Transcript Issue 18 - Patrick M. Crowley

ECON3315
International Economic Issues
Instructor: Patrick M. Crowley
Issue 18: The IMF
Overview
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What the IMF does – it’s purposes
What are the circumstances for the IMF to become
involved in a country’s finances?
What kind of resources does the IMF have?
What are the economic effects of IMF lending?
What the IMF does
The IMF goes into countries and analyses
their macroeconomic policies, suggesting
changes that could be made to improve
economic growth
The IMF also makes it’s funds temporarily
available to members to give them
opportunities to correct maladjustments in
their balance of payments
The purposes of the IMF
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iii.
iv.
v.
vi.
To promote international monetary cooperation through a permanent
institution which provides the machinery for consultation and
collaboration on international monetary problems.
To facilitate the expansion and balanced growth of international trade,
and to contribute thereby to the promotion and maintenance of high
levels of employment and real income and to the development of the
productive resources of all members as primary objectives of economic
policy.
To promote exchange stability, to maintain orderly exchange
arrangements among members, and to avoid competitive exchange
depreciation.
To assist in the establishment of a multilateral system of payments in
respect of current transactions between members and in the
elimination of foreign exchange restrictions which hamper the growth
of world trade.
To give confidence to members by making the general resources of the
Fund temporarily available to them under adequate safeguards, thus
providing them with opportunity to correct maladjustments in their
balance of payments without resorting to measures destructive of
national or international prosperity.
In accordance with the above, to shorten the duration and lessen the
degree of disequilibrium in the international balances of payments of
members.
What are the circumstances for the IMF to
become involved in a country’s finances?
When a member nation requests to borrow from the IMF, the member
country borrows against it’s quota.
Quotas determined by size of the economy and the variability of
trade
The IMF can also borrow from its financially strongest countries
Loans under the “Poverty Reduction and Growth facility” and the
“Exogenous Shocks Facility” do not come out of quotas.
The situation in a country has to warrant a loan, and when IMF
staffers agree there is a problem a presentation is made to the
Executive Board by the country and the IMF staffers in the form of
a “letter of intent”.
What are the circumstances for a loan though?
When the country concerned has a “balance of payments” problem –
that is, they cannot afford to pay for their necessary imports or
make payments on existing loans.
What kind of resources does the IMF have?
What are the economic effects of IMF
lending?
Moral hazard = ?
If a distressed country gets funds from the IMF, this
usually has the effect of allaying fears of other
investors, who will then lend to the country (“bail in”).
Once the country has the loan, moral hazard can take
place (e.g. Indonesia in 1997), allowing an
unsustainable situation to persist, leading to the
country seeking a further loan to pay off creditors.
Pressure on IMF from private lenders to continue to
support government so that they get their payments….
Recent developments
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At April 2009 G20 meeting in London,
agreement on tripling of IMF resources to
$750bn, and an additional $250bn in extra
SDRs
Double amount of concessional loans
available for poor countries (to $6bn)
NAB (New agreement to borrow) accounts
for most of the increase – up until now
these monies were made available on a
bilateral basis
G20 hopes that IMF will now be the central
institution in any coordinated efforts to
combat the financial crisis