International Monetary Fund

1. International Monetary System
and
International Monetary Fund

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. 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. 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. 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. 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. 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. 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. 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. 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. 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. Exchange rates of SDR
Currency 29-Mar-12 28-Mar-12 27-Mar-12 26-Mar-12
Euro 1.16416 1.15994 1.16106 1.16157
Japanese Yen 127.7 128.372 128.287 127.532
U.K. Pound Sterling 0.973217 0.972053 0.970318 0.971468
U.S. Dollar 1.54507 1.54702 1.54805 1.5421
Algerian Dinar 114.713 114.704 114.664 114.312
Australian Dollar 1.4898 1.48367 1.47195 1.47556
Bahrain Dinar 0.580946 0.581679 0.582065 0.579831
Botswana Pula 11.2861 11.251 11.1611 11.1585
Brazilian Real 2.81558 2.80551 2.80862 2.8057
Brunei Dollar 1.94324 1.94429 1.94868 1.94397
Canadian Dollar 1.54492 1.54454 1.5369 1.53007
Chinese Yuan 9.72346 9.73264 9.72791 9.6934
Danish Krone 8.65808 8.62537 8.63327 8.637
Indian Rupee 79.0301 78.7743 78.8109 79.1252

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. 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. 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. 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