International financial management

1. Unit - V

2. International Monetary System
• International Monetary System (IMS) is a well-designed
system that regulates the valuations and exchange of
money across countries.
• It is a well-governed system looking after the cross-
border payments, exchange rates, and mobility of
capital.
• This system has rules and regulations which help in
computing the exchange rate and terms of international
payments. In other words, International Monetary
System mobilizes the capital from one nation to another
by felicitating trade.

3. Participants in IMS
There are many participants like
• MNCs (Multinational Corporations),
• Investors,
• Financial Institutions

4. AGENCIES THAT FACILITATE
INTERNATIONAL FLOWS
• International monetary fund
• World bank
• World trade organization
• International fianancial corporation
• International devolopment association
• Bank for international settlements
• Organization for economic co-operation and devolopment
• Regional devolopment agencies

5. INTERNATIONAL MONETARY
FUND(IMF)
• It was established in July 1944.
• It has an executive board composed of 24 executive directors
representing the member countries.
• The board is baased In WASHING.TON,D.C., and meets atleast
three times a week to dis cuss ongoing issues.
• • One of the key factor of imf is compensatory financial facility.

6. OBJECTIVES OF IMF
• promote cooperation among countries on international
monetary issues.
• Promote stability in exchange rates.
• Provide temporary funds to member countries attempting to
correct imbalances of international payments.
• Promote free mobility of capital funds across countries
• Promote free trade

7. EVOLUTION OF THE INTERNATIONAL
MONETARY SYSTEM
• The idea of creating an international economic and monetary union
has a long history. In spite of this, it remained for centuries only a
dream for the simple reason that until 1940s, no government took a
keen interest in any of the schemes proposed. In 1920s, a French
economist, Nogaro, floated the idea of establishing an international
bank to issue a new international currency. In 1929, Schacht, the
President of the Reichsbank, the central bank of Germany proposed
the creation of an international clearing union. In 1930, Keynes
suggested a -modified gold standard to be managed by a
'supranational bank' acting asthe international bank of the last rewrt.
Nothing happened, however.

8. The Gold Standard
• The international monetary system that operated prior to the 19 14-
18 war was termed as the gold standard.
• Then the countries accepted the major assets gold and sterling in
settlement of international debt.
• A unit of a country's currency was defined as a certain weight of gold
(e.g. a pound sterling could be converted into 113.0015 grains of fine
gold and the U.S. dollar into 23.22 grains.
• Through these gold equivalents, the value of the pound was 113.0015
/ 23.22 times, (or 4.885 times that of the dollar.
• Thus 4.885 dollars was the 'par value' of the pound).

9. • A country is said to be on the gold standard when its central bank is
obliged to give gold in exchange for its currency when presented to it.
• The gold standard was the foundation of the international trading
system.

10. Bretton Woods Conference
• The Bretton Woods Conference, officially known as the United
Nations Monetary and Financial Conference, was a gathering of
delegates from 44 nations that met from July 1 to 22, 1944 in
Bretton Woods, New Hampshire, to agree upon a series of new
rules for the post-WWII international monetary system.
• The two major accomplishments of the conference were the
creation of the International Monetary Fund (IMF) and the
International Bank for Reconstruction and Development (IBRD).

11. The IMF and World Bank
• The Bretton Woods Agreement created two Bretton
Woods Institutions, the IMF and the World Bank.
• Formally introduced in December 1945 both institutions
have withstood the test of time, globally serving as
important pillars for international capital financing and
trade activities.
• The purpose of the IMF was to monitor exchange
rates and identify nations that needed global monetary
support.

12. • The World Bank, initially called the International Bank for
Reconstruction and Development, was established to manage
funds available for providing assistance to countries that had
been physically and financially devastated by World War II.
• In the twenty-first century, the IMF has 189 member countries
and still continues to support global monetary cooperation.
Tandemly, the World Bank helps to promote these efforts
through its loans and grants to governments.

13. NEED FOR INTERNATIONAL MONETARY
SYSTEM
• Today people live in a global economy.
• A global economy is characterised not only by the free
movement of goods and services, but also by the free
movement of ideas and of capital.
• The movements in exchange rates, interest rates and
stock prices in various countries are intimately
interconnected.

14. • There are certain benefits of the global economy,
namely the international division of labour, economies
of scale and the rapid spread of innovations from one
country to another, non-economic benefits as the
freedom of choice associated with the international
movement of goods, capital and people, and the
freedom of thought associated with the international
movement of ideas

15. Advantages of International Monetary
System
• IMS enhances financial stability and maintains the price
level on a global scale. It also boosts global growth.
• International Monetary System mobilizes money across
countries and determines the exchange rate.
• This system encourages the governments of respective
countries to manage their Balance of Payment by reducing
the trade deficit.
• IMS is a well-regulated system that makes the whole
process of international trading smooth.
• This system relocates the capital from one country to
another by enhancing cross-border investments.

16. Disadvantages of IMF
• Failure to play an effective role in international monetary
matters is one of the disadvantages of IMF
• Failure to tackle East Asian currency crisis is one of the
disadvantages of IMF
• Domination by rich countries is one of the disadvantages
of IMF
• Stringent conditions by IMF is one of its disadvantages
• High interest rates by IMF
• Inadequate resources

17. Role of the IMF
• 1) Transparency
• Data Dissemination: IMF’s Data Quality Assessment
Framework (DQAF) is used for comprehensive assessments of
countries’ data quality, covering institutional environments,
statistical processes, and methodological foundations of the
statistical products.
• Fiscal Policy Transparency: The IMF’s Fiscal Transparency
Code , part of the IMF's Fiscal Transparency Initiative, is the
international standard for disclosure of information about public
finances.
• Central Bank Transparency: The IMF’s Central Bank
Transparency Code is the international code allowing central
banks to map their transparency practices, with the purpose of
enhancing their accountability and – ultimately – their policy

18. 2) Financial Sector:
• Banking Supervision: Basel Committee on
Banking Supervision’s Core Principles for
Effective Banking Supervision
• Securities Regulation: International
Organization of Securities Commissions’
(IOSCO) Objectives and Principles of Securities
Regulation.
• Insurance Supervision: : International
Association of Insurance Supervisors’ Insurance
Core Principles.

19. 3) Institutional and Market Infrastructure
• Insolvency and Creditor Rights: A standard based on the
World Bank’s Principles for Effective Insolvency and
Creditor/Debtor Regimes and the United Nations Commission
on International Trade Law’s Legislative Guide on
InsolvencyLawwas finalized in consultation with IMF staff.
• Corporate Governance: G20/Organisation for Economic Co-
operation and Development’s Principles of Corporate
Governance.
• Accounting and Auditing: International Accounting Standards
Board’s International Financial Reporting Standardsand
International Auditing and Assurance Standards
Board’s International Standards on Auditing.

20. WORLD BANK
• World Bank is an international financial institution that provides loans and
grants to low and middle-income countries for various projects.
• Its most recent aim is to reduce the poverty across the world.
• It was established at the 1944 Bretton Woods Conference, along with the
International Monetary Fund (IMF).
• Both IMF and the World Bank work in tandem.

21. • The World Bank Group comprises five international organizations that provide
loans to developing countries. These are:
(1) The International Bank for Reconstruction and Development (IBRD)
(2)The International Development Association (IDA)
(3) The International Finance Corporation (IFC)
(4) The Multilateral Investment Guarantee Agency (MIGA)
(5) The International Centre for Settlement of Investment Disputes (ICSID).

22. Objectives of World Bank
• To provide long term capital to members countries for economic
reconstruction and development.
• To induce long term capital investment for assuring BOP equilibrium and
balanced development of international trade.
• If capital is not available even after providing a guarantee, then IBRD provides
loans for productive activities on considerate conditions.
• To ensure the implementation of development projects so as to bring about a
smooth transference from wartime to a peaceful economy.

23. Functions of the World Bank
• i. Bank can grant loans to members countries up to 20 % of its share in paid-up
capital.
• ii. Bank also provides loans to private investors belonging to the members on its
own guarantee, but private investors need to take permission of its native country.
Banks charge 1% to 2% as service charge.
• iii. The quantum of loan service, interest rate, terms and conditions are decided by
the World Bank itself.
• iv. Generally bank grant loans for a particular project duly submitted to the bank by
the member country.
• v. The debtor nation has to repay either in reserve currencies or in the currencies in
which the loan was sanctioned.