1.International Financial Institutions (1)

7/29/2019 1.International Financial Institutions (1)

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INTERNATIONAL MONETARY FUND

AND WORLD BANK


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Origin: In June 1944 representatives of 44 allied powers met atBretton Woods, New Hampshire, USA to give concrete shape tothe objectives of finding a system which would

(a) help in removing the restrictions on trade.

(b)ensure free convertibility of currencies which wassuspended during the war period due to multitude of

exchange controls and(c) maintain stability in exchange rates among the currencies.

The agreement reached at the meeting provided forestablishing two institutions which came to be known asBretton Woods twins the International Monetary Fund (IMF)and the International Bank for Reconstruction and Development- IBRD (World Bank).

In these efforts USA represented by H.D.White & UKrepresented by Lord Keynes had a greater role to play.


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1. To promote international monetary co-operation through apermanent institution which will provide machinery forconsultation and collaboration on international monetaryproblems.

2. Promoting the growth of international trade to achieve high

level of employment and real income.3. Promoting exchange rate stability, to maintain orderly

exchange arrangements among members and to avoidcompetitive exchange depreciation.

4. Establishing a system of multilateral payments in respect ofcurrent transactions, elimination of foreign exchangerestrictions which hamper the growth of world trade andencouraging convertibility of currencies.

5. Building a reserve base to be available to members to correctdisequilibrium in the BOPs.


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IMF was meant to achieve two main objectives (1) it is an organisation to monitor the proper

conduct of international monetary system and

(2) a source of liquidity for countries in need offoreign exchange to finance temporary balance of

payment difficulties.


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1. Reviewing and monitoring national and global economic

and financial developments and advising members on theireconomic policies

2. Lending them hard currencies to support adjustment andreform policies designed to correct BOP and promotesustainable growth

3. Offering wide range of technical assistance as well as

training for government and central bank officials .4. Working with governments, international organisations,

regulatory bodies and the private sector to strengthen theinternational monetary and financial system.

5. Working along with world Bank to asses the financial

sectors of countries to help identify actual and potentialweaknesses.

6. Working with the Basel Committee on Banking Supervisionto improve the regulatory standards


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I. Quotas

The main resource for IMF is members quotas

It represents the subscription of a country to the capital of IMF

It is fixed for each country based broadly on its economic size

Quotas also forms the basis for determining its drawing right

from the IMF, its voting power and share in allocation of SDRs.All these are available in proportion to the quota allotted to it.

Initially 25% of a countrys quota was paid in the form of goldor USD and 75% in the countrys own currency. At presentinstead of gold, 25% is contributed in the form of SDRs or

widely accepted foreign currency i.e USD, Euro, Yen, GBP. Current quota formula is a weighted average of GDP (weight

50%), Openness (30%) economic variability (15%) andinternational reserves (5%).


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I. Quotas Since quotas are fixed on the economic strength, developed

countries had largest share of quotas hence voting rights.

Decision making rests with a few industrially advancedcountries.

Quotas are reviewed by the IMF at intervals of not more than5 years.

Initially the quotas totalled approx. USD 7 billion andcurrently it stands at USD 720 billon.

The latest fourteenth is under review will be over by January2013.

IMF quotas.pdf
http://localhost/var/www/apps/conversion/tmp/scratch_8/IMF%20quotas.pdfhttp://localhost/var/www/apps/conversion/tmp/scratch_8/IMF%20quotas.pdf


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II. Borrowings To supplement quota subscriptions IMF can borrow from

members : GAB, NAB and Trust Funds General Arrangement to Borrow introduced in 1962 under which 10

countries G-10 (Belgium, Canada, France, Germany, Italy, Japan, Nederland,Sweden, UK and USA). Switzerland joined later making it 11. agreed to lend toIMF their own currencies when the funds are needed for a participant in thearrangement.

New Arrangement to Borrow- similar to GAB, IMF entered into a newarrangement to borrow in 1998, under which 25 countries have agreed tolend SDR 34 billion. The stipulation for IMF is that borrowings under GABand NAB cannot exceed SDR 34 billion

Trust Funds IMF provides financial assistance to low-income countriesthrough concessional lending under Poverty Reduction and Growth Facility

(PRGF) and debt relief under Heavily Indebted Poor Countries (HIPC)initiatives.

Resources for these programs are through bilateral contributions and areseparate from the quota subscriptions and IMF only acts as a trustee.


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Different lending programs of IMF

What is Special Drawing Rights (SDR), why

was it created and how does it work ?

Documents

1.International Financial Institutions (1)