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International Monetary Fund

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  1. 1. International Monetary System and International Monetary Fund
  2. 2. The Gold Standard (1880-1913)• Each country defined the value of its currency in terms of gold – – US : $/ounce ; Britain : Pound/ounce• The exchange rate is calculated as $ per ounce of gold/ Pound per ounce gold• Central banks were restricted to issue more currency
  3. 3. Advantages and Disadvantages• Price Stability – Central banks are unable to expand Money supply – Money supply is increased by increased production of gold – Or by running BOP a/c surplus• Volatility in the supply of gold causes adverse shocks to the economy• Monetary policy won’t be helpful in achieving the macroeconomic goals
  4. 4. War Years (1914-1945)• End of gold standard• Countries started printing currencies to pay for their war related expenditures• Convertibility of currencies into gold was abolished• High rates of inflation• Focus shifted on cooperation and rebuilding of war affected countries
  5. 5. Bretton-Woods System(1945-1971)• In July 1944, conference is organized by the UN to eliminate the chaos of war• The conference was known as International Monetary and Financial Conference• It was led by US and Britain and included 42 other nations• Creation of new financial system – Stabilize the exchange rates – Capital for reconstruction – International cooperation
  6. 6. Bretton-Woods System(1945-1971)• It was a “Gold-Exchange “ standard• Only dollar was backed by and convertible into gold• Other countries have “adjustable peg”• IMF was created to monitor the agreement• IMF holds the gold and currency reserves of its members and then lends the money to other members facing difficulty in meeting their international payments
  7. 7. Bretton-Woods System(1945-1971)• In this period US encountered BOP deficit• But, European countries and Japan build up their international reserves• Foreign held dollar reserves exceeded the gold reserves of U.S• Devaluation could not be performed• Adoption of flexible exchange rate system• In 1973, adopted the managed floating exchange rate system
  8. 8. IMF was established to promote balanced expansion of world trade, stability of exchange rates, avoidance of competitive currency devaluation, and the correction of country’s BOP problems.
  9. 9. How the purposes are served• Monitors economic and financial developments and policies, in the member countries and gives policy advice to its members.• Lends to member countries with BOP problems, not just to provide temporary financing but to support adjustment and reform policies aimed to correct bop• Provides the govt. and central banks of its member countries with technical assistance and training in its areas of its expertise
  10. 10. IMF’s Special Drawing Rights (SDR)• It is an international reserve asset or artificial currency created by IMF in 1969• To supplement the existing official reserves of members• It serves as a unit of account in IMF• Value of SDR in now based on basket of key international currencies• SDR is not a claim on IMF but a potential claim on the currencies of IMF members• Two ways to obtain currencies using SDR – Voluntary Exchange – Involving IMF
  11. 11. IMF’s Special Drawing Rights (SDR)• IMF has an SDR department which handles the SDR transactions among member nations• Members having larger holdings of SDR than their quota will get interest rate and vice-versa.• Exchange rates of SDR are published daily except on IMF holidays or whenever the IMF is closed for business
  12. 12. Exchange rates of SDRCurrency 29-Mar-12 28-Mar-12 27-Mar-12 26-Mar-12Euro 1.16416 1.15994 1.16106 1.16157Japanese Yen 127.7 128.372 128.287 127.532U.K. Pound Sterling 0.973217 0.972053 0.970318 0.971468U.S. Dollar 1.54507 1.54702 1.54805 1.5421Algerian Dinar 114.713 114.704 114.664 114.312Australian Dollar 1.4898 1.48367 1.47195 1.47556Bahrain Dinar 0.580946 0.581679 0.582065 0.579831Botswana Pula 11.2861 11.251 11.1611 11.1585Brazilian Real 2.81558 2.80551 2.80862 2.8057Brunei Dollar 1.94324 1.94429 1.94868 1.94397Canadian Dollar 1.54492 1.54454 1.5369 1.53007Chinese Yuan 9.72346 9.73264 9.72791 9.6934Danish Krone 8.65808 8.62537 8.63327 8.637Indian Rupee 79.0301 78.7743 78.8109 79.1252
  13. 13. Financial Resources of IMF• Members provide the bulk of financial resources• Upon joining, member pays its capital subscription or “quotas”• Quota is determined by the relative size of the member economy (output and trade)• Quota includes 25% in international reserve currency (US $, Euro, Yen etc.) rest is paid in member’s own currency
  14. 14. Financial Resources of IMF• Member’s access to IMF loans is also determined by their quotas allocation• Voting power and member’s influence in IMF is also depend on quotas• 250 basic votes + 1 additional vote for each SDR 100000• US quota in 2006 =37149300000 = 371743 votes – ( 371493+250)• Total no. of members’ votes is 2176037
  15. 15. Financial Resources of IMF• US controls 17.08 % votes at IMF• India’s current quotas and voting power – 5821.5 millions of SDR and 58956 (2.34 %)
  16. 16. Decision- Making in IMF• 24 member executive board is the main decision making body• Countries with five largest quotas have permanent seats on the board ( US, Japan, Germany, France and UK)• All other members are organized into regional groups• Each regional group selects its representative member to represent regional constituency in the executive board.• Changing quotas requires 85% approval in executive board• US having 17% voting alone can veto redistribution of quotas and voting power