high rate of conditioning of the utilized funds, depending on the success of implementing the program of economic stabilization, contained in the letter of intent
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Goals of the Programs of Economic Stabilization

" Article I of the Statute of the IMF :
economic growth, reducing unemployment, price stability and balance-of-payments equilibrium priority goal of the program of economic stabilization from the point of view of the IMF is achieving a viable balance-of-payments deficit, that can be financed with net capital inflow in the long run
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Components of the Program of Economic Stabilization

" conditions for the program of economic stabilization:
change in exchange rate, change in interest rates and price policy measures
" monetary approach to balance-of-payments adjustments:

reducing aggregate demand to the level of available aggregate supply - demand-side policy measures increasing aggregate supply to the level of existing aggregate demand supply-side policy measures
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Components of the Program of Economic Stabilization

" criteria for assessing success of implementing the program of economic stabilization:
credit ceiling devaluation/depreciation of the home currency financial liberalization, especially liberalization of interest rates
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Criticisms of the Programs of Economic Stabilization

" mainly by developing countries and countries in transition " principle of conditioning " size of the funds of the IMF and the ratio between the funds approved at low and at high rate of conditioning " asymmetry of the balance-of-payments adjustment " declaration of causes for the balance-of-payments deficit " concept and short-term orientation of the programs of economic stabilization
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Criticisms of the Programs of Economic Stabilization

" effects of the programs of economic stabilization:
comparison of the economic situation during the program implementation and prior to it comparison of the results of the program with the goals comparison of the results of the program with a hypothetical situation in the country in the absence of the program of economic stabilization results of empirical studies:
improvement in a countrys balance-of payments in a prevailing number of cases lower growth rates during the implementation of programs of economic stabilization than prior to them lower reduction in the rate of inflation than anticipated in the program in most countries income redistribution
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3. Role of the IMF in Solving Some of the Important Problems of the International Community in the Last Two Decades
" IMF did not have an important influence on the formation and implementation of the economic policy of industrialized countries " as a rule, the IMF took over a leading role in forming solutions and answering to international community challenges and problems that affected either developing countries or countries in transition and the solution of which required engagement of public as well as private funds in industrialized countries
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IMF and the Developing Countries Debt Crisis in the 1980s

" after the debt crisis outbreak in 1982, the IMF took over the role of the architect for the solution of the crisis " basic mechanism for the solution of the debt crisis:
repeatedly restructuring liabilities of the debtor countries towards foreign commercial banks and creditor countries
" important role also in both official programs for the solution of the debt crisis:
Baker Program (1985) Brady Program (1989)
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IMF and the Inclusion of the Countries in Transition into the World Economy
" IMF, together with other international financial institutions, especially the World Bank and EBRD, has a crucial role in:
designing the macroeconomic policies that would lead these countries through the transition from centrally planned to market economies securing financial funds, needed for financing their balance-ofpayments deficits:
Systemic Transformation Facility (STF) (1993)
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The Role of the IMF in Solving Financial Crises of Developing Countries/Countries in Transition in the Second Half of the 1990s
" active participation of the IMF in solving financial crises:
Mexico (1994), Asia (1997), Russia (1998), Brazil (1999) not only the architect of the solution, also the main financier formation of SRF and CCL moral hazard?
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4. Introducing Improvements into the Work of the IMF Early Warning System
" unsuitability of the capital transfer data " General Data Dissemination System:
secure an integral and more timely insight into various kinds of statistical data on a given country to all participants in international financial community
Improved Surveillance of Economic Policies

" trend of deepened analysis of the functioning of the financial system and various structural reforms " more clear reports on the basis of Article IV consultations
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Increased Pace of Securing Funds

" better qualification for quick intervention
Increasing the Size of the Available Funds

" strengthening activities in all areas in which the size of the available funds can be increased:
agreement of the economically most important countries about a big issue of SDR further increases in the funds of the IMF by regular revisions of the member countries quotas
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UNIVERSITY OF LJUBLJANA

International Finance Mojmir Mrak

CONTENTS AND PURPOSE

" occasional revisions of quotas:

" payment of quotas:

" Board of Directors:

International Finance Mojmir Mrak

" Director and his deputy:

" Civil servants:

Sources of Financial Funds

" New Arrangement to Borrow (NAB) (1998):

International Finance Mojmir Mrak

Financial Arrangements, Accessible to Member Countries April 1999

Extended Fund Facility (EFF)

International Finance Mojmir Mrak

Financial Arrangements, Accessible to Member Countries April 1999

" Financial Arrangements from Other Resources:

Restrictions of Access to IMF Funds by Financial Arrangements

International Finance Mojmir Mrak

Size of Financing from the IMF

International Finance Mojmir Mrak

Regular Activities of the IMF

International Finance Mojmir Mrak

International Finance Mojmir Mrak

Institutional Basis of the Programs of Economic Stabilization

International Finance Mojmir Mrak

Goals of the Programs of Economic Stabilization

International Finance Mojmir Mrak

Components of the Program of Economic Stabilization

" monetary approach to balance-of-payments adjustments:

Components of the Program of Economic Stabilization

International Finance Mojmir Mrak

Criticisms of the Programs of Economic Stabilization

International Finance Mojmir Mrak

Criticisms of the Programs of Economic Stabilization

IMF and the Developing Countries Debt Crisis in the 1980s

International Finance Mojmir Mrak

International Finance Mojmir Mrak

Improved Surveillance of Economic Policies

Increased Pace of Securing Funds

Increasing the Size of the Available Funds

International Finance Mojmir Mrak

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