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  • 1. I.M.F 2012 Economics of Global Trade and Finance Research Work Master of Commerce Business Management Semester I (2012-2013) Submitted In partial Fulfillment of the requirement for the Award of Degree of Master of Commerce in Business Management Submitted By, Harpreet Singh Khanna Roll No:75 Under the Guidance of, Prof. Lalit TyagiGURU NANAK KHALSA COLLEGE OF ARTS, SCIENCE AND COMMERCE, MATUNGA, MUMBAI- 400019. 1
  • 2. I.M.F 2012 GURU NANAK KHALSA COLLEGE OF ARTS, SCIENCE AND COMMERCE, MATUNGA, MUMBAI- 400019. CERTIFICATEThis is to certify that Mr Harpreet Singh Khanna of M.Com BusinessManagement Semester I (2012-2013) has successfully completed the project onContribution of IMF in Global Trade under the guidance of Prof. Lalit Tyagi.Course Co-ordinator PrincipalProf. Allan D’Souza Dr. Ajit SinghProject Guide/Internal ExaminerProf. Lalit TyagiExternal Examiner 2
  • 3. I.M.F 2012 DECLARATIONI, Harpreet Singh Khanna student of M.Com Business ManagementSemester I (2012-2013) hereby declares that I have completed theProject on Title. The information submitted is true and original to thebest of my knowledge. Signature of student Harpreet Singh Khanna Roll No:75 3
  • 4. I.M.F 2012 ACKNOWLEDGEMENTThe college, the faculty, the classmates & the atmosphere, in the collegewere all the favorable contributory factors right from the point when thetopic was to be selected till the final copy was prepared. It was a veryenriching experience throughout the contribution from the followingindividuals in the form in which it appears today. I feel privileged totake this opportunity to put on record my gratitude towards them.Prof. Lalit Tyagi made sure that the resource was made availablein time & also for immediate advice & guidance throughout making thisproject. Prof. Allan D’Souza, the Co-ordinator for M.Com of our collegeGuru Nanak Khalsa College has always been inspiring & driving force.We are thankful to everyone associated with administration part ofBusiness Management section has been very helpful in making theinfrastructure available for data entry. A 4
  • 5. I.M.F 2012 PROJECT REPORT ON I.M.F And its contribution in Global Trade UNDER THE GUIDANCE OF Prof.Lalit Tyagi Submitted By HARPREET SINGH KHANNA SYNOPSIS5
  • 6. I.M.F 2012 Name Page No. Introduction 9 History 13Asian Financial Crisis and Relief 15 Role of I.M.F 17 Technical Assistance 19 Lending by the I.M.F 21 Gold 28 SDR 30 Governance 33 Accountability 35 Tackling Current Challenges 37 Case Study 40 Bibliography 426
  • 7. I.M.F 2012 IMF Head Office in Washington DC7
  • 8. I.M.F 2012INTRODUCTIONThe International Monetary Fund (IMF) is an international organization that was created on July22, 1944 at the Bretton Woods Conference and came into existence on December 27, 1945 when29 countries signed the Articles of Agreement.[1] It originally had 45 members. The IMFs statedgoal was to stabilize exchange rates and assist the reconstruction of the world’s internationalpayment system post-World War II. The IMF describes itself as ―an organization of 188countries (as of April 2012), working to foster global monetary cooperation, secure financialstability, facilitate international trade, promote high employment and sustainable economicgrowth, and reduce poverty. The organizations stated objectives are to promote internationaleconomic cooperation, international trade, employment, and exchange rate stability, including bymaking financial resources available to member countries to meet balance of payments needs. Itsheadquarters are in Washington, D.C.The IMF works to foster global growth and economic stability. It provides policy advice andfinancing to members in economic difficulties and also works with developing nations to helpthem achieve macroeconomic stability and reduce poverty.The IMF promotes international monetary cooperation and exchange rate stability, facilitates thebalanced growth of international trade, and provides resources to help members in balance ofpayments difficulties or to assist with poverty reduction.With its near-global membership of 188 countries, the IMF is uniquely placed to help membergovernments take advantage of the opportunities—and manage the challenges—posed byglobalization and economic development more generally. The IMF tracks global economictrends and performance, alerts its member countries when it sees problems on the horizon,provides a forum for policy dialogue, and passes on know-how to governments on how to tackleeconomic difficulties.The IMF provides policy advice and financing to members in economic difficulties and alsoworks with developing nations to help them achieve macroeconomic stability and reducepoverty.Marked by massive movements of capital and abrupt shifts in comparative advantage,globalization affects countries policy choices in many areas, including labor, trade, and taxpolicies. Helping a country benefit from globalization while avoiding potential downsides is animportant task for the IMF. The global economic crisis has highlighted just how interconnectedcountries have become in today’s world economy. 8
  • 9. I.M.F 2012Key IMF activitiesThe IMF supports its membership by providing: policy advice to governments and central banks based on analysis of economic trends and cross-country experiences. research, statistics, forecasts, and analysis based on tracking of global, regional, and individual economies and markets. loans to help countries overcome economic difficulties. concessional loans to help fight poverty in developing countries. technical assistance and training to help countries improve the management of their economies.Original aimsThe IMF was founded more than 60 years ago toward the end of World War II (see History). Thefounders aimed to build a framework for economic cooperation that would avoid a repetition ofthe disastrous economic policies that had contributed to the Great Depression of the 1930s andthe global conflict that followed.Since then the world has changed dramatically, bringing extensive prosperity and lifting millionsout of poverty, especially in Asia. In many ways the IMFs main purpose—to provide the globalpublic good of financial stability—is the same today as it was when the organization wasestablished.More specifically, the IMF continues to: provide a forum for cooperation on international monetary problems facilitate the growth of international trade, thus promoting job creation, economic growth, and poverty reduction; promote exchange rate stability and an open system of international payments; and lend countries foreign exchange when needed, on a temporary basis and under adequate safeguards, to help them address balance of payments problems. 9
  • 10. I.M.F 2012An Adapting IMFThe IMF has evolved along with the global economy throughout its 65-year history, allowing theorganization to retain its central role within the international financial architectureAs the world economy struggles to restore growth and jobs after the worst crisis since the GreatDepression, the IMF has emerged as a very different institution. During the crisis, it mobilizedon many fronts to support its member countries. It increased its lending, used its cross-countryexperience to advise on policy solutions, supported global policy coordination, and reformed theway it makes decisions. The result is an institution that is more in tune with the needs of its 188member countries. Stepping up crisis lending : The IMF responded quickly to the global economic crisis, with lending commitments reaching a record level of more than US$250 billion in 2010. This figure includes a sharp increase in concessional lending (that’s to say, subsidized lending at rates below those being charged by the market) to the world’s poorest nations. Greater lending flexibility : The IMF has overhauled its lending framework to make it better suited to countries’ individual needs. It is also working with other regional institutions to create a broader financial safety net, which could help prevent new crises. Providing analysis and advice : The IMF’s monitoring, forecasts, and policy advice, informed by a global perspective and by experience from previous crises, have been in high demand and have been used by the G-20. Drawing lessons from the crisis : The IMF is contributing to the ongoing effort to draw lessons from the crisis for policy, regulation, and reform of the global financial architecture. Historic reform of governance : The IMF’s member countries also agreed to a significant increase in the voice of dynamic emerging and developing economies in the decision making of the institution, while preserving the voice of the low-income members. The IMF currently has a near-global membership of 188 countries. To become a member, a country must apply and then be accepted by a majority of the existing members. In June 2010, Tuvalu joined the IMF, becoming the institutions 187th member. Upon joining, each member country of the IMF is assigned a quota, based broadly on its relative size in the world economy. The IMFs membership agreed in November 2010 on a major overhaul of its quota system to reflect the changing global economic realities, especially the increased weight of major emerging markets in the global economy. A member countrys quota defines its financial and organizational relationship with the IMF, including: Subscriptions : A member countrys quota subscription determines the maximum amount of financial resources the country is obliged to provide to the IMF. A country must pay its subscription in full upon joining the IMF: up to 25 percent must be paid in the IMFs own currency, called Special Drawing Rights (SDRs) or widely accepted currencies (such as the dollar, the euro, the yen, or pound sterling), while the rest is paid in the members own currency. 10
  • 11. I.M.F 2012 Voting power : The quota largely determines a members voting power in IMF decisions. Each IMF members votes are comprised of basic votes plus one additional vote for each SDR 100,000 of quota. The number of basic votes attributed to each member is calculated as 5.502 percent of total votes. Accordingly, the United States has 421,965 votes (16.76 percent of the total), and Tuvalu has 759 votes (0.03 percent of the total). Access to financing : The amount of financing a member country can obtain from the IMF is based on its quota. For instance, under Stand-By and Extended Arrangements, which are types of loans, a member country can borrow up to 200 percent of its quota annually and 600 percent cumulatively. SDR allocations : SDRs are used as an international reserve asset. A members share of general SDR allocations is established in proportion to its quota. The most recent general allocation of SDRs took place in 2009.11
  • 12. I.M.F 2012HistoryCo-operation and Reconstruction (1944-1971)During the Great Depression of the 1930s, countries attempted to shore up their failingeconomies by sharply raising barriers to foreign trade, devaluing their currencies to competeagainst each other for export markets, and curtailing their citizens freedom to hold foreignexchange. These attempts proved to be self-defeating. World trade declined sharply (see chartbelow), and employment and living standards plummeted in many countries.This breakdown in international monetary cooperation led the IMFs founders to plan aninstitution charged with overseeing the international monetary system—the system of exchangerates and international payments that enables countries and their citizens to buy goods andservices from each other. The new global entity would ensure exchange rate stability andencourage its member countries to eliminate exchange restrictions that hindered trade.The Bretton Woods agreementThe IMF was conceived in July 1944, when representatives of 45 countries meeting in the townof Bretton Woods, New Hampshire, in the northeastern United States, agreed on a framework forinternational economic cooperation, to be established after the Second World War. Theybelieved that such a framework was necessary to avoid a repetition of the disastrous economicpolicies that had contributed to the Great Depression.The IMF came into formal existence in December 1945, when its first 29 member countriessigned its Articles of Agreement. It began operations on March 1, 1947. Later that year, Francebecame the first country to borrow from the IMF.The IMFs membership began to expand in the late 1950s and during the 1960s as many Africancountries became independent and applied for membership. But the Cold War limited the Fundsmembership, with most countries in the Soviet sphere of influence not joining. 12
  • 13. I.M.F 2012The End of Bretton Woods System (1971-1981)By the early 1960s, the U.S. dollars fixed value against gold, under the Bretton Woods system offixed exchange rates, was seen as overvalued. A sizable increase in domestic spending onPresident Lyndon Johnsons Great Society programs and a rise in military spending caused bythe Vietnam War gradually worsened the overvaluation of the dollar.The system dissolved between 1968 and 1973. In August 1971, U.S. President Richard Nixonannounced the "temporary" suspension of the dollars convertibility into gold. While the dollarhad struggled throughout most of the 1960s within the parity established at Bretton Woods, thiscrisis marked the breakdown of the system. An attempt to revive the fixed exchange rates failed,and by March 1973 the major currencies began to float against each other.Since the collapse of the Bretton Woods system, IMF members have been free to choose anyform of exchange arrangement they wish (except pegging their currency to gold): allowing thecurrency to float freely, pegging it to another currency or a basket of currencies, adopting thecurrency of another country, participating in a currency bloc, or forming part of a monetaryunion.Debt and Painful Reforms (1982-1989)The oil shocks of the 1970s, which forced many oil-importing countries to borrow fromcommercial banks, and the interest rate increases in industrial countries trying to control inflationled to an international debt crisis.During the 1970s, Western commercial banks lent billions of "recycled" petrodollars, gettingdeposits from oil exporters and lending those resources to oil-importing and developingcountries, usually at variable, or floating, interest rates. So when interest rates began to soar in1979, the floating rates on developing countries loans also shot up. Higher interest payments areestimated to have cost the non-oil-producing developing countries at least $22 billion during1978–81. At the same time, the price of commodities from developing countries slumpedbecause of the recession brought about by monetary policies. Many times, the response bydeveloping countries to those shocks included expansionary fiscal policies and overvaluedexchange rates, sustained by further massive borrowings.When a crisis broke out in Mexico in 1982, the IMF coordinated the global response, evenengaging the commercial banks. It realized that nobody would benefit if country after countryfailed to repay its debts.The IMFs initiatives calmed the initial panic and defused its explosive potential. But a long roadof painful reform in the debtor countries, and additional cooperative global measures, would benecessary to eliminate the problem. 13
  • 14. I.M.F 2012Societal Change for Eastern Europe and Asian Upheaval (1990-2004)The fall of the Berlin wall in 1989 and the dissolution of the Soviet Union in 1991 enabled theIMF to become a (nearly) universal institution. In three years, membership increased from 152countries to 172, the most rapid increase since the influx of African members in the 1960s.In order to fulfill its new responsibilities, the IMFs staff expanded by nearly 30 percent in sixyears. The Executive Board increased from 22 seats to 24 to accommodate Directors from Russiaand Switzerland, and some existing Directors saw their constituencies expand by severalcountries.The IMF played a central role in helping the countries of the former Soviet bloc transition fromcentral planning to market-driven economies. This kind of economic transformation had neverbefore been attempted, and sometimes the process was less than smooth. For most of the 1990s,these countries worked closely with the IMF, benefiting from its policy advice, technicalassistance, and financial support.By the end of the decade, most economies in transition had successfully graduated to marketeconomy status after several years of intense reforms, with many joining the European Union in2004.Asian Financial CrisisIn 1997, a wave of financial crises swept over East Asia, from Thailand to Indonesia to Koreaand beyond. Almost every affected country asked the IMF for both financial assistance and forhelp in reforming economic policies. Conflicts arose on how best to cope with the crisis, and theIMF came under criticism that was more intense and widespread than at any other time in itshistory.From this experience, the IMF drew several lessons that would alter its responses to futureevents. First, it realized that it would have to pay much more attention to weaknesses in countriesbanking sectors and to the effects of those weaknesses on macroeconomic stability. In 1999, theIMF—together with the World Bank—launched the Financial Sector Assessment Program andbegan conducting national assessments on a voluntary basis. Second, the Fund realized that theinstitutional prerequisites for successful liberalization of international capital flows were moredaunting than it had previously thought. Along with the economics profession generally, the IMFdampened its enthusiasm for capital account liberalization. Third, the severity of the contractionin economic activity that accompanied the Asian crisis necessitated a re-evaluation of how fiscalpolicy should be adjusted when a crisis was precipitated by a sudden stop in financial inflows. 14
  • 15. I.M.F 2012Debt relief for poor countriesDuring the 1990s, the IMF worked closely with the World Bank to alleviate the debt burdens ofpoor countries. The Initiative for Heavily Indebted Poor Countries was launched in 1996, withthe aim of ensuring that no poor country faces a debt burden it cannot manage. In 2005, to helpaccelerate progress toward the United Nations Millennium Development Goals (MDGs), theHIPC Initiative was supplemented by the Multilateral Debt Relief Initiative (MDRI).Globalization and the Crisis (2005 - present)The IMF has been on the front lines of lending to countries to help boost the global economy asit suffers from a deep crisis not seen since the Great Depression.For most of the first decade ofthe 21st century, international capital flows fueled a global expansion that enabled manycountries to repay money they had borrowed from the IMF and other official creditors and toaccumulate foreign exchange reserves.The global economic crisis that began with the collapse of mortgage lending in the United Statesin 2007, and spread around the world in 2008 was preceded by large imbalances in global capitalflows.Global capital flows fluctuated between 2 and 6 percent of world GDP during 1980-95, butsince then they have risen to 15 percent of GDP. In 2006, they totaled $7.2 trillion—more than atripling since 1995. The most rapid increase has been experienced by advanced economies, butemerging markets and developing countries have also become more financially integrated.The founders of the Bretton Woods system had taken it for granted that private capital flowswould never again resume the prominent role they had in the nineteenth and early twentiethcenturies, and the IMF had traditionally lent to members facing current account difficulties.The latest global crisis uncovered a fragility in the advanced financial markets that soon led tothe worst global downturn since the Great Depression. Suddenly, the IMF was inundated withrequests for stand-by arrangements and other forms of financial and policy support.The international community recognized that the IMF’s financial resources were as important asever and were likely to be stretched thin before the crisis was over. With broad support fromcreditor countries, the Fund’s lending capacity was tripled to around $750 billion. To use thosefunds effectively, the IMF overhauled its lending policies, including by creating a flexible creditline for countries with strong economic fundamentals and a track record of successful policyimplementation. Other reforms, including ones tailored to help low-income countries, enabledthe IMF to disburse very large sums quickly, based on the needs of borrowing countries and nottightly constrained by quotas, as in the past.For more on the ideas that have shaped the IMF from its inception until the late 1990s, take alook at James Boughtons "The IMF and the Force of History: Ten Events and Ten Ideas thatHave Shaped the Institution. 15
  • 16. I.M.F 2012Role of IMFSurveillanceWhen a country joins the IMF, it agrees to subject its economic and financial policies to thescrutiny of the international community. It also makes a commitment to pursue policies that areconducive to orderly economic growth and reasonable price stability, to avoid manipulatingexchange rates for unfair competitive advantage, and to provide the IMF with data about itseconomy. The IMFs regular monitoring of economies and associated provision of policy adviceis intended to identify weaknesses that are causing or could lead to financial or economicinstability. This process is known as surveillance.  Country surveillanceCountry surveillance is an ongoing process that culminates in regular (usually annual)comprehensive consultations with individual member countries, with discussions in between asneeded. The consultations are known as "Article IV consultations" because they are required byArticle IV of the IMFs Articles of Agreement. During an Article IV consultation, an IMF teamof economists visits a country to assess economic and financial developments and discuss thecountrys economic and financial policies with government and central bank officials. IMF staffmissions also often meet with parliamentarians and representatives of business, labor unions, andcivil society.The team reports its findings to IMF management and then presents them for discussion to theExecutive Board, which represents all of the IMFs member countries. A summary of the Boardsviews is subsequently transmitted to the countrys government. In this way, the views of theglobal community and the lessons of international experience are brought to bear on nationalpolicies. Summaries of most discussions are released in Public Information Notices and areposted on the IMFs web site, as are most of the country reports prepared by the staff.  Regional surveillanceRegional surveillance involves examination by the IMF of policies pursued under currencyunions—i ncluding the euro area, the West African Economic and Monetary Union, the CentralAfrican Economic and Monetary Community, and the Eastern Caribbean Currency Union.Regional economic outlook reports are also prepared to discuss economic developments and keypolicy issues in Asia Pacific, Europe, Middle East and Central Asia, Sub-Saharan Africa, and theWestern Hemisphere.  Global surveillanceGlobal surveillance entails reviews by the IMFs Executive Board of global economic trends anddevelopments. The main reviews are based on the World Economic Outlook reports, the GlobalFinancial Stability Report, which covers developments, prospects, and policy issues ininternational financial markets, and the Fiscal Monitor, which analyzes the latest developments 16
  • 17. I.M.F 2012in public finance. All three reports are published twice a year, with updates being provided on aquarterly basis. In addition, the Executive Board holds more frequent informal discussions onworld economic and market developments.  Technical AssistanceThe IMF shares its expertise with member countries by providing technical assistance andtraining in a wide range of areas, such as central banking, monetary and exchange rate policy, taxpolicy and administration, and official statistics. The objective is to help improve the design andimplementation of members economic policies, including by strengthening skills in institutionssuch as finance ministries, central banks, and statistical agencies. The IMF has also given adviceto countries that have had to reestablish government institutions following severe civil unrest orwar.In 2008, the IMF embarked on an ambitious reform effort to enhance the impact of its technicalassistance. The reforms emphasize better prioritization, enhanced performance measurement,more transparent costing and stronger partnerships with donors. 17
  • 18. I.M.F 2012Technical AssistanceBeneficiaries of technical assistanceTechnical assistance is one of the IMFs core activities. It is concentrated in critical areas ofmacroeconomic policy where the Fund has the greatest comparative advantage. Thanks to itsnear-universal membership, the IMFs technical assistance program is informed by experienceand knowledge gained across diverse regions and countries at different levels of development.About 80 percent of the IMFs technical assistance goes to low- and lower-middle-incomecountries, in particular in sub-Saharan Africa and Asia. Post-conflict countries are majorbeneficiaries. The IMF is also providing technical assistance aimed at strengthening thearchitecture of the international financial system, building capacity to design and implementpoverty-reducing and growth programs, and helping heavily indebted poor countries (HIPC) indebt reduction and management.  Types of Technical AssistanceThe IMFs technical assistance takes different forms, according to needs, ranging from long-termhands-on capacity building to short-notice policy support in a financial crisis. Technicalassistance is delivered in a variety of ways. IMF staff may visit member countries to advisegovernment and central bank officials on specific issues, or the IMF may provide residentspecialists on a short- or a long-term basis. Technical assistance is integrated with countryreform agendas as well as the IMFs surveillance and lending operations.The IMF is providing an increasing part of its technical assistance through regional centerslocated in Gabon, Mali, Mauritius, and Tanzania for Africa; in Barbados and Guatemala forCentral America and the Caribbean; in Lebanon for the Middle East; and in Fiji for the PacificIslands. The IMF also offers training courses for government and central bank officials ofmember countries at its headquarters in Washington, D.C., and at regional training centers inAustria, Brazil, China, India, Singapore, Tunisia, and the United Arab Emirates.Partnership with DonorsBilateral and multilateral donors are playing an increasingly important role in enabling the IMFto meet country needs in this area, with their contributions now financing about two thirds of theIMFs field delivery of technical assistance. Strong partnerships between recipient countries anddonors enable IMF technical assistance to be developed on the basis of a more inclusive dialogueand within the context of a coherent development framework. The benefits of donorcontributions thus go beyond the financial aspect.The IMF is currently seeking to leverage the comparative advantages of its technical assistanceto expand donor financing to meet the needs of recipient countries. As part of this effort, theFund is strengthening its partnerships with donors by engaging them on a broader, longer-termand more strategic basis. 18
  • 19. I.M.F 2012The idea is to pool donor resources in multi-donor trust funds that would supplement the IMFsown resources for technical assistance while leveraging the Funds expertise and experience.Expansion of the multi-donor trust fund model is envisaged on a regional and topical basis,offering donors different entry points according to their priorities. To this end, the IMF isestablishing a series of topical trust funds, covering such topics as anti-moneylaundering/combating the financing of terrorism; fragile states; public financial management;management of natural resource wealth, public debt sustainability and management, statisticsand data provision; and financial sector stability and development. 19
  • 20. I.M.F 2012Lending by the IMFA country in severe financial trouble, unable to pay its international bills, poses potentialproblems for the stability of the international financial system, which the IMF was created toprotect. Any member country, whether rich, middle-income, or poor, can turn to the IMF forfinancing if it has a balance of payments need—that is, if it cannot find sufficient financing onaffordable terms in the capital markets to make its international payments and maintain a safelevel of reserves.IMF loans are meant to help member countries tackle balance of payments problems, stabilizetheir economies, and restore sustainable economic growth. This crisis resolution role is at thecore of IMF lending. At the same time, the global financial crisis has highlighted the need foreffective global financial safety nets to help countries cope with adverse shocks. A key objectiveof recent lending reforms has therefore been to complement the traditional crisis resolution roleof the IMF with more effective tools for crisis prevention.The IMF is not a development bank and unlike the World Bank and other development agencies,it does not finance projects. 20
  • 21. I.M.F 2012The Changing Nature of LendingAbout four out of five member countries have used IMF credit at least once. But the amount ofloans outstanding and the number of borrowers have fluctuated significantly over time.In the first two decades of the IMFs existence, more than half of its lending went to industrialcountries. But since the late 1970s, these countries have been able to meet their financing needsin the capital markets.The oil shock of the 1970s and the debt crisis of the 1980s led many lower- and lower-middle-income countries to borrow from the IMF.In the 1990s, the transition process in central and eastern Europe and the crises in emergingmarket economies led to a further increase in the demand for IMF resources.In 2004, benign economic conditions worldwide meant that many countries began to repay theirloans to the IMF. As a consequence, the demand for the Fund’s resources dropped off sharply .But in 2008, the IMF began making loans to countries hit by the global financial crisis The IMFcurrently has programs with more than 50 countries around the world and has committed morethan $325 billion in resources to its member countries since the start of the global financial crisis.While the financial crisis has sparked renewed demand for IMF financing, the decline in lendingthat preceded the financial crisis also reflected a need to adapt the IMFs lending instruments tothe changing needs of member countries. In response, the IMF conducted a wide-ranging reviewof its lending facilities and terms on which it provides loans.In March 2009, the Fund announced a major overhaul of its lending framework, includingmodernizing conditionality, introducing a new flexible credit line, enhancing the flexibility of theFund’s regular stand-by lending arrangement, doubling access limits on loans, adapting its coststructures for high-access and precautionary lending, and streamlining instruments that wereseldom used. It has also speeded up lending procedures and redesigned its Exogenous ShocksFacility to make it easier to access for low-income countries. More reforms have since beenundertaken, most recently in November 2011. 21
  • 22. I.M.F 2012Lending to preserve Financial StabilityArticle I of the IMFs Articles of Agreement states that the purpose of lending by the IMF is "...togive confidence to members by making the general resources of the Fund temporarily availableto them under adequate safeguards, thus providing them with opportunity to correctmaladjustments in their balance of payments without resorting to measures destructive ofnational or international prosperity."In practice, the purpose of the IMFs lending has changed dramatically since the organizationwas created. Over time, the IMFs financial assistance has evolved from helping countries dealwith short-term trade fluctuations to supporting adjustment and addressing a wide range ofbalance of payments problems resulting from terms of trade shocks, natural disasters, post-conflict situations, broad economic transition, poverty reduction and economic development,sovereign debt restructuring, and confidence-driven banking and currency crises.Today, IMF lending serves three main purposes.First, it can smooth adjustment to various shocks, helping a member country avoid disruptiveeconomic adjustment or sovereign default, something that would be extremely costly, both forthe country itself and possibly for other countries through economic and financial ripple effects(known as contagion).Second, IMF programs can help unlock other financing, acting as a catalyst for other lenders.This is because the program can serve as a signal that the country has adopted sound policies,reinforcing policy credibility and increasing investors confidence.Third, IMF lending can help prevent crisis. The experience is clear: capital account crisestypically inflict substantial costs on countries themselves and on other countries throughcontagion. The best way to deal with capital account problems is to nip them in the bud beforethey develop into a full-blown crisis. 22
  • 23. I.M.F 2012Conditions for LendingWhen a member country approaches the IMF for financing, it may be in or near a state ofeconomic crisis, with its currency under attack in foreign exchange markets and its internationalreserves depleted, economic activity stagnant or falling, and a large number of firms andhouseholds going bankrupt. In difficult economic times, the IMF helps countries to protect themost vulnerable in a crisis.The IMF aims to ensure that conditions linked to IMF loan disbursements are focused andadequately tailored to the varying strengths of members policies and fundamentals. To this end,the IMF discusses with the country the economic policies that may be expected to address theproblems most effectively. The IMF and the government agree on a program of policies aimed atachieving specific, quantified goals in support of the overall objectives of the authoritieseconomic program. For example, the country may commit to fiscal or foreign exchange reservetargets.The IMF discusses with the country the economic policies that may be expected to address theproblems most effectively. The IMF and the government agree on a program of policies aimed atachieving specific, quantified goals in support of the overall objectives of the authoritieseconomic program. For example, the country may commit to fiscal or foreign exchange reservetargets.Loans are typically disbursed in a number of installments over the life of the program, with eachinstallment conditional on targets being met. Programs typically last up to 3 years, depending onthe nature of the countrys problems, but can be followed by another program if needed. Thegovernment outlines the details of its economic program in a "letter of intent" to the ManagingDirector of the IMF. Such letters may be revised if circumstances change.For countries in crisis, IMF loans usually provide only a small portion of the resources needed tofinance their balance of payments. But IMF loans also signal that a countrys economic policiesare on the right track, which reassures investors and the official community, helping countriesfind additional financing from other sources.Main Lending FacilitiesIn an economic crisis, countries often need financing to help them overcome their balance ofpayments problems. Since its creation in June 1952, the IMF’s Stand-By Arrangement (SBA)has been used time and again by member countries, it is the IMF’s workhorse lending instrumentfor emerging market countries. Rates are non-concessional, although they are almost alwayslower than what countries would pay to raise financing from private markets. The SBA wasupgraded in 2009 to be more flexible and responsive to member countries’ needs. Borrowinglimits were doubled with more funds available up front, and conditions were streamlined andsimplified. The new framework also enables broader high-access borrowing on a precautionarybasis. 23
  • 24. I.M.F 2012The Flexible Credit Line (FCL) is for countries with very strong fundamentals, policies, andtrack records of policy implementation. It represents a significant shift in how the IMF deliversFund financial assistance, particularly with recent enhancements, as it has no ongoing (ex post)conditions and no caps on the size of the credit line. The FCL is a renewable credit line, which atthe country’s discretion could be for either 1-2 years, with a review of eligibility after the firstyear. There is the flexibility to either treat the credit line as precautionary or draw on it at anytime after the FCL is approved. Once a country qualifies (according to pre-set criteria), it can tapall resources available under the credit line at any time, as disbursements would not be phasedand conditioned on particular policies as with traditional IMF-supported programs. This isjustified by the very strong track records of countries that qualify to the FCL, which giveconfidence that their economic policies will remain strong or that corrective measures will betaken in the face of shocks.The Precautionary and Liquidity Line (PLL) builds on the strengths and broadens the scope ofthe Precautionary Credit Line (PCL). The PLL provides financing to meet actual or potentialbalance of payments needs of countries with sound policies, and is intended to serve as insuranceand help resolve crises. It combines a qualification process (similar to that for the FCL) withfocused ex-post conditionality aimed at addressing vulnerabilities identified during qualification.Its qualification requirements signal the strength of qualifying countries’ fundamentals andpolicies, thus contributing to consolidation of market confidence in the country’s policy plans.The PLL is designed to provide liquidity to countries with sound policies under broadcircumstances, including countries affected by regional or global economic and financial stress.The Rapid Financing Instrument (RFI) provides rapid and low-access financial assistance tomember countries facing an urgent balance of payments need, without the need for a full-fledgedprogram. It can provide support to meet a broad range of urgent needs, including those arisingfrom commodity price shocks, natural disasters, post-conflict situations and emergenciesresulting from fragility.The Extended Fund Facility is used to help countries address balance of payments difficultiesrelated partly to structural problems that may take longer to correct than macroeconomicimbalances. A program supported by an extended arrangement usually includes measures toimprove the way markets and institutions function, such as tax and financial sector reforms,privatization of public enterprises.The Trade Integration Mechanism allows the IMF to provide loans under one of its facilities to adeveloping country whose balance of payments is suffering because of multilateral tradeliberalization, either because its export earnings decline when it loses preferential access tocertain markets or because prices for food imports go up when agricultural subsidies areeliminated. 24
  • 25. I.M.F 2012Lending to low-income countriesTo help low-income countries weather the severe impact of the global financial crisis, the IMFhas revamped its concessional lending facilities to make them more flexible and meet increasingdemand for financial assistance from countries in need. These changes became effective inJanuary 2010. Once additional loan and subsidy resources are mobilized, these changes willboost available resources for low-income countries to US$17 billion through 2014.Three types of loans were created under the new Poverty Reduction and Growth Trust (PRGT)as part of this broader reform: the Extended Credit Facility, the Rapid Credit Facility and theStandby Credit Facility.The Extended Credit Facility (ECF) provides financial assistance to countries with protractedbalance of payments problems. The ECF succeeds the Poverty Reduction and Growth Facility(PRGF) as the Fund’s main tool for providing medium-term support LICs, with higher levels ofaccess, more concessional financing terms, more flexible program design features, as well asstreamlined and more focused conditionality.The Rapid Credit Facility (RCF) provides rapid financial assistance with limited conditionality tolow-income countries (LICs) facing an urgent balance of payments need. The RCF streamlinesthe Fund’s emergency assistance, provides significantly higher levels of concessionality, can beused flexibly in a wide range of circumstances, and places greater emphasis on the country’spoverty reduction and growth objectives.The Standby Credit Facility (SCF) provides financial assistance to low-income countries (LICs)with short-term balance of payments needs. It provides support under a wide range ofcircumstances, allows for high access, carries a low interest rate, can be used on a precautionarybasis, and places emphasis on countries’ poverty reduction and growth objectives.Several low-income countries have made significant progress in recent years toward economicstability and no longer require IMF financial assistance. But many of these countries still seekthe IMFs advice, and the monitoring and endorsement of their economic policies that comeswith it. To help these countries, the IMF has created a program for policy support and signaling,called the Policy Support Instrument. 25
  • 26. I.M.F 2012Debt reliefIn addition to concessional loans, some low-income countries are also eligible for debts to bewritten off under two key initiatives.The Heavily Indebted Poor Countries (HIPC) Initiative, introduced in 1996 and enhanced in1999, whereby creditors provide debt relief, in a coordinated manner, with a view to restoringdebt sustainability; andThe Multilateral Debt Relief Initiative (MDRI), under which the IMF, the InternationalDevelopment Association (IDA) of the World Bank, and the African Development Fund (AfDF)canceled 100 percent of their debt claims on certain countries to help them advance toward theMillennium Development Goals.Borrowing ArrangementsIf the IMF believes that its resources might fall short of members needs—for example, in theevent of a major financial crisis—it can supplement its own resources by borrowing. It has had arange of bilateral borrowing arrangements in the 1970s and 1980s. Currently it has two standingmultilateral borrowing arrangements and one bilateral borrowing agreement.Through the New Arrangements to Borrow (NAB) and the General Arrangements to Borrow(GAB), a number of member countries and institutions stand ready to lend additional funds to theIMF. The GAB and NAB are credit arrangements between the IMF and a group of members andinstitutions to provide supplementary resources of up to SDR 34 billion (about US$50 billion) tothe IMF to forestall or cope with an impairment of the international monetary system or to dealwith an exceptional situation that poses a threat to the stability of that system.In April 2009, the Group of Twenty industrialized and emerging market economies agreed totriple the Fund’s lending capacity to $750 billion, enabling it to inject extra liquidity into theworld economy during this time of crisis. The additional support will come from several sources,including contributions from member countries that have pledged to help boost the Fund’slending capacity. 26
  • 27. I.M.F 2012GoldThe IMF holds a relatively large amount of gold among its assets, not only for reasons offinancial soundness, but also to meet unforeseen contingencies.The IMF holds about 90.5 million ounces, or 2,814.1 metric tons, of gold at designateddepositories. The IMFs total gold holdings are valued on its balance sheet at about $4.9 billion(SDR 3.2 billion) on the basis of historical cost. The IMFs holdings amount to about $160billion (as determined by end-February 2012 market prices).Gold and the international monetary systemGold played a central role in the international monetary system after World War II. The countriesthat joined the IMF between 1945 and 1971 agreed to keep their exchange rates pegged in termsof the dollar and, in the case of the United States, the value of the dollar in terms of gold. This"par value system" ceased to work after 1971Until the late 1970s, 25 percent of member countries initial quota subscriptions and subsequentquota increases had to be paid for with gold. Payment of charges and repayments to the IMF byits members constituted other sources of gold.Use of Gold in the IMFThe IMFs Articles of Agreement strictly limit the use of the gold following the SecondAmendment in 1978. But in some circumstances, the IMF may sell gold or accept gold aspayment from member countries.In September 2009, the IMFs Executive Board approved the total sale of 403.3 metric tons ofgold as a key step in implementing the new income model to help put the IMFs finances on asound long-term footing. The IMF sold this gold in two phases—the first phase was set asideexclusively for off-market sales to official holders.A total of 212 metric tons was sold during this first phase, comprising sales to the Reserve Bankof India, the Bank of Mauritius, and the Central Bank of Sri Lanka. An additional amount waslater sold to the Bangladesh Bank. In February 2010, the on-market phase of its gold salesprogram began. So as to avoid disruption to the gold market, these sales were phased over time.In December 2010, the IMF concluded the gold sales program with total sales of 403.3 metrictons of gold. Total proceeds amounted to about $15 billion (SDR 9.5 billion).Proceeds equivalent to the book value of the gold sold, about $4.2 billion (SDR 2.7 billion), wereretained in the IMFs General Resources Account. Profits from the gold sales were invested in anincome-generating fund to supplement IMF income. In February 2012, the Executive Boardapproved the distribution to all IMF member countries of about $1.1 billion (SDR 700 million) inreserves attributed to a portion of the windfall profits from recent IMF gold sales, with theexpectation that member countries would return equivalent amounts to support concessionallending to low-income countries. The distribution will be effected only when members provide 27
  • 28. I.M.F 2012satisfactory assurances that they would make new Poverty Reduction and Growth Trust subsidycontributions equivalent to at least 90 percent of the amount distributed—i.e. about $1 billion(SDR 630 million).The selling of gold by the IMF is rare as it requires an Executive Board decision with an 85percent majority of the total voting power. Prior to the recent sale of gold, the last time gold wassold by the institution was through off-market transactions completed in April 2001, with 12.9million ounces traded. This transaction was approved by the membership as a means to financethe IMFs participation in the Heavily Indebted Poor Countries Initiative and the continuation ofthe Poverty Reduction and Growth Facility. 28
  • 29. I.M.F 2012Special Drawing Rights (SDR)The Special Drawing Right (SDR) is an international reserve asset, created by the IMF in 1969to supplement the existing official reserves of member countries.The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on thefreely usable currencies of IMF members. Holders of SDRs can obtain these currencies inexchange for their SDRs in two ways: first, through the arrangement of voluntary exchangesbetween members; and second, by the IMF designating members with strong external positionsto purchase SDRs from members with weak external positions. In addition to its role as asupplementary reserve asset, the SDR serves as the unit of account of the IMF and some otherinternational organizations.In addition to its role as a supplementary reserve asset, the SDR serves as the unit of account ofthe IMF and some other international organizations.SDR’s valueThe value of the SDR is based on a basket of key international currencies—the euro, Japaneseyen, pound sterling, and U.S. dollar. The U.S. dollar-value of the SDR is posted daily on theIMF’s website. The basket composition is reviewed every five years by the Executive Board toensure that it reflects the relative importance of currencies in the world’s trading and financialsystems.The SDR interest rate provides the basis for calculating the interest charged to members onregular (nonconcessional) IMF loans, the interest paid and charged to members on their SDRholdings, and the interest paid to members on a portion of their quota subscriptions. The SDRinterest rate is determined weekly and is based on a weighted average of representative interestrates on short-term debt in the money markets of the SDR basket currencies.SDR allocations to IMF membersUnder its Articles of Agreement, the IMF may allocate SDRs to members in proportion to theirIMF quotas, providing each member with a costless asset. However, if a member’s SDRholdings rise above its allocation, it earns interest on the excess; conversely, if it holds fewerSDRs than allocated, it pays interest on the shortfall.There are two kinds of allocations:General allocations of SDRs. General allocations have to be based on a long-term global needto supplement existing reserve assets. Decisions to allocate SDRs have been made three times: in1970-72, for SDR 9.3 billion; in 1979–81, for SDR 12.1 billion; and in August 2009, for anamount of SDR 161.2 billion. 29
  • 30. I.M.F 2012Special allocations of SDRs. A special one-time allocation of SDRs through the FourthAmendment of the Articles of Agreement was implemented in September 2009. The purpose ofthis special allocation was to enable all members of the IMF to participate in the SDR system onan equitable basis and correct for the fact that countries that joined the Fund after 1981—morethan one-fifth of the current IMF membership—had never received an SDR allocation.With the general SDR allocation of August 2009 and the special allocation of Setember 2009, theamount of SDRs increased from SDR 21.4 billion to SDR 204.1 billion (currently equivalent toabout $317 billion). 30
  • 31. I.M.F 2012Governance  Government StructureThe IMFs mandate and governance have evolved along with changes in the global economy, allowingthe organization to retain a central role within the international financial architecture. The diagrambelow provides a stylized view of the IMFs current governance structure.Board of GovernorsThe Board of Governors is the highest decision-making body of the IMF. It consists of onegovernor and one alternate governor for each member country. The governor is appointed by themember country and is usually the minister of finance or the head of the central bank.While the Board of Governors has delegated most of its powers to the IMFs Executive Board, itretains the right to approve quota increases, special drawing right (SDR) allocations, theadmittance of new members, compulsory withdrawal of members, and amendments to theArticles of Agreement and By-Laws.The Board of Governors also elects or appoints executive directors and is the ultimate arbiter onissues related to the interpretation of the IMFs Articles of Agreement. Voting by the Board ofGovernors usually takes place by mail-in ballot.The Boards of Governors of the IMF and the World Bank Group normally meet once a year,during the IMF-World Bank Spring and Annual Meetings, to discuss the work of theirrespective institutions. The Meetings, which take place in September or October, havecustomarily been held in Washington for two consecutive years and in another member countryin the third year. 31
  • 32. I.M.F 2012The Annual Meetings usually include two days of plenary sessions, during which Governorsconsult with one another and present their countries views on current issues in internationaleconomics and finance. During the Meetings, the Boards of Governors also make decisions onhow current international monetary issues should be addressed and approve correspondingresolutions.The Annual Meetings are chaired by a Governor of the World Bank and the IMF, with thechairmanship rotating among the membership each year. Every two years, at the time of theAnnual Meetings, the Governors of the Bank and the Fund elect Executive Directors to theirrespective Executive Boards.Ministerial CommitteesThe IMF Board of Governors is advised by two ministerial committees, the InternationalMonetary and Financial Committee (IMFC) and the Development Committee.The IMFC has 24 members, drawn from the pool of 187 governors. Its structure mirrors that ofthe Executive Board and its 24 constituencies. As such, the IMFC represents all the membercountries of the Fund.The IMFC meets twice a year, during the Spring and Annual Meetings. The Committee discussesmatters of common concern affecting the global economy and also advises the IMF on thedirection its work. At the end of the Meetings, the Committee issues a joint communiquésummarizing its views. These communiqués provide guidance for the IMFs work programduring the six months leading up to the next Spring or Annual Meetings. There is no formalvoting at the IMFC, which operates by consensus.The Development Committee is a joint committee, tasked with advising the Boards of Governorsof the IMF and the World Bank on issues related to economic development in emerging anddeveloping countries. The committee has 24 members (usually ministers of finance ordevelopment). It represents the full membership of the IMF and the World Bank and mainlyserves as a forum for building intergovernmental consensus on critical development issues.The Executive BoardThe IMFs 24-member Executive Board takes care of the daily business of the IMF. Together,these 24 board members represent all 188 countries. Large economies, such as the United Statesand China, have their own seat at the table but most countries are grouped in constituenciesrepresenting 4 or more countries. The largest constituency includes 24 countries.The Board discusses everything from the IMF staffs annual health checks of member countrieseconomies to economic policy issues relevant to the global economy. The board normally makesdecisions based on consensus but sometimes formal votes are taken. At the end of most formaldiscussions, the Board issues what is known as a summing up, which summarizes its views.Informal discussions may be held to discuss complex policy issues still at a preliminary stage. 32
  • 33. I.M.F 2012Country RepresentationUnlike the General Assembly of the United Nations, where each country has one vote, decisionmaking at the IMF was designed to reflect the position of each member country in the globaleconomy. Each IMF member country is assigned a quota that determines its financialcommitment to the IMF, as well as its voting power.To be effective, the IMF must be seen as representing the interests of all of its 188 membercountries, from its smallest shareholder Tuvalu, to its largest, the United States.In November 2010, the IMF agreed on reform of its framework for making decisions to reflectthe increasing importance of emerging market and developing economies.Giving more say to emerging marketsIn recent years, emerging market countries have experienced strong growth and now play a muchlarger role in the world economy.The reforms will produce a shift of 6 percent of quota shares to dynamic emerging market anddeveloping countries. This realignment will give more say to a group of countries known as theBRICS: Brazil, Russia, India, and China.Protecting the voice of low-income countriesThe reform package also contains measures to protect the voice of the poorest countries in theIMF. Without these measures, this group of countries would have seen its voting shares decline.Timeline for implementing the reformThe Board of Governors, the IMF’s highest decision-making body, must ratify the newagreement by an 85 percent majority before it comes into effect.The plan is for the reform to be implemented in 2012. 33
  • 34. I.M.F 2012AccountabilityThe IMF is accountable to its 188 member governments, and is also scrutinized by multiplestakeholders, from political leaders and officials to, the media, civil society, academia, and itsown internal watchdog. The IMF, in turn, encourages its own members to be as open as possibleabout their economic policies to encourage their accountability and transparency.Engagement with intergovernmental groupsOfficial groups, such as the Group of Twenty (G-20) industrialized and emerging marketcountries (G-20) and the Group of Eight (G-8) are also actively engaged in the work of the IMF.The G-20 consists of the 20 leading and emerging economies of the world, and includes all G-8countries plus Argentina, Australia, Brazil, China, India, Indonesia, Korea, Mexico, SaudiArabia, South Africa, and Turkey, as well as the European Union. The G-20 discusses andcoordinates international financial stability and is a key player in shaping the work of the IMF.Its meetings usually take place twice a year at the level of heads of state and government, withseveral other ministerial-level meetings, including finance ministers and central bank governors,held a few times a year.The G-8 finance ministers and central bank governors meet at least twice annually to monitordevelopments in the world economy and assess economic policies. The Managing Director of theIMF is usually invited to participate in those discussions. The G-8 functions as a forum fordiscussion of economic and financial issues among the major industrial countries—Canada,France, Germany, Italy, Japan, Russia, the United Kingdom, and the United States.Civil society, think tanks, and the mediaThe IMFs work is scrutinized by the media, the academic community, and civil societyorganizations (CSOs).IMF management and senior staff communicate with the media on a daily basis. Additionally, abiweekly press briefing is held at the IMF Headquarters, during which a spokesperson takes livequestions from journalists. Journalists who cannot be present are invited to submit their questionsvia the online media briefing center.IMF staff at all levels frequently meet with members of the academic community to exchangeideas and receive new input. The IMF also has an active outreach program involving CSOs.Internal watchdogThe IMFs work is reviewed on a regular basis by an internal watchdog, the IndependentEvaluation Office, established in 2001. The IEO is fully independent from IMF management andoperates at arms length from the Executive Board, although the Board appoints its director. 34
  • 35. I.M.F 2012The IEOs mission is to enhance the learning culture within the IMF, strengthen its externalcredibility, promote greater understanding of the work of the Fund, and support institutionalgovernance and oversight.The IEO establishes its own work program, selecting topics for review based on suggestionsfrom stakeholders inside and outside the IMF. Its recommendations strongly influence the Fundswork.Ethics office and code of conductThe IMF also has its own Ethics Office. Established as an independent arm of the Fund in 2000,the Office provides advice and guidance to IMF staff, and undertakes investigations intoallegations of unethical behavior and misconduct. An Integrity Hotline—a 24-hourwhistleblowing system—was launched in 2008. The Ethics Office publishes an Annual Report,which is published on the IMF’s website.Upon joining the IMF, all staff sign an agreement that commits them to adhere to the IMF’sethics rules, which include a Code of Conduct and rules for financial disclosure. A separate Codeof Conduct applies to IMF Executive Directors. The IMF’s Executive Board has also set outApplicable Standards of Conduct for the Managing Director.TransparencyThe IMF also encourages its member countries to be as open as possible about their economicpolicies. Greater openness encourages public discussion of economic policy, enhances theaccountability of policymakers, and facilitates the functioning of financial markets.To that effect, the IMFs Executive Board has adopted a transparency policy to encouragepublication of member countries policies and data. This policy designates the publication statusof most categories of Board documents as "voluntary but presumed." This means that publicationrequires the members explicit consent but is expected to take place within 30 days following theBoard discussion.In taking these steps to enhance transparency, the Executive Board has had to consider how tobalance the IMFs responsibility to oversee the international monetary system with its role as aconfidential advisor to its members. The IMF regularly reviews its transparency policy. 35
  • 36. I.M.F 2012Tackling Current ChallengesA Partner in EuropeThe IMF is actively engaged in Europe as a provider of policy advice, financing, and technicalassistance. We work both independently and, in European Union (EU) countries, in cooperationwith European institutions, such as the European Commission (EC) and the European CentralBank (ECB). The IMFs work in Europe has intensified since the start of the global financialcrisis in 2008, and has been further stepped up since mid-2010 as a result of the sovereign debtcrisis in the euro area. As IMF Managing Director Christine Lagarde has stressed, to get beyondthe crisis, Europe must address three key issues—lack of growth, reduced competitiveness, andthe need for greater integration. To restore confidence more immediately, the euro zone mustdevelop a strong firewall to protect its members. 36
  • 37. I.M.F 2012Reinforcing multilateralismThe crisis highlighted the tremendous benefits from international cooperation. Without thecooperation spearheaded by the Group of Twenty industrialized and emerging market economies(G-20) the crisis could have been much worse. At their 2009 Pittsburgh Summit G-20 countriespledged to adopt policies that would ensure a lasting recovery and a brighter economic future,launching the "Framework for Strong, Sustainable, and Balanced Growth."The backbone of this framework is a multilateral process, where G-20 countries together set outobjectives and the policies needed to get there. And, most importantly, they undertake to checkon their progress toward meeting those shared objectives—done through the G-20 MutualAssessment Process or MAP. At the request of the G-20, the IMF provides the technical analysisneeded to evaluate how members’ policies fit together—and whether, collectively, they canachieve the G-20’s goals.The IMF’s Executive Board has also been considering a range of options to enhance multilateral,bilateral, and financial surveillance, and to better integrate the three. It has launched ―spilloverreports‖ for the five most systemic economies—China, the Euro Area, Japan, United Kingdom,and the United States—to assess the impact of policies by one country or area on the rest of theworld. 37
  • 38. I.M.F 2012Rethinking Macroeconomic PrinciplesThe severity of the crisis—immense hardship and suffering around the world—and the desire toavoid a repeat also raised some profound questions about the pre-crisis consensus onmacroeconomic policies. In this context, the IMF is encouraging a wholesale re-examination ofmacroeconomic policy principles in the wake of the global economic crisis.In March 2011, the IMF hosted a high profile conference to take stock of these policy questionsand promote a discussion about the future of macroeconomic policy. The agenda focused on sixkey areas: monetary policy; fiscal policy; financial intermediation and regulation; capital accountmanagement; growth strategies; and the international monetary system (discussed further below).A key goal of the conference was to promote a broad-based and ongoing dialogue that extendsbeyond the corridors of the IMF. To this end, the conference was webcast and the conference co-hosts opened an online discussion with posts on the IMF blog 38
  • 39. I.M.F 2012India, China contributing a lot to globalgrowth: IMFWashington, Feb 5 (IANS):India and China with their large economies growing at 7 and 10 percent respectively areplaying a significant role in global economic recovery, according to a top InternationalMonetary Fund (IMF) official."Its actually true, just by looking at the numbers and the weights that they have in the globaleconomy," Kalpana Kochhar, Deputy Director, Asia and Pacific Department told reporters in aconference call Thursday when asked about India and Chinas role in the recovery."When you have two relatively large economies growing at 7 and 10 percent, respectively, Indiaand China, they are contributing quite a lot to global growth," she said.Noting that IMF forecast for global growth for next year is close to 4 percent, of which advancedcountries are only contributing less than 2 percent, Kochhar said: "So the rest of it is in factcoming from emerging markets, and from within emerging markets, a large part from China andIndia.""So its a significant contribution thats coming from these two countries," she added noting Indiawas one of the first countries to recover from the crisis."It benefited from the normalisation of global financing conditions and the return of risk appetite,but also benefited from fiscal stimulus that was already in the pipeline and from timely monetaryand further fiscal easing after the crisis broke out."After annual Article IV consultations with India last month, IMF has projected Indias growth toreach 6.75 percent for the fiscal year ending March, 2010, and then rising to 8 percent for theyear ending March, 2011.IMF "believed there are a lot of indications already in the pipeline that suggest that this recoverywill in fact occur and will broaden," Kochhar said. But "along with the recovery, weve seen anupward rise in prices. Inflation has picked up. Some of it is due to food, but some of it is also 39
  • 40. I.M.F 2012due to demand pressures."Against that background, IMF welcomed the moves that were taken by the Reserve Bank ofIndia (RBI) just last week to tighten monetary policy, Kochhar said. "And we believe that, givencurrent trends, there should be further gradual withdrawal of monetary accommodation."While the stimulus measures were instrumental in supporting activity during the crisis, it haspushed the deficit into double digits again, and the debt back to nearly 80 percent, Kochhar said.IMF, therefore, recommend that the fiscal adjustment strategy begin with this next budgetsuggesting that it should be anchored on a debt target along with some nominal expenditurerules.However as noted in its report just setting a debt target isnt enough. It has to be accompanied bymeasures on both the revenue side and the expenditure side, particularly subsidy reform,Kochhar said.The third issue that IMF focused on was in financial sector reform, particularly reforms thatwould be beneficial to finance the major infrastructure investment that the government of India isplanning over the next few years, she said 40
  • 41. I.M.F 2012 Bibliography www.fraudwatchers.org41